GST, Coal & Power Tariff

The much awaited GST was implemented by the government recently and there were articles in all major news papers. The article that caught my attention was regarding lowering of tax on coal from 11.69% to 5% which is supposed to lower the cost of electricity in the country where 60% power generation is using coal.

Lets take a look at how power price is decided. Tariff is not determined by fuel prices alone. The cost of each unit of energy consumed has 2 parts:

  1. Fixed cost (capital costs)
  2. Variable cost (fuel cost)

So where does coal price come into picture? The answer is both 1 & 2.

Lets dig deep into fixed cost. It consists of following subheads:

Sl Component weightage
a Return on Equity 15.50%
b Interest on Loan Capital As per actual
c Depreciation 5.28%
d Interest on Working Capital Based on Normative Parameters
e Operation & Maintenance Costs Based on Normative Parameters

Item d, working capital allows the power plants to stock coal for 1.5 months in case of pit head plants (situated near a coal mine) and 2 months in case of others.

Variable cost aka energy charges is for the recovery of primary fuel costs, (Primary fuel is Coal. There are secondary fuels in a power plant like light diesel oil, heavy fuel oil ets used during startup) secondary fuel cost and auxiliary power consumption (6 - 9% of the generated power is used to power the drives such as fans, pumps etc)

Consider an example of a 500 MW coal based power plant.

500 MW is more or less a common practice. There are 110 & 200 MW plants which were installed much earlier and will continue to run for 25 years - which is the average life of a coal based plant. Newer installations are 660 MW & 800 MW units. Even 1000 MW unit is under construction.

No Particulars Normative Parameters
1 Capacity of Plant 500 MW
2 Capital Cost 4 Cr/MW
3 Plant Load Factor (PLF) 80%
4 Plant Availability Factor 85%
5 Heat Rate (related to efficiency) 2,425 Kcal/Kw Hr
6 Auxiliary Power Consumption 6.50%
7 Plant Life (For thermal plant based on Coal) 25 Years

The power tariff would work out to approx Rs 1.42 (capital cost) + Rs 2.61 (energy cost) = Rs 4.03 / unit. Approximately 40% is the fixed cost and 60% is the variable cost. Detailed calculation for capital cost and variable cost can be seen here. With plants of higher capacity (Eg 660 MW or 800 MW) operating at super critical (Mechanical engineers would understand, others read as higher efficiency) parameters, the ratio changes slightly towards higher fixed cost and lower variable cost

The power when it reaches the end customers are loaded with transmission cost and distribution costs and a few losses which adds to this price.

So, what exactly has changed with GST? 60% reduction on the 11% tax on a component which constitutes to 60% of the tariff. Or simply 15 paisa per unit. It may not be a change at all for a small domestic customer who use 100 Units per month, but is definitely something for an industrial customer who consumes more. The benefit will be passed on to the common man as lower cost of finished goods.

If this blog was written a few years ago, the tariff would have been Rs 2 per unit(The same 1.4 towards fixed cost and .6 towards variable cost). The cost of fuel has increased to almost 4 times, thereby doubling the energy costs.


  1. AK Manohar, AGM (ME), NTPC Kudgi.
  2. Tarun Jagdish, Chartered Accountant

This was written keeping non power professionals in mind. Its very likely that the experts may have a different perspective. I would like to learn that, you may please mail me