Coal India could get to pass on cost of expensive imports.

New Delhi: The government is weighing a new coal pricing dispensation to help Coal India (CIL) recover the extra cost of imported coal it might have to give power plants to comply with the fuel supply agreement (FSA). The agreement means Coal India must guarantee supply of at least 80% of fuel required by these plants.

Government sources said a committee of secretaries led by Pulok Chatterjee, principal secretary to the Prime Minister, has been mandated to evolve a pricing dispensation where power companies will have to bear the extra cost of imported coal to the extent of difference in the quality of imported and domestic coal.

The quality of imported coal is much superior to domestic coal. For example, the ash content in domestic coal can be as high as 40%, compared with 10% in imported coal. The gross calorific value (GCV) of domestic coal is 3,000-3,500 Kcal/kg while that of imported coal is 5,000-7,000 Kcal/kg.

CIL will be allowed to recover the balance of the extra cost of imported coal by increasing overall coal price. In other words, the proposed pricing regime will allow CIL to supply imported coal to power plants without having to bear the extra cost.

Industry experts differ over the merit of the move. “Rather than a committee deciding on commercial issues, a coal regulator should be appointed as early as possible,” said Dilipkumar Jena, senior consultant and knowledge manager (mining), PwC. On the other hand, the association of power producers (APP), a body of private power developers welcomed the move. “The increase in price of coal due to imports would need to spread over the entire quantity of domestic production to keep the power cost manageable,” said director-general Ashok Khurana. The government came out with a proposal to set up a coal regulator in 2008 but is yet to deliver on the promise.

The government favours Coal India importing coal through state trading agency MMTC rather than on its own, since it wants the coal monopoly to focus on its primary mandate of production.

India’s coal import bill is projected to rise fast in coming years as the country undertakes implementation of ambitious capacity addition plans in the power sector while domestic coal production stagnates. It imported 40 million tonnes of thermal coal (valued at $3.2 billion) only in 2010-11. But this could go up to 250 million tonnes ($30 billion) by 2016-17, according to the International Energy Agency.

The secretaries panel was set up in February after industrialists including Ratan Tata and Anil Ambani met Manmohan Singh too seek his intervention to tackle the fuel crisis in the power sector. The committee backed appointing MMTC as the nodal agency for importing coal because it has been importing coal for state electricity boards (SEBs) for several years. The SEBs specify quantity and quality of coal to the canalising agency. MMTC follows the Central Vigilance Commission’s public procurement guidelines which mandate international tendering and award of contract to the lowest bidder, making the procedure quite transparent. This route also saves time.

After initial resistance from its board, Coal India signed FSAs with power companies for supplying at least 80% of the annually contracted quantity for 20 years as per the PMO’s directive. But the penalty quantum, which is payable by Coal India in case of short supply, has been reduced from 10% to 0.01% of the value of shortfall.

As per an estimate, Coal India must import 20-30 million tonnes of coal in the current year if it has to meet its contractual commitment.

The Coal India board reduced the penalty amount after the public sector company was issued a Presidential decree to ensure it signed FSAs with power companies. The decree came after the company’s board rejected a proposal to comply with the PMO’s directive.

Source : financialexpress.com