India has decided to allow power companies to pass on the costs of foreign coal to customers, a minister said on Friday, a move likely to boost imports and investment in power generation, but bring higher energy prices to consumers.

However, a proposal to raise gas prices for the first time in three years has been deferred, Information and Broadcasting Minister Manish Tiwari told reporters after a cabinet meeting.

A gas price rise to near-world levels would have fuelled investment in the sector and made liquefied natural gas (LNG) imports from major producers like Qatar more attractive.

India is the world's third-largest producer of coal and more than half the country's power comes from burning the fuel, but domestic output falls short of demand, triggering frequent and lengthy power cuts in Asia's third-largest economy.

It also means power producers have to turn to expensive coal imports and until now, they have not been able to pass these costs fully on to customers.

"That's a very, very positive development," Isaac George, the chief financial officer at GVK Power, said of the government decision.

The move could help bring as much as 78,000 MW of generation capacity on stream, a Power Ministry source said.

India's economy grew at its weakest pace in a decade in the year to March 31, 2013 and the government is trying to tackle a raft of reforms, some leading to unpopular price rises, ahead of state elections this year and national elections in 2014.

Deferring a gas price rise to near world levels will see the government avoid an expected voter backlash.

CONSUMERS TO PAY

The new power prices have to be approved by individual states, which can decide to subsidise them and ease the costs for millions of poor Indians.

"Ultimately the consumers have got to pay for the cost of generation, so there is no question of the developer taking a hit on the cost of imported coal. There was absolutely no sense in that," said Mr. George.

Shares in GVK and other power companies like Tata Power and Adani Power rose after the decision.

India's electricity generation is dominated by state-run NTPC although an increasing number of private players are setting up units, often near the coast to facilitate imports.

The country's total installed capacity is about 212,000 MW as of January this year, according to the state electricity authority.

Coal accounts for over half of the country's energy demand and 80 per cent of production comes from Coal India Ltd, which is 90 per cent owned by the Union government.

Producers can either import directly or through state-run firms like Coal India and MMTC Ltd.

Copyright: Thomson Reuters 2013