Under pressure to keep price of coal sold through Coal India ltd (CIl) mines under control so that the burden doesn’t pass on to the common man through the power distribution companies, the Government is likely to review the present price determination mechanism of coal.
According to official sources, the mechanism also involves estimated cost of CIl’s future projects and also cost incurred in upgradation of its existing mines. This, as per industry estimates, escalates coal cost and, therefore, there is a possibility that the Coal Ministry may have a re-look at it.
There has been a lot of pressure on the Coal Ministry, especially from the political class, regarding the price mechanism of coal produced from CIl mines. To determine the coal price, the requirement of funds for future coal projects as well as for modernisation of existing mines, is also factored in by CIl and its subsidiaries.
This makes coal more expensive as factoring in costs to be incurred in future projects is always susceptible to delays and overruns. Also it goes against the principles of economics.
The main reason behind the move to review the mechanism is that once coal is procured by power producers at a price which is determined through the aforementioned formula, therefore by the time it reaches the common man through the distribution companies, it tends to inflate the monthly power bills.
The concern over the formula also stems from the fact that already more than 200 CIl projects are running behind schedule owing to delay in environmental clearances. With no clarity regarding their commencement, factoring in their costs in coal price fixation makes the common man fuel dearer.
The Coal Ministry on its part, according to sources, says that the mechanism is based as per the guidelines of the Government, where the internal rate of return ( IRR) of minimum 12 per cent is required to be ensured for opening up a new mine.
However with concern over the mechanism growing, there is a possibility that the Government may review the formula, they added.
Recently even the Parliamentary Standing Committee on Coal and Steel, in its report on coal pricing, which was presented in Parliament during the ongoing Budget session, had observed that it was not convinced with the argument put forward by the Government that investment in the new projects is one of the factors in coal price fixation.
“The Committee failed to understand as to how CIl and its subsidiaries can add estimated cost of a future project which has not yet started and may take years together to complete in fixing coal prices which ultimately put extra burden on consumers,” it noted.
The Parliamentary panel in fact raised a pertinent point by asking the Government whether there is any kind of a methodology it has in place for estimating the financial viability of new coal projects.
It in fact recommended to the Government that such cost estimations for new projects be kept out for fixation of coal price so that the interest of the common consumers can be safeguarded. The panel asked the Coal Ministry to keep it upgraded on what action it has taken to address the issues related to the coal price mechanism.