This article is part of the series Comprehensive Energy Monitor: India and the World
Under the
colliery control order of 1945 and the
Essential Commodities Act, 1955, the price of coal in India was regulated by the government of India (GOI) until the 1990s. In 1996, the GOI started gradually
deregulating the price of coal. The pricing of coal was fully ‘
deregulated’ after the
colliery control order 2000 (CCO 2000) superseded the colliery control order 1945. Under CCO 2000 the GOI has no power to fix the price of coal. But Coal India Limited (CIL) has
explicitly stated that it
consults with the GOI to determine the price of coal and avoids price increases, especially for its lower grade coal by improving cost efficiencies. The rationale is that the
price of coal has significant ramifications on the Indian economy in general and for thermal power generation in particular, therefore, CIL takes into consideration general inflation levels, increase in production costs that cannot be offset through
efficiency improvements, the need for generating internal resources to ensure viability of projects and to a lesser extent the landed cost of comparative imported coal to set the price of coal. This means that CIL sells coal to power plants
at prices lower than that in Indian (e.g., through e-auctions) and international markets. However, this does not translate into low-cost power because coal takes on additional levies and costs as it makes its way from the mine to the power station. These
additional fixed costs over which CIL has no control often make up more than 50 percent of the cost of coal. The result is that CIL prioritises the production and
supply of low-quality coal to keep overall prices low for thermal coal. Low-quality coal increases local and global pollution from coal-based power plants, increasing the cost of pollution abatement.
The price notification was amended between 1994 and 1996 to enhance the price differential between run of mine (ROM), steam and slaking coal to accommodate the increase in transportation charges and also to provide additional prices for coal produced from certain mines.
Pricing of Coal
As observed earlier, until 2000, the
GOI fixed grade-wise and colliery-wise price of coal under section 4 of the colliery control order 1945 which was re-enforced by the essential commodities act 1955. The price notification was amended between 1994 and 1996 to enhance the price differential between run of mine (ROM), steam and slaking coal to accommodate the
increase in transportation charges and also to provide additional prices for coal produced from certain mines. The mining cost of a
sample of mines estimated periodically was adjusted for inflation and used as the basis for the price at which coal was sold to consumers.
The concept of
useful heat value (UHV) was used to differentiate between different grades of coal. Whilst reports on the Indian coal sector prepared in the 1990s and early 2000s were critical of the concept of UHV seen to be unique to India, there was a reasoned argument behind it. In 1954, when the concept of UHV was proposed by the
coal washeries committee, power generators were burning better grades of coal (including coking coal required by the steel industry), the reserves of which were depleting fast. The objective of the adoption of
UHV concept was therefore to encourage and popularize the use of poor grades of non-coking coal by the power utilities. The
empirical formula developed by CFRI (central institute of mining and fuel research) for UHV of coal, UHV = 8900 - 138 (A+M) where A is the ash content in percentage and M the moisture content in percentage, consisted of a ‘discount’ which increased with increase in the ash plus moisture content coal.
Lower grades of coal (grades D to G) were used to generate power but as power tariff was regulated the price of these coal grades were not subject to ‘deregulation’.
Following the recommendations of the
bureau of industrial costs and prices (BICP), the GOI deregulated prices of all grades of coking coal and A, B & C grades of non-coking coal that accounted for 40 percent of coal production in 1996. The price of
deregulated coal grades rose shapely compared to grades whose prices were still under administrative control. Lower grades of coal
(grades D to G) were used to generate power but as power tariff was regulated the price of these coal grades were not subject to ‘deregulation’.
The GOI de-regulated the price of soft coke,
hard coke and D grade of non-coking coal in 1997 following the recommendations of the committee on integrated coal policy. CIL and SCCL (Singareni Collieries Company Limited) were allowed to fix prices of
E, F and G grades of non-coking coal once every six months by updating cost indices as per the escalation formula in the 1987 report of the BICP. Efforts of CIL to shift to a
gross caloric value (GCV) system in the late 1990s did not succeed initially due to protests from major consumer sectors, such as power. Eventually in January 2012, CIL shifted to benchmarking
coal on the basis of GCV. 17 slabs of 300 kilocalorie (kcal) bandwidth, starting from 2,200 kcal to 7,000 kcal, and above 7,000 kcal
replaced the 7-grade classification based on UHV concept. But customers from the power sector continued to receive discounts from 25 percent to 77 percent of the notified price under the revised price regime. For coal that was sold through e-auctions, the floor price was set
20 percent above notified price.
Delivered Price of Coal
In 2010-11, when CIL has listed the pit-head price (not including excise, royalty, sales tax and clean energy cess) of grade 10 coal (calorific value more than
4,301 kilo calories per kilogram (kcal/kg) and less than 4600 kcal/kg) used for power generation was INR780/tonne (t). In 2020-21 the
price of grade 10 coal had increased marginally to INR1034/t. The
delivered price of coal includes but is not limited to sizing and crushing charges, rapid loading and unloading charges, transport charges etc. In addition, the statutory charges that include royalty, excise duties, clean energy cess (now reassigned as GST
compensation cess), VAT (value added tax), other taxes and levies are added to the pit-head price of coal. The GST rate on coal and lignite is 5 percent and state VAT is 5 percent on coal and lignite. The royalty rate on coal is 14 percent (except in the state of West Bengal) on the price of coal. There is additional royalty on account of the district mineral foundation (DMF) which accrues to the state government exchequer and national mineral exploration trust (NMET), which accrues to the Union government exchequer. The largest component of the taxes is the clean energy cess (now GST compensation fund) which was increased to INR400/t in 2016 from INR200/t earlier. The largest component of the additional charges is the cost of transportation by rail which can be as high as INR1,050/t for the average distance of 470 kilometres (km). With the addition of charges and levies, the delivered price of coal can be around twice the pit-head price of coal.
Issues
Over 50 percent of the delivered price of coal is fixed (beyond the control of CIL) and the result is that CIL is forced to prioritise supply of lower quality coal (for example unwashed) to keep prices low in the larger interest of the Indian economy. But stock markets have punished CIL for its good deeds as it depresses revenue. CIL’s inability to raise prices for the supply of higher quality coal has destroyed shareholder value of whom GOI is the largest. Power generators too are under tacit political pressure to keep power tariff low. This reinforces the disincentive to use higher-quality coal. The use of lower-quality coal to keep prices low results in higher cost investments to address pollution at the local and global level. It is perverse to increase pollution in the name of affordability at one end and introduce expensive technologies at the other to decrease pollution.
Source: Yahoo finance
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