Will the Indian Government’s Coal Price Pooling Policy Deadlock Ever be Overcome?

Dec. 19, 2012 - PRLog -- The issue of formulating a policy for thermal coal price pooling has zigzagged between Coal India’s boardroom, the Prime Minister’s Office, Ministry of Coal, Ministry of Power and the Central Electricity Authority in a dizzying back and forth. In the meantime, the media, including the mainstream popular media, has been gleefully reporting on the issue fuelling the perception that India’s policy paralysis runs deep.

Price pooling seeks to combine imported and domestic coal prices into one uniform price that would apply to all consumers of Coal India. It would mean a higher ‘pooled’ price for power plants using domestic coal and lower ‘pooled’ prices for plants using imported coal.

With price pooling, power plants receiving coal from Coal India should be indifferent to imported or domestic coal. No matter the ratio in which plants receive the two different types of coal, all plants would face the same pooled price. Overall, the mechanism should be revenue neutral for Coal India.

Though initiatives for price pooling have been around for several years, the proposal began to gain prominence over the last year after three things became clear.

First, that domestic coal would continue to be priced lower than equivalent imported coal. Second, that supply from Coal India would be determined through long-term fuel supply agreements signed with the company rather than through supply linkages administered by the Government. Third, it became clear that Coal India would never be able to meet demand using only domestic coal. Imported coal would be required to fill the gap.

Price pooling is intended to be a short term construct, a temporary fix to shortcomings that originate from elsewhere in the system. Coal India is not able to raise prices to balance supply and demand therefore domestic coal is priced lower than the equivalent imported coal.

Plants that receive domestic coal currently have an advantage over plants that have to use imported coal because they can produce electricity more cheaply. Price pooling removes that advantage. It is a solution only because Government is unable to fix, at least for now, the underlying existing structural imbalance of price.

The price pooling mechanism doesn’t naturally fit within the Coal India construct. Development of the price pooling concept is an inherently political process. States and state-owned power utilities have to be cajoled into agreement, interests of business have to be addressed and stakeholders have to be managed. Managing the process is better suited to the political machinery of Government than the boardroom of Coal India.

Coal India has already been trying to speak with power utilities and states to arrive at a consensus. It has announced that it will not get into the price pooling framework, unless everyone signs on. But consensus is always elusive in India, let alone on an issue that is fundamentally so contentious.

The Coal India boardroom is unlikely to ever frame a consensus on the issue by itself. Ultimately, the decision to go ahead with price pooling will be a political decision with the formal weight of Government behind it.

The political battle of price pooling is unlikely to go away even if a mechanism is agreed and implemented. Price pooling will cause winners and losers. Those political battles will linger. As the one implementing the price pooling mechanism, Coal India will be perpetually embroiled in managing the process. All of this will distract Coal India away from its core emphasis of producing and selling coal.

Price pooling remains a good idea. But it is an inherently political process for which the instruments of the state are better at managing. Three years ago Government took Coal India public believing that listing the company would make it more independent, more like a corporation. With Government intent on instituting price pooling, that independence is about to be tested.

The Indian Government may be surprised to learn exactly how independent their company has become.
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