Low-cost domestic coal insulating users from rising global energy prices may become a thing of the past if the Planning Commission, India’s apex policy advisory body, has its way. The commission has suggested raising domestic coal prices to align them with global benchmarks in its approach paper to the 12th Five-Year Plan beginning March 2012.
The move is part of the commission’s overall call for gradually rationalising prices in the energy sector — oil, gas, coal and power — to move away from the current “unfortunate” controlled pricing regime.
“A transition to more rational energy pricing requires upward adjustment in all these prices. The adjustment needed cannot be achieved in one go, but the process must begin so that a full adjustment occurs over two-three years,” the paper said.
Pointing out the reluctance of power generators to use higher cost imported fuel, the paper also suggested pooling of costly imported coal with relatively cheaper domestic coal as a short-term solution and moving towards increased prices in the long term.
“Coal prices are theoretically decontrolled, but in fact they are adjusted only in consultation with the coal ministry. The price of domestic coal is 30 to 50 per cent lower than imported coal, even after accounting for the difference in quality,” the approach paper said.
Domestic coal prices currently vary between Rs 700 per tonne and Rs 1,700 per tonne for varying grades. State-owned monopoly producer Coal India Ltd (CIL) had last revised the prices in February, adopting a differential pricing strategy.
CIL had raised prices by 30 per cent for non-regulated sectors such as cement, steel and paper, while the regulated sectors of power and fertilizer were largely spared from the price hike. Coal offered by Mahanadi Coalfields Ltd (MCL) was made costlier for the power sector by Rs 90 per tonne or 20 per cent, owing to a parallel decision to bring parity in the prices of E&F grades.
The price rise had made cement costlier by Rs 10 per bag with an impact of 15-20 per cent for the steel sector. “Increasing prices is never easy, but our ability to grow rapidly in a world of high energy prices depends crucially on our ability to adjust these prices. Suppressing energy prices will not help.”
In oil sector too, the approach paper said, the lack of alignment between global and domestic prices is imposing burden on the exchequer and oil companies, creating market distortions. The paper said electricity, too, is underpriced as state regulators hold back tariff adjustments under political pressure.
Experts, however, said the commission’s largely price-centric approach towards the energy sector is not adequate.
“In coal, for instance, the distortions of the sector go beyond merely the way prices are determined. The distortion is not only because prices are only partially decontrolled. What is required is a focus on overall policy reform with easing of entry conditions for the private sector and setting up a regulator,” said Gokul Chaudhri, partner, BMR Advisors.