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Saturday, 22 June 2013 00:46
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Gas-pricing deferred, good half-step on coal pricing

Though it has taken more than a year to come to a solution to the problem of Coal India Ltd (CIL) not being able to supply enough coal to the country’s 131,000 MW coal-based power capacity—in April 2012, the government even issued a Presidential Directive to CIL mandating it sign agreements with power firms—the Cabinet did well to clinch a partial solution on Friday. Though the solution is not the one the power ministry was pushing for—of coal-price pooling—it is a pragmatic step and takes care of the needs of 78,000 MW of power capacity. Of this, around 40,000 MW is already in place but cannot generate due to lack of coal supplies; another 38,000 MW is to come up within the next 2-3 years. Given the country’s rising power needs and the fact that around R400,000 crore of investment capital is locked up in these projects, that’s a relief for all concerned.

 

Right now, CIL produces just enough coal to meet the needs of around 90,000 MW of power capacity. Theoretically, the stranded 40,000 MW of capacity can be made to work—ditto for the 38,000 MW that will be on stream in 2-3 years—by using imported coal. But given how much more expensive imported coal is, this raises two problems. First, SEBs may not be willing to pay a higher price for coal when they can buy cheaper power from the CIL-fuelled power plants. Two, since the majority of the 78,000 MW of capacity was bid out with a single-tariff in which a hike in fuel costs cannot be passed on, the producers are legally restrained from hiking tariffs. In the event, the power ministry proposed that all coal be pooled and, as a corollary, the prices be pooled—as a result, while those buying CIL coal would end up paying a slightly higher price, those buying imported coal would end up paying a slightly lower price; and since both would get fuel at the same price, there would be no problem passing this on to the SEBs. As for the contracts not allowing fuel price hikes to be passed on, these would get changed.

This was, however, not acceptable, so what has been decided is a next-best solution, that those importing coal will be allowed to pass on the hike to consumers. The power ministry will issue a circular to all regulators saying the fuel costs can be passed on and then it is up to each plant to make its case with the state electricity regulator. The belief now is that the price hike can get absorbed for a variety of reasons: First, over a period of time, the electricity generated by CIL-fuelled plants will soon be less than that of those based on imported coal. Two, the older plants that get fuel from CIL are less efficient than the new ones, so the price difference may not be that much. The solution still has to work in the sense that state electricity regulators don’t automatically have to hike tariffs, but it is a start. Pity, no decision got taken on gas pricing which affects around 25,000 MW of stranded power capacity.

 
 

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