Recouping energy losses PDF Print E-mail
Tuesday, 17 January 2012 03:13
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Scrap single-part tariff, boost captive coal supply

Given Coal India’s complete failure in meeting the needs of the country’s power sector—the number of coal plants with less than a week’s supply of coal rose from 27 in January 2011 to 45 by December—and the fall in RIL’s gas supplies from the KG Basin, you don’t get any prizes for guessing what issues will top the agenda of the Prime Minister’s meeting with the chiefs of power companies like Ratan Tata and Anil Ambani tomorrow. It’s equally clear the PM doesn’t have that much to offer by way of solutions, other than asking Coal India to try and raise production and to ensure there is better coordination between it and the Railways so that there are no coal stocks lying around Railway sidings.

After reminding the power CEOs of how the industry’s dynamics have taken a turn for the better since he managed to persuade the power ministry to finally notify ‘open access’ for larger buyers (http://bit.ly/zNc7jL) a few weeks ago, the PM would do well to focus on a few short-term solutions, other than promising to work on getting together a consensus on scrapping Coal India’s monopoly—you just have to look at how India’s oil/gas reserves have multiplied after ONGC’s monopoly was scrapped and the private sector invited in to know how the economy would benefit. Also keep in mind that, apart from failing to provide coal supplies to older power plants, Coal India stopped signing legally enforceable fuel supply agreements around two years ago with new power plants.

One of the most-important short-term solutions is to allow captive mines to produce more coal to sell in the open market—some portion of the gains, 50% say, could be taken by the government, leaving enough for the captives to feel enthused enough to want to hike production. Another decision that needs to be taken is to scrap the single-part tariff that the power ministry introduced some years ago. Prior to this, all hikes in fuel costs were passed on to buyers and the only risk taken by power producers related to getting the project off the ground. Though it is not possible for anyone to take a 20-25 year call on fuel prices, this is what the single-part tariff, in effect, asked power producers to do. This is also the reason why two ultra-mega power projects (UMPPs) are in trouble since the sharp hike in prices of imported coal—that can’t be passed on to buyers under the single-part tariff—means it is cheaper for them to pay penalties for not producing power than it is to produce it. Deutsche Bank forecasts a 50% shortfall in coal supplies by FY 15—given that imported coal costs more than double what local coal does, continuing with the single-part tariff means India’s power crisis will dramatically worsen.



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