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Cover Story | August 2017

Many countries imposed regulations & taxes on coal, impacting end-users

<span style="font-weight: bold;">Kameswara Rao, Leader - Energy, Utilities and Mining, PwC India.</span><br /> <span style="font-weight: bold;"><br /> Indian industry has entered coal mining in a big way about 10 years' back to support their UMPP project plans. How Indonesian experiment has turned sour for mining operators/ importers? </span><br /> Not just Indonesia, many countries, including Australia, have imposed regulations and taxes which impacted end-use companies that mined coal and commodities for purchase at cost of production. Higher taxes meant that input costs exceeded that on which the projects were constructed. <p></p> <p> <span style="font-weight: bold;">Only UMPPs in operation in Gujarat are in the limelight recently, citing imported woes. Is it a problem of not having a clause on 'commensurate pricing' of power sold by them from time to time in PPAs, instead? </span><br /> The only other UMPP is in Sasan which is based on domestic coal. The bid conditions did offer commensurate pricing option, but bidders did not exercise it fully as they aimed to use captive coal, which was right in principle. </p> <p><span style="font-weight: bold;">Is this a peculiar problem faced only in India? Explain. </span><br /> Many other countries, which depend on imported coal, such as China and Japan too faced higher costs. In some cases the power plants would have taken a hit as Indian ones did and in other cases power markets permitted pass-through of costs. It depends on the jurisdiction and regulations. </p> <p> <span style="font-weight: bold;">What are the available remedies for the imported coal based power plants in India now and utilisation of these assets in a best possible way? </span><br /> In an ideal world, the higher costs should be recognised in tariffs. Any power plant, private or public, would have suffered similar consequences. The stakeholders, including the buyers, have to seek a regulatory workout to salvage these otherwise good assets.</p> <p> <span style="font-weight: bold;">Are there any UMPPs in operation outside Gujarat, which rely on imported coal? </span><br /> No. </p> <p> <span style="font-weight: bold;">UMPPs were planned with an avowed aim of bridging the gap between demand and supply of electricity? How many projects have been bid for and what is the status of such projects now? </span><br /> Three projects were bid for, and two have been constructed. </p> <p> <span style="font-weight: bold;">Imported coal-based power projects were doing well till a year ago. What were the advantages they had provided? What went wrong with their operations, of late?</span> <br /> The large scale of UMPPs offered economies of scale in both mining and power generation, which meant that we had large base load capacity at affordable rates. </p> <p> <span style="font-weight: bold;">How the coal price movement in global markets have changed over the last 10 years/a few years? </span><br /> The increase in commodity prices in 2007-08 and subsequently up to 2010 led many governments to enact new regulations that were aimed at extracting more value for the governments through taxation. These regulations, rather than prices itself, are responsible for the industry's woes.</p>
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