The idea of distributing imported coal in the country using a ‘pooled price’ mechanism was mooted first in 2010. This was to cater to India’s growing demand for power-grade fuel over and above what Coal India Ltd (CIL) is in a position to supply from its mines.

This proposal from the Planning Commission, which envisages customers of domestic coal shelling out a slightly higher price to partially subsidise the higher cost of imported fuel, did not see the light of the day then. The reason: Imports not materialising due to CIL delaying award of contracts.

The agenda has resurfaced again in the last couple of months, following disputes over CIL fulfilling fuel supply agreements (FSA) signed with power stations commissioned after March 2009.

A section of power producers, led by the public sector NTPC Ltd, has put its foot down in seeking a minimum supply commitment of 80 per cent of its coal requirements — a demand virtually impossible to meet in view of constraints to raising domestic production.

Since that makes imports imminent if the FSAs are to be workable, the Centre, especially the Planning Commission, has once again revived the pooled price mechanism idea.

But this time, it is to serve a narrower purpose: The imported coal is now slated to be distributed to fulfil the FSA requirements of nearly one-third of the country’s thermal power capacity, the bulk of which is in private sector. The cost of this coal is proposed to be subsidised by existing generation utilities, mostly in the public sector.

Who gains?

The CIL board approved the price pooling proposal on August 7, as it would have no impact on the company’s finances. However, it has left many wondering as how the power sector gains from the whole mechanism.

In a regulated environment, where power producers are allowed to pass-through their costs (so long as they do not claim to pay more than the index price for imported coal, as determined by the regulator), the cost of fuel makes little difference to them. Most of the state-owned power plants work under this principle: Theoretically speaking, therefore, NTPC and others have little to gain or lose from pooling of fuel prices.

While both CIL and the Centre are yet to explain the rationale, logically subsidised imported fuel should largely help a section of privately-owned power producers, which had entered into long-term power supply agreements with distributing companies or Discoms — mainly controlled by State governments — at a fixed, levelised tariff. It is they who are currently in serious trouble, due to a host of issues ranging from inadequate domestic coal supplies, unfriendly mining policies adopted by exporting nations, to the rupee’s recent depreciation.

Needless to mention, none of these issues was anticipated during the tariff bidding. Ideally, pooled-price mechanism should particularly help a couple of producers whicho banked on cheap domestic supplies — either fully or partially — to keep the costs on tight leash.

Undoing a wrong?

Incidentally, it was UPA-1 which implemented the fixed tariff bidding policy. When it was introduced, it was projected as serving the dual purpose of attracting private investments in power generation and ensuring affordable ‘electricity for all’.

It is now common knowledge that the policy has backfired. With the private sector having locked in huge capital in new plants and the Discoms/regulators denying amendments in the terms and conditions of the original PPAs, the Centre is probably now looking at roundabout ways to find a solution to its own mistakes.

In a bid to justify pooling of coal prices, it has put forth the argument that the proposed mechanism would end up increasing the cost of electricity by merely 10 paise a unit on an average, while providing some breathing space to the power sector.

It is, however, debatable whether the entire nation should be paying for safeguarding the ‘business risks’ of private capital and a faulty government policy. Also, one could ask why a first entrant in the business (who gets adequate domestic coal and is operating in regulated tariff regime) should be making way for the late entrant (who had a relatively aggressive business plan), which is what the proposal suggests. But, that is not all.

Once implemented, pooling of coal prices would eventually lead to the burden being passed on to the Discoms. True, the fact that they have signed fixed-tariff PPAs with private producers would not oblige the Discoms to pay any extra for this power. But the majority of power they buy are not from private producers, but from generators operating in the regulatory cost-plus tariff regime.

In a scenario where they are also grappling with aggregate under-recoveries of Rs 200,000 crore, the proposed pooling mechanism would only add to the fiscal vulnerability of the Discoms. They will end up paying more for the electricity , without having much of a clue about how they can recover the same.

All’s not over

While the Planning Commission or the Power Ministry may be convinced of the merits of the proposal, matters may not end there.

While the CIL board has approved the proposal with regard to price pooling of the coal to be imported by it vis-à-vis its own mined coal, the company has also been mandated to go back to each of its existing consumers, as a pre-requisite to introducing the mechanism. That, willy-nilly, makes the proposal itself a national agenda.

If the consumers refuse to digest the prescribed pill, CIL may have to abort its import plans, as in the past. It would, then, force power producers to go back to the drawing board, while not pushing for 85 per cent supply commitments from CIL.

(This article was published on August 10, 2012)
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