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The costs of coal

Anxiety about corruption charges is limiting options for downstream ministries like power

Written by The Indian Express | Published: October 20, 2012 2:21 am

Anxiety about corruption charges is limiting options for downstream ministries like power

Pricing issues in the power sector are moving to a level of complexity that could soon rival the telecom sector. In both sectors,the crux of the matter is how to price natural resources,coal or airwaves,in a way that does not generate windfall profits for companies. Anxiety created by the well-intentioned but intemperate agitation against corruption has meant that coal allocation plans for the years to come are in a mess.

To ensure that there is no chance of corruption charges against the key deliverable in the power sector — the electricity tariff — government agencies are developing a cast-iron inspection regime for power plants. Instead of the current model,where fuel costs are part of the quotes offered by power developers at the bidding stage,the new bidding format for new projects will make fuel costs pass through. The power ministry’s proposed solution,to use an independent engineer to do a quarterly audit as part of the new model,has annoyed power-producing companies.The larger issue is whether a standard bidding document can be created,one that will satisfy the regulators that no generating company enjoys an unfair advantage,assure the lending banks that they can earn a decent return,and convey to the auditors and to civil society that there is no misuse of coal or excessive coating of capital to reduce the share of public profit. The stakes are high,as private sector developers will provide for nearly half the 84,000 MW of project capacity slated to be commissioned over the next five years.

The problem is compounded because domestic coal is unlikely to be available in adequate quantities anytime soon,since most private operators have been driven out of the sector. Power plants will now depend on imported coal far more than they have done so far. This is the reason for the ministry’s rush to put the new standard bidding document in place. It will tide over tariff uncertainties stemming from the use of imported coal,the price of which will fluctuate. While some producers would prefer reverting to the old regulated tariff regime until a more acceptable solution emerges,it is clear that “Coalgate” will ending up substantially costing the economy,and not in the way the auditors imagined.

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