Watch out for steep power tariffs

Wed, 5 Jun Pre-Open

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Policy bottlenecks and fuel linkages are two key factors impacting power sector right now. Considering the deficiency of coal reserves, India has to import a portion of its coal requirement. Also, since most power producers are dependent on Coal India to get their feedstock to generate power, government made it mandatory for the company to sign fuel supply agreements with power producers. This meant that power producers were assured of coal supply. However, it also resulted in further bureaucratic hurdles. Fuss was created over what should be the minimum commitment supply level of Coal India and what should be the penalty if it fails to meet its target. Price pooling was another issue on hand.

While various proposals were considered and debated to solve this policy logjam it seems that the saga is not likely to end soon. Now the government has decided that price pooling will be shelved. Earlier it was proposed that prices of domestic and imported coal should be pooled so as to reduce the aggregate cost of fuel for new power producers who were unable to procure their entire requirement from domestic markets. It may be noted that domestic coal prices are lower than international prices. Hence, if you are unable to procure coal domestically you need to import the fuel. This raises your input cost which impacts margins since the end user tariffs are regulated by the government.

With price pooling shelved government has now decided to pass on the entire additional cost of imported coal to the customer. So, the basic model is - Coal India will supply the mandated amount to the power producer as decided initially. Any coal deficit must be met by the power producer by importing the coal themselves at higher prices. This would mean that power tariffs are likely to go through the roof as increasing cost will be passed on to the customers.

There are two ways to look at the impact of the said proposal. The traditional way goes on to say that increase in prices is harmful to the society as consumers will have to pay higher cost of power. And power being a necessary resource for both retail and commercial use; it is government's responsibility to ensure that it is priced reasonably. However, it should be noted that the higher tariffs will affect only corporates and consumer with high power consumption rates.

The other way to look at this proposal is that passing on costs would improve the health of power producers. If they are made to bear the burden of increased fuel cost, then the investments in the sector will run dry. Most private sector power producers in India are already contemplating on rolling back their capex plans. Hence, any regulation that makes power production financially unviable will have a direct impact on capacity addition in the sector. Hence, government should take steps that balance the need of both the stakeholders - power producers and consumers.