Coal Price Pooling – A Must For Power Sector

The power stocks are back in limelight after the Cabinet Committee on Economic Affairs (CCEA) gave an in-principle approval for the coal price pooling (CPP) mechanism. This is another breather to the fuel-trapped power sector which has seen many lows in the last few years.

This will change the scenario in the power sector in which power companies were solely responsible for sourcing of coal. As per CPP mechanism, Coal India is required to import coal on behalf of the power companies and supply it to the power generators. The pooling mechanism would see that all the power generating companies share the price of the high priced imported coal.

Broadly, this mechanism will ensure that all the power companies in the country operate at the level playing field. It will also make sure that too much cost is not being wasted on transportation of huge quantities of coal from coal rich states (such as Orissa, Chhattisgarh etc) to the coal strapped states such as Maharashtra, Gujarat, Andhra Pradesh etc). It will also make certain that the imported coal is not being transported from ports to the central or northern states.

The main idea is to increase the profitability of the Power companies which have incurred losses in the last two years. The Power sector has been seeing thin margins, funding constraints, lower tariffs and scarce fuel supply after huge capacities were increased by many companies. With the announcement of the restructuring of debt of State Electricity boards, the government has tried to address the first three issues. The recent move will benefit the coal based power companies which produce over half of the nation's electricity.

Though the move has been announced by CCEA, the exact timeline has not been provided as of yet. Nevertheless, the decision is critical for the power sector as the coal pooling mechanism would lower the imported coal prices in the country.

The exact impact of the coal price pooling cannot be known as it will consider the distance of the power plant form the domestic coal mines as well as from the coastal areas of the country. The basic theme is that the power plants near the domestic coal mines should not only consume the domestic coal but also share the imported coal prices. On the other hand, projects based near the coastal areas should consume imported coal at a lower price than quoted in the international markets.

A mere in-principle approval of CPP has lifted the sentiment on a few stocks in the power sector which indicates how critical this would be for the sector. While it will mainly benefit the power plants based on the imported coal (Tata Power, Adani Power, Reliance Power, Lanco Infra etc.), it would dent the margins of the power companies based on the domestic coal (mainly power plants of State Electricity boards, NTPC, CESC etc.).

The move, however, is much needed for the entire sector. It will see more investments in the sector and increased participation from the private sector, which has taken a beating due to the losses posted by the private sector companies in the last two years.