Domestic coal price hike to affect power stations: Expert

The Cabinet Committee on Economic Affairs (CCEA) has agreed on a mechanism for price pooling of coal to meet the 80 percent trigger level for fuel supply pacts issued by Coal India. Partha Bhattacharya, former Chairman of Coal India and the current ED, Deepak Fertilizer believes the exercise will not affect the P&L of Coal India. However, the details are still not clear and he feels there are certain issues regarding domestic and imported coal that needs to be taken care of before finalising anything.

Bhattacharya further added that if price of domestic coal goes up, it is likely to impact most power stations that do not require imported coal. "There are so many power stations in the country which are dependent only on domestic coal. They will have to suddenly face a price hike of domestic coal because some power stations will have to be provided coal at a cheaper than cost price. So this may have a little bit of a legal issue which needs to be plugged while the scheme is designed," he explained. Here is the edited transcript of the interview on CNBC-TV18. Q: CCEA gave its in-principle nod for pooling of prices to bridge the 60,000 MW coal deficit. Logistically, how will this work? Coal India will be responsible for importing this. You are quite sure that the P&L of Coal India itself will remain unaffected.
A: I have just gone through the Press Information Bureau (PIB) note on this. It says that it will be revenue neutral for Coal India, which means that their P&L should be unaffected. But, at the same time, I think the details would be known only when the proposal is finalized. It is being worked out between the Cabinet Committee on Economic Affairs (CCEA) and Coal India.
So once it is finalized, more clarity will come out of this. There are a couple of issues that need to be taken care of. First of all, I would say that imported coal and domestic coal are different from a quality point of view. Since we do not wash our domestic coal, we supply it on a mined basis, so the variability of Gross Calorific Value (GCV) is very high. Imported coal is normally washed and therefore the variability is much lower.
Let us say, if you take coal of the same GCV, for example 4000 kilocalories and a variability of plus-minus 10 percent, it makes a very different product as compared to a variability of plus-minus 2-3 percent. So that factor will have to be also taken into account while doing this pricing. The other point is that in any case there will be power stations who will have to pay more for using the same domestic coal because some other power station has to be supplied imported coal at a lower than cost price.
There could be some legal implications of this which needs to be properly handled and I am quite sure that the government, when they formulate the scheme, will tie up all these points and it will be properly guarded. But, these are issues that need to be taken care of. Q: Will the impact be on companies like National Thermal Power Corporation (NTPC) which have had long-term Fuel Supply Agreement (FSA) with Coal India?
A: If domestic coal prices go up, it is going to impact everybody, particularly power stations who are not required to take imported coal at all. There are so many power stations in the country which are dependent only on domestic coal. They will have to suddenly face a price hike of domestic coal because some power stations will have to be provided coal at a cheaper than cost price. So this may have a little bit of a legal issue which needs to be plugged while the scheme is designed.
_PAGEBREAK_ Q: Can you throw some light with regards to the two possible methods which are being evaluated at this point in time? We do understand there is a plain vanilla pooling which is also being contemplated as well as an index-based pooling. Which is the more likely scenario to come about and which one would possibly be the most efficient according to you?
A: One has to give it a lot of thought before I can really answer. I do not deal with the subject anymore at this point of time. So without getting into the details, how the index has moved, going forward I cannot say how things will shape up if it is index driven or if it is a plain vanilla one. We have to really look at it carefully before we can attempt to answer this. Q: Normally when you price the coal the distance from the railway pithead or the distance from Coal India does not figure in at all. You all give the coal at the same price to all power stations?
A: Yes, the pithead price is the same irrespective of distance. Q: You therefore expect that from a power producer's point of view, at least those who are dependent on imported coal and could not pass-through the higher price because the Power Purchase Agreement (PPA) allows only Coal India prices to be passed through, do you think that logjam is sorted out and power companies will at least be able to pass-through the price? Is that issue sorted out?
A: I would say that could be a very positive fallout of the whole process. If the process has anything positive about it, this could be one thing because it will again be a notified price of Coal India. Imported coal will become available at Coal India notified prices.
Particularly for coastal power stations where domestic coal has to move quite a bit, the transport cost is quite high and I think the differential may not be very huge, especially if the imported coal prices are kept a little higher, even the parity price considering the lower variability of quality. So if all these things are properly worked out, I think the scheme may bring in certain amount of benefits. Q: How much of an increase in coal prices are we staring at?
A: People are talking about Rs 100 a tonne. If that is the thing, normally we will need something about 0.7 kg/unit in the price. So it works out to about 7 paise or so. Q: One of the key points which a lot of brokerages have made post the news yesterday is that while this is a half step forward implementation, it actually might be a problem and might take a long time with regards to pooling of coal prices. In your mind, what are the key bottlenecks that would come about if in case implementation does come through? How much do you think it will take in terms of a timeline for this to actually start being implemented and executed on the ground?
A: If the possible loopholes, the legal issues etc. are properly guarded and taken care of then implementation should not be too big a problem. The second thing is that Coal India will have to gear itself up for import of coal, which it has not done so far. First of all, it has to start the process of importing and it has to create a proper institutional mechanism within its organization to go in for imports.
That is not a very big problem and it could have done it earlier also. But, there was a certain amount of difficulty in getting imported coal accepted by the power stations at the normal price. With this pooling price, I think that acceptability will definitely improve. Coal India should be able to get into imports, but those processes will take some time. Q: In terms of time, how much do you think could be the lead time before we are able to get this integrated price?
A: It is too early to say that. But, if you say that the scheme has come into place today, legally all loopholes are taken care of and everything is fine, then it can be within six months.