Indonesia Tax Plan May Turn India Power Firms to Australia, Africa

Indonesia's plan to impose a 25 percent export tax on coal may turn Indian power producers towards other coal exporting countries and increase tensions between companies and the Indian government over electricity tariffs.

About 9,000 megawatts, nearly 10 percent of India's total coal-fired capacity, became unviable last year after Indonesia changed rules on coal prices. An additional sudden spike in coal costs would make matters worse and push other plants to raise prices, which would lead distribution utilities to buy less.

India imports about 12 percent of its coal requirements and sources 70 percent of that from Indonesia, the world's largest thermal coal exporter.

"It's a setback for power producers. This will discourage them from taking up projects based on imported coal," said K Rajagopal, CEO for thermal at India's Lanco Infratech Ltd , which runs a 1,200 MW plant fuelled entirely by imported coal.

State-run NTPC, Tata Power and Adani Power will be among the many Indian companies likely to be affected by Indonesia's export duty.

Coal fuels more than half of India's power capacity of 191,000 MW and will be required for 85 percent of the 76,000 MW additional capacity targeted in the next five years.

"Plants can't run on such expensive coal imports. This will make power unaffordable in India," said Ashok Khurana, director general of the Association of Power Producers.

"The only option is to ramp up domestic production and change the fuel mix with emphasis on renewable sources," said Khurana.

Domestic Delays

Slow environmental clearances and land acquisition have led to stagnating coal output in the country and have increased dependence on imports.

Coal India, which accounts for 80 percent of India's coal output, produced about 436 million tonnes in 2011/12, missing a scaled-down target.

The world's largest miner has come under heavy pressure from the government, its controlling shareholder, to sign pacts with power producers to supply 80 percent of their fuel requirements or face a penalty.

Non-coking coal imports have grown by about 25 percent per year since 2003-04. Estimated imports of 54 million tonnes for 2011/2012 are projected to quadruple to 213 million tonnes in 2016/17.

A coal shortage in India between April 2011 and February 2012 led to loss of 8.7 billion kilowatt-hours of power generation. Shortage of power is seen as hurdle in faster industrial growth of Asia's third largest economy.

Australia, South Africa and Mozambique are likely to emerge as the major sources of coal for Indian power firms in the coming years, though these countries also have policy and infrastructure constraints of their own, said Kameswara Rao, executive director at research consultants PwC.

"The taxation policy and the poor grade of coal it produces will make Indonesia less attractive," Rao said, predicting that Australia may displace Indonesia as the top coal exporter to India by 2015-16.

State Tariff Ties

Reliance Power, controlled by billionaire Anil Ambani, is already caught in a legal battle with state governments after the latter threatened to penalise the company for delaying a proposed 4,000 MW plant in the southern state of Andhra Pradesh.

Reliance delayed the project after Indonesia pushed up coal prices last year. Now Reliance, like Tata and Adani, wants state governments to raise tariffs for the projects that were originally bid for at a fixed rate.

But state governments are refusing to raise tariffs, unwilling to increased the burden on distribution utilities, which are mostly controlled by state governments. They probably lost around 800 billion Indian rupees ($15.8 billion) in 2011/12, higher than 635 billion rupees in 2009/10, rating agency ICRA estimates.

Bigger losses would have to be offset either by unpopular consumer price hikes or by increased subsidies from the government, adding to its massive bills for providing cheap food and fuel.

"This is a wake-up call for the government," said Rao at PwC. The consumer tariff should rise in line with fuel costs, and the government must focus on non-carbon energy, he said.

($1 = 50.6900 Indian rupees)