April 19, 2007

Analysis: India plans a new coal policy

Published: April 18, 2007 at 10:24 AM

By KUSHAL JEENA
UPI Energy Correspondent

NEW DELHI April 18 (UPI) -- India says it is contemplating a new coal distribution policy that would be based on the requirements of regulated and non-regulated sectors to give a boost to small- and medium-sized industries.
The Coal Ministry said the new policy would be put in place within a month of its approval. The ministry set up an expert group to go into the details of the existing policy and suggest corrective measures to aid India's ailing coal sector. The group, headed by Coal Secretary H.C. Gupta, was also asked to recommend steps to boost small- and medium-sized industry, which are based on the supply of coal.

The group's report to the Coal Ministry is expected at the end of the month. It may also be placed before Parliament during the current budget session, which reconvenes April 23.

"This is the right time that the country's coal distribution system should be thoroughly revamped and give a new look which is based on the requirements of regulated and non-regulated sectors," said Manoj Narula, an energy expert at the Federation of Indian Chambers of Commerce and Industries, an apex Indian trade body.

The core and non-core sectors are the main buyers of coal. The government is considering changing the existing system because cement and steel, two of the main procurers of coal, have long been deregulated. The government wants the new coal distribution policy to be in line with both the regulated and deregulated sectors.

According to the Coal Ministry's definition, a particular sector where prices are determined either by the government or by a state-run public-sector company should be brought under the regulated regime. In the non-regulated framework, the ministry wants to include all industrial sectors that have already been deregulated.

The companies under the regulated framework meet more than 80 percent of their coal requirement at notified prices. The balance is met through imports. Once the new coal distribution policy framework is put in place, power-generation giant National Thermal Power Corp. and other government-controlled power utilities would fall under the purview of the regulated sector. It also includes the fertilizer and defense sectors, as government-backed regulators determine the prices of fertilizers and defense equipment.

Under the new distribution policy framework, state-owned Coal India Ltd. can determine 75 percent of the quantity of coal to be procured by the non-regulated sector through an agreement and at notified prices. The companies would have to be dependent on imports to meet their 25 percent requirement of coal.

"The new policy would cause a serious harm to steel and cement sectors, as they constitute 26 percent of country's coal demand," said energy analyst Jayanta Roychowdhury. "With the new coal distribution system in place, these two important sectors would now have to be more dependent on import as their cost input would subsequently rise high."

India's small- and medium-sized industries are likely to support the new policy. Their current limit of 500 tons would be increased at least six-fold under the new rules. These industrial sectors have pressured the government for a long time to raise their coal allocation limit, saying it affects production capacity.

India is the third-largest coal producer in the world but remains a marginal player in global coal markets. There is an absence of a domestic coal market, with the bulk of sales taking place under a system of coal linkages based on available rail capacity. The monopoly producer CIL fixes the pithead prices of coal in the country.

The constrained supply of and projected requirement of thermal coal suggest the need for imports. By the end of the 11th five-year plan, India's import needs could rise to 60 million tons of high-quality thermal coal. The imports will also put a competitive pressure on the domestic coal industry to be efficient.

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