The government's attempt at pooling the prices of imported and domestic coal under corporate pressure may fail, with the power ministry and the Central Electricity Authority (CEA) admitting to hurdles in the way of implementing a scheme aimed at improving the financial viability of power plants.
Pooling involves offsetting the high cost of imported coal with that of the cheaper local product, of which there isn't enough to meet demand. India's ambitious power projects have got stuck because of, among other things, the lack of adequate coal supplies. Getting India's power sector back on track is critical to reviving flagging economic growth, hence the importance of the price pooling plan.
The inability to implement the scheme may in turn reduce the profits of the imported coal-based projects developed by Tata Power Co. Ltd, Reliance Power Ltd (R-Power), Adani Power Ltd and JSW Energy Ltd.
There had been portents that the plan wouldn't be easy to implement. Even as the cabinet committee on economic affairs (CCEA) approved the price pooling of imported and domestic coal in early February as fuel costs exceeded projections, officials said resistance from the states may scuttle the plan, because it would mean a rise in the price of the power thus generated.
While CCEA took an "in principle" decision, the cabinet has to take a final call and had asked the coal and power ministries to revert with the specifics on the proposal.
"Coal pooling doesn't look like a possibility. Why should the states agree to an increase in tariff?" said an official at CEA, India's apex power sector planning body, requesting anonymity.
A top power ministry official, who also didn't want to be identified, confirmed the resistance to the proposal. "There are concerns on the working and implementation of the proposal," he said. "It looks tough to implement."
According to the original proposal, meant to be a temporary mechanism till domestic coal mining meets demand, only those power projects located near the coast will be eligible to benefit from the proposed pooling of coal prices. Such projects will have to feature on a list prepared by CEA and will be those awarded via the so-called Case 2 bidding route, under which they are assured domestic coal linkages.
Meanwhile, India's bid to boost local production has got bogged down as environmental approval processes have become more stringent and the allocation of coal blocks has come under the scanner following allegations of wrongdoing.
Pradeep Jena, energy secretary in the Orissa government, expressed the state's view and the more general opinion among the states.
"We are against the proposal. Why should we, who have coal reserves, be made to share the costs?" Jena said. "Most of the states have opposed the move. They want others to pay for Coal India Ltd's (CIL's) inefficiency. Why should we pay."
CIL is the state-owned monopoly miner of the commodity.
The Economic Times newspaper reported on 19 February that the West Bengal government accused the Union government of "extracting higher electricity charges from households and factories to pay for gross miscalculation by business houses on the cost of imported coal".
Price pooling could increase the cost of coal by Rs.90-100 a tonne. The average price difference is around Rs.1,500 a tonne, with domestic coal being priced at Rs.4,500 a tonne. The estimate for the price rise is based on the current price of coal and the estimated demand for imports by CIL of 20 million tonnes (mt) a year.
Spokespersons for Tata Power and R-Power declined to comment. Queries emailed to spokespersons for Adani Power and JSW Energy remained unanswered. An external spokesperson for JSW Energy said the company was "unable to participate in the story for now".
The ministry and CIL are already of the opinion that the fuel should be imported on a so-called cost-plus basis and the incremental power generation costs should be passed on to the end-consumer by the electricity producers.
Mint reported on 7 March about the finance ministry and the Planning Commission supporting the coal ministry's view that the government should reject the pooling plan.
Analysts have also expressed their reservations on the pooling mechanism.
"This development is positive, but we also have concerns on implementation," UBS Global Equity Research wrote in a 6 February report.
The government is in favour of the pooling mechanism as it will reduce by around 50% of the cost of domestic coal transportation from the mines to coastal sites and from the coast to inland projects. CEA is of the view that power plants equidistant from the coast and coal mines should be supplied imported coal, whereas CIL should supply coal for pithead-based power stations. It currently supplies 347 mt to the power sector.
Coal demand in India is expected to grow to 730 million tonnes per annum (mtpa) in 2016-17 from 649 mtpa now. CIL has been mandated by the government to meet 80% of the downstream demand for coal.