Its All About Power Sector

In order to reduce the gap between the demand and supply of fuel supply t power plants based on coal, a number of mechanisms have been proposed in the recent times. The situation at the end of 12th five year plan is most like likely that Coal India will not be able to demand all the commitment made in it's Fuel Supply Agreements (FSA's). To meet the shortfall in supply of domestic coal for power generation, it will be necessary to import larger volumes of coal in the years to come. During 2013-14, Coal India Limited(CIL) experts to supply only about 379 MT of domestic coal at administered prices, leaving a balance of about 100 MT to be imported at market prices.
The present arrangement compels off-coast producers to import coal while coastal producers do not substitute even a fraction of their allocation of domestic coal by imported coal. This causes wasteful transportation which adds to congestion as well as costs. An arrangement that rationalises coal prices in order to avoid dual transportation would lead to significant savings in time and costs, whereby power producers near coastal regions would be incentivised to use more of imported coal, thus releasing equivalent volumes of domestic coal for supply to off-coast power producers. On the other hand, off-coast producers would be required to pay the import parity price (IP Price) for pari of their supply of domestic coal. This can be enabled by a system of dual pricing of domestic coal which would require a pre-determined quantity of domestic coal to be supplied to every porter producer at notified prices while the balance would have to be procured either at the IP Price in case of domestic coal or at international prices in case of imports. The IP Price may be fixed by CIL at par with the landed cost of imported coal.
(Alternatively, Coal Pool Pricing, Coal Banking, Model concession Agreement are some other mechanisms that were proposed to reduce the demand supply gap if fuel to power the thermal plants based on coal.)
The proposed arrangement would

• Facilitate the much-needed import of coal
• Minimise transportation time and costs
• Allow each State to exercise choice in sourcing of coal
• Address regulatory issues of tariff-setting

Inevitability for Imports: According to the World Economic Forum's Global Competitiveness Report 2011-12, the quality of electricity supply in India is ranked at 112 out of' 142 countries. While the demand for power has been increasing in line with the growth of the Indian economy, power generation has not kept pace. In particular, the shortfall in coal production has been one of the principal causes of the continuing power shortage. As such, there is a pressing need for increasing power generation by enhancing coal supply. Being a nationalised industry. Coal India Limited (CIL) presently accounts for over 85% of the total production of coal. Since CIL can ramp up its production only at a modest pace, reliance on imported coal seems inevitable, even though it is about 40% costlier than domestic coal.
Dual Pricing of domestic coal: Dual Pricing of domestic coal would recognise the duality of coal prices and operate in a manner that ensures an equitable treatment for all regions while reducing transportation costs; and rail congestion. Under this arrangement, bulk of the supplies would continue at the notified price and the balance would be bridged either by imported coal or through domestic coal to be supplied by CIL at the import parity price (the "IP Price"). The additional revenues on account of IP Price will be distributed by CIL in (he form of a proportionate discount on the notified price, such that the system of Dual Pricing is revenue neutral for CIL and cost neutral for power producers.
Determination of Firm Commitment: As a part of this arrangement, CIL would indicate a pre-dctermined quantity of coal for firm supply to each power producer under its respective FSA (the 'Firm Commitment'). This will reflect the level below which CIL would be required to pay penalties under the FSA. Supplies beyond the Firm Commitment would have to be procured by each producer at the prevailing market price. While coastal plants would normally import coal at the international price, off-coast plants would buy from CIL at the IP Price.
Under the proposed arrangement, even the Firm Commitment would be split into two parts. While 80% of'the Finn Commitment will be supplied at the notified pricc, less a discount of about 10%, the remaining 20% of the Firm Commitment may be supplied at the IP Price. The net impact on producers would be negligible, as the additional burden cast by the IP Price will be offset by the said discount. In fact, there could be some savings due to lower transport costs.
Procurement at IP Price: Under the proposed arrangement, CIL may earmark say, 75 million tonnes of coal (out of the 379 million tonnes earmarked for the power sector in 2013-14) for sale at IP price. CIL Will also be thedefauk supplier of imported coal. Power producers would be free to determine their respective procurement of domestic supply at IP Price as well as the quantity/ agency of import. For the purposes of tariff regulation by the Electricity Regulatory Commissions, the IP Price as well as the import price declared by CIL should be eligible for a pass through treatment, subject to actuals.
Dual Pricing would be equitable for all regions and States as it does not go against their resource endowments. It is also compatible with the principles of economics in that it does not "conceal the increase in marginal costs by increasing the average costs of all.
Possible Ways to workout in the future: CIL may tlx the Firm Commitments for all power producers in accordance with the respective FSAs and leave the balance to be imported or supplied at IP Price. With a view to augmenting the overall supplies for the power sector, CIL may also divert 1.25% (5 million tonnes) from e-auction for sale at IP price. CIL may thus earmark 80 (75+5) million tonnes of domestic coal for sale at IP Price and provide a proportionate rebate on the notified price to ensure revenue neutrality for CIL and cost neutrality for power producers. CIL would be free to divert additional quantities from e-auction for supply at IP Price. The revenues generated from such additional supplies may be retained by CIL.
CIL should, with prior approval of the Coal Ministry, spell out the methodology for fixing IP Price so as to reflect the landed cost of imported coal at the nearest port. Based on this methodology, CIL would announce the IP Price and the same would also be treated as the normative import price. Power producers would be free to channelise their imports through CIL or undertake imports through other agencies, subject to the. ceiling of normative import price.
Ministry of Coal and Ministry of Power may formulate a detailed proposal for Dual Pricing. Planning Commission may coordinate, if necessary. Consultations may also be undertaken with State governments, utilities and power producers. The proposal may need Cabinet approval before it is operationaliscd. If consultations/approvals are undertaken in a timely manner, the Dual Pricing arrangement may be operationalised from September 15, 2013.
Apart from the above, it is very important not to lose sight of the fact that reliance on imported coal will increase electricity tariffs, with all its consequential effects on inflation and costs across the economy. India has sufficient coal, but issues associated with governance have caused significant barriers in increasing its production by CIL. For almost two years, there has been recognition of the fact that PPP in coal mining should be introduced quickly. This needs to be assigned a high priority.

Source: Cerebral Business Research Pvt. Ltd.