A faulty fuel escalation index, which excludes assorted taxes and levies on coal and its transportation via the railways, has caused under-recoveries of Rs 8,400 crore to a clutch of independent producers over the five years to FY17.
A faulty fuel escalation index, which excludes assorted taxes and levies on coal and its transportation via the railways, has caused under-recoveries of Rs 8,400 crore to a clutch of independent producers over the five years to FY17. These companies, with a combined capacity of 12,000 MW, had won the contracts under the “Case 1” competitive bidding that allows unrestricted tariff escalation based on a fuel index. While the firms hit by the non-inclusion of imposts in the index include Adani Power, GMR Energy, Lanco Infratech, the industry has blamed “regulatory delays and policy inconsistencies” for the situation. In a letter to power minister RK Singh recently, the Association of Power Producers (APP) said the index does not cover 49% of coal costs and 21% of fuel transportation costs.
The letter, reviewed by FE, also stated that the Central Electricity Regulatory Commission (CERC), in its May 2016 order, directed its staff to submit a report on a revised methodology for index calculation within two months. The report, however, has not been finalised yet. According to Ahsok Khurana, director-general at APP, the issue “is leading to huge under-recoveries for the power units and the likelihood of these assets turning into NPAs is imminent if the issue is not resolved quickly”.
The price escalation index for coal—determinant for the calculation of variable fuel charges of power production—does not include royalty, district mineral fund contribution, etc, paid by Coal India and adds to its basic coal production cost. Also, the GST compensation cess (earlier known as the clean energy cess) and surface transportation charges are not included in the railway freight.
The CERC had come up with a new escalation index in May, which gave some respite to the power sector by segregating coal prices into three parts based on gross calorific value (GCV). Under the previous index, coals from various categories and different GCVs were clubbed, failing to reflect the additional hikes in fuel prices. However, even the renewed index failed to include the taxes and levies. Sources said the CERC had asked the department of industrial policy and promotion (DIPP) to come up with separate coal price index for the power sector, but the DIPP said the task would have to be executed by the CERC itself. The revised national tariff policy states that if any change in domestic duties or taxes imposed by the government after bids are awarded causes changes in costs, it should be allowed as pass-through after the approval of regulators, unless otherwise mentioned in the conditions of the power purchase agreement.
The lacuna between policies and actual implementation are further impacting power producers who are already reeling under various problems – many have no power purchase agreements for long-term supplies and several are facing lack of steady coal supply and the sudden rise in prices of imported coal.