The government plans to cap costs of power plants that can be passed on to electricity consumers, to prevent rise in tariffs as all power firms have agreed to forego mining costs for winning the blocks.

The move will hit power firms as they will have to absorb the mining costs throughout the life of the block and will not be able to pass on the high coal costs under different heads.

Companies said the move was unfair and the government should have indicated such plans before coal block auctions. The government had earlier said it will revise existing power contracts between generating and distribution companies to lower electricity tariffs from plants that will run on coal from auctioned captive blocks.

It now plans capping the fixed costs of the plants to prevent tariff increase in new contracts as most companies that have won the mines with aggressive price bids do not have power purchase agreements (PPAs).
Through the move, the government is ensuring that companies do not pass on the burden of high coal cost in new PPAs. "We are pretty clear that the companies will not be able to smuggle the costs to tariffs," a senior government official said requesting anonymity. The power ministry may issue advisories to the state power distribution companies to check the tariff pass through when they call for the bids. As per the norms, the companies which won the blocks will have to sign PPAs with distribution utilities to be able to mine the coal.

The government has already made it clear that the existing PPAs will be re-opened to bring down the tariff, the official said. The power ministry is soon expected to issue advisories to the state and central electricity regulatory commissions to revise the existing PPAs. The government is also amending the National Tariff Policy to enable the electricity regulatory commissions to open the legally binding PPAs to revise the fuel cost.

Section 63 of the Electricity Act, which relates to tariff-based competitive bidding, limits the role of electricity regulators to adopting the tariff and notvetting. "The government is exploring ways to pass on benefits of low coal cost to consumers. The government can revise the tariffs downwards under the change of law provision in the PPAs," another government official said.