Coal linkage rationalisation wont cut coal prices

Written by Indronil Roychowdhury | Updated: Sep 30 2011, 08:21am hrs
Rationalising linkage has been one of the coal sectors latest reform initiatives, intended to mitigate high coal prices at consumers end and reduce fuel consumption for coal transportation. An inter-ministerial task force formed for the purpose in 2010 has come out with a plan of transferring linkages of consumers to the closest mine so that they dont need to carry coal from distant mines. This will also mitigate environmental factors as carrying coal over a lesser distance would mean limiting the spread of coal dust particles.

In the present system, the standing linkage committee gives coal linkages to consumers in sectors including power, steel and cement. There is no criterion, as such, for giving linkages.

A consumer in Jharkhand could get linkage at Orissa while the closest coal mine could be in Jharkhand itself. This creates logistic issues like problems in getting railway rakes and carrying coal by road, which down the line results in lower off-takes and stock piling at the pit headswhich also aggravates the risk of coal mine fires. So, just binging the consumers to the closest mine is supposed to address many issues. But consumers, especially power sector consumers, dont seem to be happy as the linkage rationalisation will help little in mitigating high prices of coal.

Take the case of the West Bengal Power Development Corporation Ltd (WBPDCL). The company has already been given linkage to its closest mines under the Eastern Coalfields Ltd (ECL) for a chunk of its requirement. But it is linked to mines that produce A and B grades of coal currently costing an average of R5,500-6,000 per tonne, much above the price of imported coal, whose contract agreement made two years back costs around R4,700 per tonne to the company. WBPDCL doesnt need A and B grades of coal and can do with E and F grades costing around R700-800 per tonne from the mines under the Mahanadi Coalfields Ltd (MCL). At present, WBPDCL is not lifting coal from ECL, though this will attract a penalty. But its present tariff structure by no means supports costlier coal purchase.

For WBPDCL, the best linkage would be with the mines under the Bharat Coking Coal Ltd (BCCL), which is neither too far from the consumers stock point (though further from its present ECL linkage) nor are its prices as high as ECL coal. But the present rationalisation formula doesnt facilitate WBPDCL in any way since the scheme is based only on distance.

According to Coal India Ltd (CIL) chairman NC Jha, the new rationalisation policy would alter neither linkage quantity nor quality. The only alteration would be in the sources, for which CIL has to work out its own formula. Now the Central Electricity Authority (CEA) has made it clear that the huge exercise of altering sources would not have any positive effect on consumers, since just helping lower transportation costs would not mitigate the high coal prices.

According to CIL officials, the task force has overlooked the pricing factor while recommending distance-based linkage rationalisation. In fact, prices of coal are not the same in every coal mine; they vary according to grade and quality. Sometimes consumers linked to distant coalfield get coal at a cheaper rate though they may pay more for freight. Coal from a closer coalfield could be costing more to a consumer, while freight could be cheaper. This has delivered parity in the cost at which consumers got coal from various parts of India, though the recent hikes in the prices of A and B grades of coal have hurt this balancing mechanism.

According to Jha, changing sources would be a very difficult task since CIL can neither change the committed quantity nor can it change prices at which consumers are buying coal at present. So it is evident that the suggested linkage rationalisation will not work since it is full of holes. The government has to take care to plugthe loopholes when it comes to formulating new policies, otherwise reforms will lose direction.