Scrapping of coal price pooling will avoid price rise

The development comes as a breather for consumers across all states, as pooling was to jack up coal prices by nearly 21% in current fiscal

The government's latest decision to shelve the coal price pooling proposal will have multiple ramifications across the energy and infrastructure sectors. The development comes as a breather for consumers across all states, as pooling was to jack up coal prices by as much as 21 per cent in the current financial year. This high coal cost would have been passed on to consumers.

However, it comes as a dampener for new projects being set up by Independent Power Producers (IPPs), who were expecting reduced cost of generation due to cheaper imported coal. Further, scrapping of pooling comes as bad news for Indian Railways, as the mechanism was to jack up the national transporter's freight revenue by an estimated Rs 2,200 crore by 2015, owing to rationalisation of freight transport.

The discussions on pooling proposal had led the domestic user industries to believe days of cheap coal are over. The ongoing fuel crunch for plants at the back of constrained production from Coal India Ltd (CIL) has led to a massive spurt in costly coal imports. Under the pooling mechanism, domestic and imported prices of coal were to be averaged out to allow consumers to avail uniform rates irrespective of the fuel source.

In order to offset the higher prices of imported coal over the notified price of equivalent quality coal supplied by CIL, the differential cost of imported coal needs to be spread over the entire indigenous coal quantity being supplied to power utilities. This spreading of additional cost was expected to result in increase of the domestic coal price by 21 per cent in 2013-14, followed by 16 per cent and seven per cent over the next two years. According to sources, opposition from state governments and lack of consensus between the power and coal ministries on key provisions led the Centre to decide against the proposal.

The coal ministry had indicated, as early as June last year, that the proposal of pooling may face opposition on several grounds. The ministry had then said that state governments would object to the increase in price of coal as the new price was likely to be higher than the current notified price at which CIL supplies coal. It had said that there are already huge outstanding dues payable by state utilities to coal companies and many utilities may not be able to bear the burden of additional price owing to their bad financial shape.

The ministry had also said that pooling may lead to cartelisation in the international market due to large-scale and bulk purchases by CIL.

Finally, implementing pooling might have meant cross-subsidising private sector companies at the cost of public sector utilities because over 90 per cent of pre-2009 capacity is in the public sector while the bulk of the new capacity that has come on stream post 2009 is in the private sector.