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superseded the colliery control order 1945.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.
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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