High coal prices a dampener for gencos

Irregular payments by state-owned distribution companies (discoms) to power generation companies has been the problem most commonly cited in context of the power sector. Receiving less attention is the issue of high prices of domestic coal, which accounts for up to 80% of power production costs and impacts the balance sheet of power producers.

Experts point that domestic coal prices are high not due to the cost of coal at the pitheads but owing to steep railway freight charges and an assortment of taxes and levies. Thus, conflicting with the Centre’s agenda of reducing coal imports by 100 MT, it is cheaper for a few power plants in the coastal areas to use imported coal than buy the domestic product. To take one example, the price of coal of 4,200 gross calorific value jumps from Rs 995 per tonne at the Mahanadi Coalfields Ltd mines to Rs 4,365 per tonne when it reaches a power plant at Tuticorin. The same grade of imported coal whose FOB (free on board) value at Indian ports is $50.19 or Rs 3,287 per tonne, costs only Rs 3,779 per tonne when it reaches the same power plant in Tamil Nadu.

While the average price of imported thermal coal in FY19 stood at Rs 5,388/ tonne — with international prices pegged at around $75/tonne — the higher average calorific value of imported coal (about 5,500 kcal/kg) also means it takes a lesser quantity of the imported fuel to generate the same amount of energy as the domestic product.

Sutirtha Bhattacharya, chairman of the West Bengal State Electricity Regulatory Commission, says on average the high freight rates charged by the Indian Railways account for 65% of the cost of coal at a plant. Besides, there are statutory levies like 14% royalty, 2% royalty for national mineral exploration trust and 30% royalty for district mineral foundation fund, which further jack up prices, says a Coal India (CIL) source. In a state like West Bengal, the royalty rates are higher, entailing an extra expense of Rs 2.5-7 per tonne. Two additional kinds of cess are levied, amounting to 25% of the cost of coal at the pithead and`1 per tonne, respectively. There are no such levies on imported coal with duties being limited to basic customs duty (BCD) of 2.5% on assessable value and a social welfare charge at 10% of the BCD, he says.

In fact, taxes and levies on domestic coal production are among the highest in the world. The levies, including royalties, Rs 400/tonne GST compensation cess and contribution to district mineral funds, work out to more than 50% of the base price of the fuel, much higher than in other coal-rich countries like Australia (7%), South Africa (11%) and the US (4%).

It is for this reason that major users of domestic coal like the NTPC, DVC, RINL, Hind Copper want coal prices to be rationalised. CIL, the country’s main coal producer, has also approached the Railway Board, seeking a 20% discount on freight charges over a haulage distance of 701-1,400 km. The issue is pending. Though the Railway Board has provided a 20% discount for haulage of coal beyond a distance of 1,400 km, sector watchers point out that this benefits only 14 out of the 126 coal-fired power plants across the country.