Your power bills to get cheaper, all thanks to fuel cost under-recoveries

Aggressive bidding by power producers in the recent coal block auctions will result in under-recovery of fuel cost ranging from 39 paise to Rs 1.02 a unit for them for 25 years, according to a study. Consumers, however, stand to benefit, with a tariff reduction of almost 1% as early as in 2016-17.


According to the Economic Times, power companies have agreed to forego the mining cost they were allowed to pass on to consumers and instead pay the government to get hold on to captive mines to guarantee the supply of coal. The aggregate under-recovery of each bidder is estimated at Rs 800 crore in FY 2015-16, which is likely to increase to about Rs 1,800 crore by FY 2017-18.


As power generation projects of the winning bidders have existing power purchase agreements with distribution utilities, mainly in states like Madhya Pradesh, Chhattisgarh, West Bengal and Odisha, average tariff relief is estimated at about 0.9% for consumers in these four states by FY 2016-17, ratings firm ICRA told ET.


The coal ministry has concluded the first phase of e-auction of 33 coal blocks. Of these, 12 were for the power sector out of which nine have been allocated so far. These blocks hold geological reserves of 1200 million tonnes, of which extractable reserves are estimated at 60%, enough to provide fuel security for about 6 GW of power generation capacity. These were among 200-plus blocks on which the Supreme Court had cancelled mining licences last year, citing irregularity in their allotment.


The winning bidders may look at options to bridge the under-recoveries in fuel cost using additional gains generated from sale of 15% of the generation capacity in the merchant, or short-term trading, market as well as the possibility of quoting higher fixed-capacity charge in the upcoming competitively bid power purchase agreements for the capacity which is yet to be tied-up. However, the slow progress seen in tie-ups of PPAs for power procurement in long-term and medium-term basis by the state-owned distribution utilities in the past two years remains a key concern for independent power producers which are yet to tie-up their capacity, ET said. According to ICRA, the absence of fuel charge recovery in power purchase agreements for the generation capacity linked to coal blocks of the winning bidders remains favourable for key power buyers - state-owned distribution utilities. This is expected to result in a reduction in their power procurement costs.