Coal India In Deep Waters Over Price Pooling Model

As per recent reports, state-owned Coal India is finding it very hard to get approval for its proposed coal price pooling model. The ailing power sector is also largely dependent on this proposed pricing model. The Prime Minister Manmohan Singh earlier this year had asked Coal India to import coal if required and sign fuel supply agreements (FSAs) with most of the power generating companies. After this development Coal India has been trapped in a scenario in which it is yet to decide how the cost of the imported coal will be passed on to its customers. There has been a lot of dust on the fuel supply pact and the execution of the same has been far removed from reality. 

Coal India earlier had approved a modified Fuel Supply Agreement (FSA) that included 65 per cent domestic coal and 15 per cent imported coal on a cost-plus basis. CIL has also entered into an agreement with 30 power utilities, including some of the private sector players. But after Coal India said that the imported coal costs would be passed on to its customers through the price pooling mechanism, there has been a strong uproar from the state governments and DISCOMs. West Bengal, Andhra Pradesh, Orissa and Chhattisgarh have strongly opposed to the price pooling mechanism while the private power utilities have welcomed the move of price pooling. This model will see coal costs in the domestic market rising by about 6-7 per cent, which will require further upward tariff revision. 

After the recent capacity additions, the country has been witnessing a high demand for coal. As the domestic coal production remains limited, companies have been importing coal from the international market where it is so costly as to turn the projects unprofitable. Besides, rupee depreciation has also been a big negative factor for these companies. As the domestic price remains at a discount to the international prices, those power generators that have been consuming domestic coal have taken strong objection to the price pooling mechanism. Besides, states like West Bengal, Orissa and Andhra Pradesh see price pooling as an injustice to them in view of their large coal reservoirs. 

The CEA (Central Electricity Authority) also came out with its own version of the model in which 25 per cent of the cost of imported coal was to be shared by all the power generators while the rest of the cost was to be absorbed by the individual players. This required all the power utilities to raise tariffs due to which the power distribution companies rejected this model. 

The PM’s office last month asked Coal India and the CEA to jointly come up with a price pooling model and media reports suggest that the new model will consider the calorific value of coal, among others. We believe that price pooling will be here to stay as the basic aim of this is to share the imported coal price which will provide some insurance against the fluctuation of the coal prices to the private sector power companies. The government is very keen on giving the sentiment of the power sector a boost and recently approved the debt restructuring of the state electricity boards while several state governments have also announced a tariff hike. 

As the gap between demand and supply will widen, India will be required to mine more coal or may be pushed to purchase the same through the international market, mainly Indonesia or South Africa. As per the 12^th Five Year Plan, coal shortage will reach over 180 million tonnes and hence most of the power utilities will become dependent on foreign coal. Under such circumstances, CIL’s price pooling policy will favour the markets. 

In our opinion, the price pooling model will largely help the private sector. Troubled players like Adani Power, Reliance Power, Tata Power, etc may see the news as positive, given the fact that domestic coal availability will be improved. Therefore, Coal India may not experience any negative impact of price pooling on its stock. One must pay good attention to the proposed price pooling mechanism in order to gain proper knowledge of the sector. The shares of Coal India due to the uncertainty of the fuel supply agreements and the coal price pooling model have declined by 9 per cent from a high of Rs 386 seen in September. The Sensex and the Power Index during this period have remained flat.