Coal price pooling likely only for power plants after March 2009

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SummaryFaced with stiff opposition from power utilities over the Centre’s move to introduce coal price pooling which could increase price of the fuel by R100 a tonne or more, the coal ministry may restrict the mechanism only to power projects getting commissioned after March 2009.

Faced with stiff opposition from power utilities over the Centre’s move to introduce coal price pooling which could increase price of the fuel by R100 a tonne (5%) or more, the coal ministry may restrict the mechanism only to power projects getting commissioned after March 2009. This means the pooling mechanism would apply only for about 60,000 MW worth of new capacities including those likely to be commissioned by March 2015, leaving out between 80,000 MW and 90,000 MW of running capacity. Also, to start with, the pooling will be done only for 2013-14 and 2014-15, to gauge the policy’s implications before deciding whether to extend it.

Among the projects that might shift to price pooling are Reliance Power’s Rosa, NTPC Simadri and Sipat, Lanco’s Anpara, Adani’s Mundra, Indiabulls’ amravati and GMR’s Kamalanga.

Under the pooling system, coal prices would be very close to international prices. India’s coal consumption is estimated to be around 500 million tonnes in 2012-13, including imports in excess of 80 million tonnes. While the domestic price of the fuel ranges between R2,200 and R2,500 a tonne, import prices are roughly 50% higher. Still, pooling would result in an increase of R100 a tonne only because imported coal is generally more efficient with higher calorific value.

Sources said that the coal ministry has proposed the limited application policy for price pooling in a note forwarded to the Cabinet Committee on Economic Affairs (CCEA). The CCEA had earlier asked the coal and power ministries to finalise a workable formula on pooling before it can decide on the issue.

Under the revised terms of the fuel supply agreement (FSA) finalised by Coal India, it will supply 80% of the annual contracted quantity of coal to power producers. Out of this, 65% of the coal will be provided from domestic sources and the balance 15% coal would be met through imports. CCEA expects that pooling of coal prices would be required in 2013-14 and 2014-15 in view of CIL’s inability to meet even 80% of the annual contracted quantity of coal for new generating units commissioned from April 1, 2009, to March 31, 2015.

“Coal India expects shortage in meeting the needs of new linked customers from its domestic mines for the next two years. If the PSU's production picks up after that, there would not be any big need to import coal and meet the needs of customers. Coal price pooling, therefore, should not be implemented as a permanent measure,” said a coal ministry official, confirming that the ministry is in favour of limited application of the pooling mechanism.

A CIL official, however, said that pooling cannot be implemented in isolation and its purpose would be defeated if selective implementation results in sharp increase in the fuel price for projects coming after March 2009. “Complete implementation of pooling (for projects coming before and after March 2009) would have resulted in an average coal price rise of just R100 per tonne or about average 25-30 paise hike in electricity tariff. But this will be much higher if limited pooling is allowed.”

Under the proposed price pooling mechanism, CIL aims to recover the additional cost of imported coal by raising domestic coal prices and supplying full quantity of coal at uniform price to consumers.

The pooling mechanism has already been opposed by a majority of state distribution utilities as they fear that it would result in a sharp escalation in a project’s variable cost and, thereby, result in higher power tariffs.

The government has mooted the idea of price pooling for coal given the widening gap between domestic demand and supply of coal, which has given rise to the possibility of default by several power projects on their electricity supply contracts. It is meant to help CIL comply with its commitment to meet at least 80% of power companies’ coal requirement.

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