MoP allows pass-through of imported coal costs: Finding a Way Out

Finding a Way Out

The last three decades, the shortage of imported coal, limited increase in domestic coal production and a substantial 25 per cent rise in demand since March 2019 have led to insufficient inventory of coal with In­dian power plants in recent months. The average coal stock at coal-based power plants stood at seven to nine days in April 2022, with an inventory of 23 million tonnes (mt), almost a third of the ideal coal stock level. (Considering de­mand conditions and the capacity utilisation of thermal power plants [TPPs], around 90 mt of coal is needed as per the guidelines of the Central Electricity Regulatory Com­mission [CERC], which require inventory levels of 12-16 days for TPPs with pithead mines and 20 days for TPPs with non-pithead mines.) The problem of insufficient coal inventory has been further exacerbated by the heat wave in April and May. The coal crisis forced several discoms to cut electricity supply and resort to blackouts.

In light of the critical situation, the Mi­­nistry of Power (MoP), on May 11, 2022, invoked the emergency provisions of Section 11 of the Electricity Act, 2003 and introduced norms mandating all gencos, including those based on do­me­stic coal, to import at least 10 per cent of their requirement for blending. Section 11 of the act allows the government to direct gencos to operate and maintain output in accordance with the target given by it. These emergency provisions are applicable until April 2023. Impor­tantly, the notification also directed gencos to operate at full capacity in the co­m­ing months so as to meet the resurgent demand. Further, on May 18, 2022, the MoP directed the CERC to allow po­w­er generators to blend up to 30 per cent of imported coal until March 31, 2023 as it is in the public interest to en­su­re continuous power supply.

A closer look at the recent policy measures announced to address the current coal crisis in the county….

MoP notification on imported coal blending

The MoP’s notification requires all gencos to comply with the aforementioned notification and place orders for importing coal equivalent to 10 per cent of their demand by May 31, 2022 and receive the first import order prior to June 15, 2022. It also stated that in case of non-receipt of imported coal by June 15, 2022 (first quarter of 2022), the defaulter gencos would have to import up to 15 per cent of their demand requirements till Octo­ber 2022. The notification also stated that the domestic coal allocation of defaulter gencos would be reduced by 5 per cent if they did not import up to 10 per cent of their demand requirements by June 15, 2022. It further added that generation units using domestic coal and forgoing imported coal in April-May 2022 would have to blend coal at the rate of 15 per cent until October 2022. From October 2022 to April 2023, gencos operating on domestic coal would blend coal at the rate of 10 per cent.

The power ministry, in consultation with the states, has asked the Central Elec­tri­city Authority (CEA) to create standard operating procedures for blending im­ported coal with domestic supply. The blen­ding process followed at NTPC Li­­­mited and Damodar Valley Corpora­ti­on (DVC) will be analysed to devise a pan-Indian mechanism.

In May 2022, NTPC invited bids to procure 4.53 mt of imported coal, mainly for blending with domestic dry fuel in thermal plants. The company has been mandated to procure 20 mt of imported coal in 2022-23. It has invited bids for procurement of 1.43 mt of imported coal on a freight on road power station basis for NTPC plants at Vindhyachal, Rihand, Singrauli, Khargone, Dadri, Tanda and Unchahar. Bids have also been invited for the procurement of 1.6 mt of im­por­ted coal on a power station basis for NTPC’s plants at Talcher, Kaniha, Fara­kka, Kahalgaon, Barh, Barauni, Bongai­gaon, Simhadri and Ramagundam.

Restarting imported coal-based plants

The notification issued by the MoP on May 11, 2022 also included provisions for reactivating imported coal-based (ICB) power plants that are stressed and un­der­going resolution through the Natio­nal Company Law Tribunal. The MoP di­rected the Power Finance Corpo­ration and the Rural Electrification Corporation to take necessary action to arrange sho­rt-term loans for a period of six months, with adequate safeguards. The amount extended to these stressed ICB plants will be used as working capital for operationalising these plants. The provisions pertaining to reactivation of stressed and under-resolution ICB pla­nts will be effective until October 30, 2022.

Financial provisions for gencos

Taking into consideration the financial limitations of coal-based TPPs, the notification incorporated provisions for the pass-through of the increased cost of imported coal, in accordance with Sec­tion 63 of the Electricity Act, 2003. This section enables gencos to raise tariffs in case of a change in variable costs such as fuel despite long-term PPAs, subject to determination by the state governments and discoms. The extent of pass-through of tariffs to discoms will be computed using the formula specified in Regula­tion 43 of the Central Electricity Regula­tory Commission (Terms and Condi­tions of Tariff) Regulations, 2019.

Moreover, on May 28, 2022, the MoP man­dated gencos to conduct provisional billing of their expenses on a weekly basis. It also required discoms to extend payment of at least 15 per cent of the provisional bill by the procurers within a week of the date of receipt of the bill. In case of default of payment of 15 per cent of the weekly provisional bill, the generating company would be free to sell 15 per cent power on the power exchange.

Cost implications

The increase in imported coal costs in the past few months as well as the expedited procurement of imported coal in the spot market will drive up fuel and generation costs enormously. NTPC expects this will push fuel costs up by Rs 7-Rs 8 per unit and lead to an in­crease in final tariffs of up to 50-70 pai­se for the consumer.