Power sector policy must allow tariff to reflect higher costs of fuel

It is ironic that the policy of cast-iron tariff bids is holding up implementation of a clutch of mega power projects and making them unviable in the face of dearer coal prices. Adani Power has reportedly approached the Supreme Court to annul its electricity sales contract with a state utility, because of uncertainty over fuel supply and unexpected rise in the cost of imported coal.

The coal price hike appears to be of a force majeure nature, beyond the control of the power producer. It seems ground enough for rebidding, with clear-cut norms to take into account future coal-price shocks. But in tandem, we need to fast-forward reform and opening up of coal mining, which anachronistically remains a public sector monopoly, and end attendant rigidities.

Now, the idea of price (read: tariffs) as the sole criteria to decide on bids for power projects is unexceptionable, as it enhances transparency in a policy-challenged sector characterised by huge revenue leakage for public utilities. Just as important, competitive tariff bids provide for price discovery, incentivising efficient producers to seek custom at attractive rates.

The point is to have a market for power with multi-level scope for price competition. The system of tariff bids can but be the first step, albeit a critical one. Next, merit order dispatch, with priority always for evacuation of least-cost power would boost systemic effectiveness. Further, we need norms for 'open access' and line capacity, so that consumers are actually able to source power competitively.

In any case, to follow through power sector reforms without reform of the market for coal, the main fuel by far in our thermal plants, would be thoroughly suboptimal. To reduce transaction costs and given the need to revise power purchase agreements necessitated by spurts in fuel costs, it would make sense to develop benchmark indices so as to factor in higher costs into retail power tariffs.

For, rigid, unrevised tariffs without regards to costs are guaranteed to break down markets, including that for power. Along with stamping out power theft, power sector reform must focus on flexible pricing in a competitive market.