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New RBI guv prescribes coal crunch remedy

30 Aug 2013

Raghuram Rajan's proposal aims at 'simplifying' newly developed coal-pricing regime to bridge domestic shortfall, in face of rising imports

Chief economic advisor in the finance ministry and Reserve Bank of India governor-designate Raghuram Govinda Rajan has prescribed an innovative solution to resolve the coal supply crisis being faced by the economy. The prescription aims at “simplifying” the newly developed coal-pricing regime to bridge domestic shortfall, in the face of rising imports.

Rajan’s solution works on the premise that India’s ability to use imported coal would be limited by the technical constraints of boiler design. The noted economist has, therefore, proposed substituting a part of the completely indigenous supply under existing pre-2009 fuel supply agreements (FSAs) with imported coal. This would free domestic coal that can be channelised for supplies under the post-2009 FSAs being signed by Coal India Ltd (CIL), boosting the ability of new projects to use imported coal.

Under the proposal, producers with pre-2009 FSAs would get 90 per cent of their annual contracted quantity (ACQ) in domestic coal. Though these companies can blend 15-20 per cent imported coal, this does not happen because there is no incentive for using costly imported coal. “If they could be incentivised to blend as much imported coal as possible, it would free up domestic coal that could be allocated to other domestic producers. That freed coal has a multiplier effect because it can be used to blend with more imported coal, expanding the domestic production base substantially,” Rajan said in a recent note to Coal Secretary S K Srivastava.

If implemented, the solution proposed by Rajan would increase coal availability by a staggering 88 per cent for producers likely to get supplies for 78,000 Mw of capacity under new FSAs.

Assuming producers with pre-2009 FSAs do not use imports and burn 275 million tonnes (mt) of domestic coal (90 per cent of ACQ) this financial year, 102 mt of domestic coal would be left for companies with post-2009 FSAs. Therefore, total coal available for producers with post-2009 FSAs would be 146 mt, assuming they blend up to 30 per cent of imported coal by weight.

However, if producers with pre-2009 FSAs blend 20 per cent imported coal by weight, they would require only 220 mt of domestic coal, the remaining 55 mt being imported coal. So, domestic coal availability for those with post-2009 FSAs would rise to 157 mt. Also, with 30 per cent imported coal blending, total availability would rise to 224 mt, an overall increase of 78 mt.

To address pricing issues under this system, Rajan has proposed giving producers with pre-2009 FSAs the option to buy some imported coal instead of their entire domestic quota and providing them imported coal at a discount, say, five per cent, as an incentive to opt for imports. CIL would bear the difference between the import parity price and 95 per cent of the notified price. This would be offset by charging producers with post-2009 FSAs more for the freed-up domestic coal.

According to Rajan’s calculation, the scheme would make domestic coal supplies to producers with post-2009 FSAs costlier by 16 per cent, against the notified price, assuming 55 mt of extra coal is diverted to them and imported coal is 1.4 times costlier than domestic coal.

The coal ministry has sought comments on the proposal from its power counterpart.

Source: Business Standard