Free pricing of coal produced by private miners in a shortage economy would create distortions in the market and in pricing of end-use primarily thermal electricity, it added.

The clarifications from the ministry comes just ahead of the Indian government readying for the third round of a coal block auction wherein private mining companies and mining entities owned and managed by provincial government would be entitled to put in bids. Successful bidders would be permitted to operate the mines without any end-use restrictions on the coal produced.

According to a ministry official, a free pricing regime or market determined price for coal would only be considered once the demand-supply gap of coal was bridged “sometime in the future.”

Coal India Ltd. (CIL), accounting for more than 80% of domestic supplies, produced around 494 million tons of the fuel, while Indian imports during April-June increased 23% over the corresponding period of the previous year at 24 million tons and estimated at 150 million tons by the end of the current fiscal year.

But even as the ministry of coal ruled out free pricing of coal produced by private miners, the government was yet to frame a pricing mechanism under which merchant sale of coal would be permitted once coal mining was opened up to private companies. One of the options for setting a benchmark price for private miners was to evolve a weighted average of coal prices charged by CIL and average international price of coal over the previous three to six months.

CIL practiced a dual-pricing regime: a notified price that it charged for supplies to thermal coal producers and price discovered through e-auction, with the notified generally being about 40% lower than e-auction prices. But only a small proportion of CIL’s incremental production was permitted for sales through e-auction by the government. However, a section of officials pointed out that government directives on coal pricing risked a pricing regime to be distorted.

For example, last month, the government directed domestic coal companies to fix their notified price 10% below the landed price of imported coal.

With international coal prices on a downward curve, grades of coal with higher gross calorific value produced by CIL was currently priced higher than imported coal of similar grades. It was not clear whether CIL would be agreeable to align its domestic price with global trends considering its higher cost of production and projected capital costs necessary to double production by 2020, officials said.