Just consider these. You have an asset in the form of a power plant that is either lying idle without generating a unit of electricity or is operating at sub-optimal levels for want of coal, the fuel. The main supplier of coal in the country which digs up more dirt than coal is not able to meet the fast-growing demand for the fuel nor is it able to ramp up its own production.

The country is starved of electricity with a demand-supply gap of more than 10 per cent, and growing. And then, there is precious capital locked up in these idle plants, both as equity from the promoting companies and as loans from banks and financial institutions. There is a risk that these loans will become non-performing assets and stress balance-sheets of banks.

Hobson’s choice

What option does the government have faced with these? Allow power companies to import coal, even if at higher prices, to tide over the next couple of years until Coal India, the main producer, is able to increase its output. That is exactly what it did on Friday when it allowed power projects — those already commissioned and those under construction now — to import coal to meet the shortfall.

Such shortfall will amount to 35 per cent of the quantity that Coal India agreed to supply this year; fall to 33 per cent in 2015-16 and further to 25 per cent by 2016-17. In other words, Coal India will increase production in the current Plan period but there will still be a deficit of 25 per cent between demand and supply of domestic coal even after four years from now.

The fall side of the government’s move though is that power tariffs may rise as imported coal is costlier than domestic coal and the higher cost will be passed on to buyers which are the state distribution utilities. Australian thermal coal prices averaged around $94 a tonne (about Rs.5,600) in May. The latest basic price of the best quality coal from India is Rs.3,900 per tonne in comparison.

One, two, three

There are three options on how to handle the extra cost. First, it can be forced on the generation companies but the problem is that they are all in bad financial shape with some of them posting losses. Indeed, that is exactly why these companies did not resort to importing coal until now. For example, Adani Power reported a loss of Rs.1,952 crore in 2012-13.

Second, the distribution utilities, most of them owned by the respective state governments, can absorb the extra cost of between 10-25 paise per unit.

This is not an option for most of the state utilities except the healthier ones such as Gujarat’s.

The final option is to pass on the higher tariffs to consumers, which is the most likely scenario. The only way that this can be avoided is if state governments decide to compensate the electricity utilities for the higher cost, which is a possibility.

Consumers, at least in industry if not domestic ones too, are unlikely to complain subject to two caveats — one, that this will ensure increase in power supply without outages and two, the net increase in per unit tariff is contained at 25 paise.

The first will take some time to happen as some of these power plants will come on stream in the next year or two. On the second, there is little guarantee because global coal prices can be volatile. And if they do rise, such increase will be passed through to consumers.

The long-term solution to this, indeed by 2017 when the current Plan ends, is to increase domestic production, if necessary by opening up coal mining to private participation, given Coal India’s obvious inability to meet demand. With 260 billion tonnes of coal reserves, it is an appalling sight indeed to see power plants idling and industry and domestic consumers alike starving for power.

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