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APR 17 2013

Is coal price pooling a good idea?

  • Economic Times, ET Bureau / Hyderabad
  • Created: Wed 17th APR 2013

It can, at best, be a short-term solution to keep coal-starved power plants going. In the longer term, there is no option but to open up the coal supply market to efficient private players and clean up the losses in the power sector

Nilotpal Basu

Policy on coal price pooling is a major issue of contention amongst policymakers. It was bound to be so. The policy need arises from the inability of the country to produce adequate quality coal to address the growing demand in the power sector.

All this while, Coal India Ltd (CIL) was the only agency that was mining, processing and supplying coal for the end users--mainly the power utilities. Since the onset of economic reforms in the country, a large number of independent power producers have come to invest and produce electrical energy. Therefore, the coal distribution policy is not only geared towards providing feed stock to government utilities both in the Central and the state sectors–but also to these private independent power producers.

From the beginning of the nineties, a new policy for attracting investment was formulated for the power sector. But this policy, instead of having an integrated approach towards the three sub-sectors–generation, transmission and distribution–became heavily loaded in favour of generation. It is this lopsidedness of the policy and failure to dovetail it with an integrated fuel policy that led to a major fiasco. This led to the crisis with the role of the government in facilitating the Enron-owned Dhabol Power Project in Maharashtra coming for flak. Despite the essentially unviable nature of the project, the government not only allowed LNG as a feedstock and offered a premium for production in excess of the off-peak load, but also counter-guaranteed an assured rate of return on investment. This was clearly aimed at benefiting Enron and ultimately led to the undermining of the financially sound MSEB. That Enron subsequently went broke for having indulged in corrupt practices is another matter. The ownership of DPC had to be finally restructured with Indian PSUs having to take the responsibility.

But it seems that the fundamental lopsided nature of our policymaking has not drawn any lessons from the Enron fiasco and scam. Therefore, today CIL’s policy of supplementing its indigenously produced coal through imported quality coal and its pricing has triggered off another major controversy over this new notion of price pooling.

Another dimension of the controversy arises out of the nature of the power producers. Together with this, the geographic location also assumes significance because of the size of the country, and the distances that needs to be covered for transportation of coal. In the case of pithead plants, many of the producers have located them at pitheads, thereby reducing the cost of transportation. A majority of these plants are state-level public power utilities. The new power producers in the private sector, which are essentially dependent on imported higher grade coal, are located in the coastal areas to reduce the distance.

An additional argument to push price pooling underlines that increases on high costs of imported fuel will be offset by the reduced levels of transportation expenditure. However, these estimates could go awry if the price of imported coal goes into a major turbulence.

Therefore, price pooling brings to bear the threat of uncertainty in the sector with particularly adverse implications for the household consumer. The only purpose at this stage seems to be saving projects initiated by private sector majors like Adani and Reliance.

The overall inclination of the government is clear. The Prime Minister himself expressed this candidly in the NDC meeting while finalising the 12th Plan; that ultimate price of energy for the consumers in India is too low to attract global investment. The uni-dimensional obsession with GDP growth fired the Prime Minister to bat for an increase in energy price from the consumer.

However, the states find this unacceptable because the implication for this increased tariff has major electoral ramifications. They will be in the direct firing line. What needs to also be debated is whether the increased tariff really bolsters a trajectory of sustainable growth?

The author is member, Central Secretariat, Communist Party of India (Marxist)

Anil Sardana

It is estimated that about 42,000 MW of thermal capacity, including both coal and gas, is impacted due to inadequate coal supply by Coal India Limited (CIL) and allocated gas. This sub-optimal or, for some projects, complete non-utilisation of assets is severely impacting the economic growth of our country when India faces deficit in meeting its base and peak load requirements. Fuel price pooling provides a solution, which will enable the import of the fuels for the interim period to fire this impacted capacity and allow the cost of import to be shared equally by all the generation capacity, by pooling it with our domestic fuels.

Coal production by CIL has remained stagnant over the last 4-5 years–around 435 million tonnes per annum (MTPA)–because of non-clearance of their new investment opportunities, whereas more than 26,000 MW of coal linkage based power projects have been added. Most newly commissioned plants are operating at PLFs of 30-40%, and as a relief to these projects it has been suggested that CIL should import coal to fill the gap between its current production and its fuel supply obligations, and the higher cost of imported coal should be shared equally by price pooling of imported coal with the domestic coal. While the cabinet has given in-principle approval the implementation mechanism is being worked out. One of the important factors that’s being debated is whether to implement the pooling mechanism for all existing power projects that have come up prior to April 2009 or restrict it to projects coming up after March 2009. If all the plants, across all the sectors viz. central, state and private are considered then increase in power cost will be marginal 10-12 paisa/kwh, but if only projects post 2009 are considered then the power cost will increase by about 65-70 paisa/kwh and making such plants less competitive and possibily not get scheduled in merit order dispatch, defeating the whole purpose of pooling.

Gas supply to power sector is currently being reduced to about 25 mmscmd as against the demand of about 100 mmscmd. This has led to stranding of 65% to 70% gas based installed capacity. However, the case of gas pooling is quite different from that of coal. As against coal where we are looking at 60-80 mtpa of imported coal being pooled with about 400 mtpa of domestic coal for power sector, we do not have big volume base of domestic gas to be pooled with very high priced RLNG. If we go ahead with gas pooling, the cost of power with pooled price is likely to be above R5/kWh, which will be very challenging to get dispatched on round-the-clock basis. Hence we will move from the situation where we have few stranded units to all gas units getting stranded. It is very unfortunate that because of not having appropriate regulations for peaking power in place, and challenges faced in implementing open access, the industrial and commercial consumers in many parts of the country have to switch to diesel based captive backup power which costs them upward of R14/kwh, during periods of load shedding by distribution companies, when these stranded gas units can provide much competitive power even when fired on LNG without any pooling, as compared to diesel backup power.

I feel that coal price pooling is a good step but for it to be effective it is important that pool considered should represent all the domestic coal linkages, so that it forms the critical mass that can absorb the high cost of imported coal. Gas price pooling, if just implemented on standalone basis for power sector, by pooling domestic gas allocation for power sector and the expensive LNG, in my opinion will not help given the low composition of domestic gas in the pool.

It is critical that we take pooling as a short-term solution only. With pooling in place there is a risk that the strong pressure being built on coal sector to open up may disappear. Also, with pooling there is a possibility that the reforms required in the coal mining sector to attract private investment that can support in expediently increasing the domestic coal production and also the policies required to support the exploration and production of gas from our conventional and unconventional resources may lose their urgency, which would be disastrous for the long term growth of power sector and its fuel needs.

The author managing director, Tata Power. Views are personal


Maharashtra Coal Gas Coal India Limited Fuel price Re-gasified liquified natural gas State Electricity Board Public sector units 12th Plan Prospecting Licence Liquefied natural gas Gas supply CIL Power coal linkages Tata Power coal mining India

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