Power CEOs may find that PM can't do much to help them

To ensure that the power sector’s crisis does not worsen, Coal India Ltd (CIL) may agree to carry the burden of its wage hikes without passing them on.

The coal ministry has also given an assurance that it will review the new pricing mechanism announced by CIL based on the gross calorific value (GCV) of coal so that power producers do not have to face a price rise. This came on a day when the Prime Minister, along with coal and oil ministers, is meeting 21 power CEOs, including Ratan Tata, Sajjan Jindal, Anil Agarwal and Anil Ambani.

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Captive power producers are already in deep waters and say they cannot bear another 10-12 percent rise in the cost of coal and are protesting against the move. They are getting some support from the Calcutta High Court which has asked Coal India not to give effect to its 30 December notification on GCV till further orders. As a result CIL has stopped billing its clients though it cannot halt supplies to the power sector, reports DNA.

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The coal ministry has asked power producers to ramp up production of coal in their captive mines and not depend solely on Coal India. It has made it clear that the coal monopoly cannot import costlier and then subsidise it for Indian power companies by pooling it with domestic supplies.

Independent power producers (IPP) have been facing a tough time after having bid aggressively for the power projects in the last decade. With international coal prices remaining firm, Coal India defaulting on coal supplies and the Indonesian government imposing an export duty on coal exports, most coal projects have become unviable.

Reliance Power had stopped work on its 4,000 mw Krishnapatnam ultra mega power project (UMPP) and Tata Power is also finding it impossible to carry on work at its Mundra power plant. It has, therefore, become mandatory for stakeholders to relook at power purchase agreements (PPA) to ensure production on time.

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Macquarie Securities, in its latest report, says that government or the regulators are unlikely to intervene to sort out the “recent problems being faced by private IPPs…”. However, The Indian Express has reported that the prime minister could propose a relook at the PPAs to make the power projects viable by passing on the cost to end consumers.

Though the IPPs would definitely be pushing for a relook at the contracts, it is easier said than done. The PPAs are signed between the power producers and state governments. Take a look at Tata Power’s Mundra project. One cannot blame the company for the trouble it has gone to. Despite planning coal supply through captive mines in Indonesia, the foreign government imposed an export duty on coal, raising its costs to the level where the project has become unviable.

Some 49 percent of Mundra’s power is supposed to be bought by Gujarat. Being a non-Congress government, it is improbable that the power ministry will be able to facilitate any negotiations, points out a power analyst in a domestic brokerage who does not wish to be named. Even Essar Power’s Salaya project will be affected due to the change in Indonesian coal pricing regulations.

The problem is similar in all projects. Renegotiations with multiple state governments cannot perhaps be done through the Central government. Moreover, Macquarie writes, the power ministry is not ready to go back to a pass-through regime, where increases in fuel costs can be passed through to tariffs. “Their view is that building fuel pass-through and interest too, which is being recommended, may take the regime very close to cost plus, which is not desired.”

There is not much the government can do about the PPAs. As Arup Roy Chowdhury, chairman and managing director of NTPC said, “When the government came into privatisation mode and these companies came into existence and won bids on a competitive basis, where is the question of crying wolf [now]? People laughed at us when we did not bid low for Sasan and Tilaiya, but with our average cost of power at Rs 2.7 a unit, how can I [even] think of putting up a plant at Rs 1.2! If the private sector wants to take the risk, it should take it in total.”

Add to this the mounting losses of state distribution companies and upto 40 percent transmission losses, you have a recipe for disaster in the power sector. Even the Shunglu Committee recommendations on the power sector will not be able to do much unless implemented.

Even if tariffs are revised and better regulated, Fortune Capital writes in a recent report, there is nothing to ensure state governments will pay their share of subsidies in time. In financial year 2010, only 56 percent of subsidies were paid by state governments. The SEBs end up taking short-term loans to bride the gap and sink deeper into debts.

What needs to be done to resolve power sector issues is known to all: give faster clearances to CIL, build better railway infrastructure for cheaper and faster transport of coal, invest in washeries to get better quality coal, hike tariffs to control the losses of distribution companies and reduce transmission losses through better technology.

If a state government wants to subsidise power for some consumers, it has to pay a direct subsidy. And if it does not pay subsidies on time, state governments’ accounts with the Reserve Bank of India can be directly debited, the Shunglu committee recommended.

But when the Centre is itself dilly-dallying over paying the subsidies due to oil companies, it is unlikely that it can impose greater discipline on the states for their transgressions.