New policy on coal next week

New policy on coal next week

New Delhi: India’s new coal distribution policy, which will significantly overhaul guidelines for allocating precious coal resources to various sectors, could be approved within a week. “The proposals for the policy have been sent to the Prime Minister, who is also the minister for coal. The policy could be given the nod as early as next week," said a senior coal ministry official who did not wish to be identified.

If the proposed policy gets the nod, the guiding principle for categorization of sectors as “core" and “non-core" will be altered. The current system of e-bidding for non-core producers is also set to go.

“It is proposed that only power and fertilizer sectors will be considered as core sectors for the purpose of awarding coal linkages. Given the increased demand for coal linkages, the idea is to give linkages to only those sectors that have to sell their products in a controlled price regime. Non-core sectors will be able to purchase coal through an e-auction. The online auction will be transparent as there will be a single reserve price of coal for all competing sectors," said another senior coal ministry official who also did not wish to be identified.

Currently, the “core" sectors comprise power, fertilizers, steel, railways, defence and cement. However, only the power and fertilizers sectors operate in a market where prices are controlled by the government rather than being determined by demand and supply.

According to the existing practice, the government allocates coal linkages to the core sectors while the non-core sectors procure the commodity by open purchase through an e-bidding process.

For 2006-07, the government provided linkages for 110.5 million tonnes (mt) out of an anticipated coal supply of 432mt. More than 80% of these linkages were given to power utilities.

Since the coal linkages are given at prices notified by the government, experts believe the proposed move will help in containing prices in both power and fertilizer sectors while increasing the production costs for the other sectors.

“For power generation, the coal prices will be regulated and it is expected to be a direct pass-through to the consumer," predicts Dipesh Dipu of audit firm PricewaterhouseCoopers (PwC).

“However, it may mean a squeeze in the margins of producers of steel, bauxite and cement, since the input cost of coal for them will be opened and is likely to be pegged on import-parity basis, with due consideration to quality. For Coal India Ltd (CIL), the loss of freedom to set prices for regulated businesses may be well compensated through market- driven pricing for unregulated consumers," he said.

E-auction of coal, a mode by which non-core sectors procured the commodity in the past, was discontinued in December after the Supreme Court raised questions on the transparency of such auctions as there were different reserve prices for different sectors.

“At present, the non-core sectors are allocated coal on first-come-first-served basis. This process is called e-bidding, where the price of coal was fixed and only the quantity is decided," said a senior official of CIL who did not wish to be identified. However, in the new avatar of e-auction there will only be a single reserve price for all bidders.

Analysts favour the return of e-auction, but caution about the manner in which the reserve price is calculated.

“The provision for e-auction may be useful for price discovery in the unregulated business. The floor price fixation and their adjustments on the quality parameters must, however, be worked out on scientific methodology, such as GCV (gross calorific value), ash content and moisture content," said PwC’s Dipu.