Power tariffs based on negative price of coal will only dim the market

If the input for a product is priced negative, or much below zero, for a period of 25 years, can the pricing for that product be sustainable? The product here is power for which a Rs 96,971-crore reduction in tariff has been promised by 11 coal block winners by pricing coal ‘negative’.

The price of coal from the auctioned coal block has no correlation to the actual cost of production. Since coal blocks earmarked for the power sector were put on reverse auction – those who bid the lowest below the reserve price get the block – it is expected power tariffs will come down.

“No commodity is free and certainly no commodity comes for a negative price. This is not the market price for coal. What these bids will do is get stuck power plants to start generating power. Either they will continue to supply at the bid price and continue to make losses for 25 years though lesser than earlier when their power plants were idle, or they will bid higher for capacity charges,” said Rajiv Mishra, managing director, CLP India.

Power generated from coal produced from auctioned blocks is expected to be cheaper than coal supplied by Coal India, which is called linkage coal. The government is even planning to auction coal linkages but “coal from blocks auctioned and to be auctioned is likely to be bid aggressively for both quality and supply security, and so likely to be cheaper than linkage auction”, said Kameswara Rao, leader, energy, mining and utilities at PricewaterhouseCoopers.

The impact of coal auction on tariffs will, however, be localised as the capacity auctioned represents only six per cent of the existing thermal generation capacity. The allocation to government companies is much larger, but the gains will depend on how efficiently they can develop them, pointed out Rao.

“The tariffs should be largely sustainable over the mine life, but will be a burden on companies’ balance sheets and over time they may seek to divest them,” he added.

While there is a fear that the operators of these blocks might try to recover their coal cost by building it on in the fixed (plant and machinery) component of power, officials said it might not be easy.

http://www.business-standard.com/article/economy-policy/power-tariffs-based-on-negative-price-of-coal-will-only-dim-the-market-115042900036_1.html

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