Understanding the

Coal Conundrum

The Analysis

Coal Conundrum The AnalysisWhy Worry?Coal and Lignite based Electricity generation accounts for 2/3rd of India’s power generation.

Source: Central Electricity Authority

ALL other sources together, provide balance 1/3rd.

Coal Conundrum The AnalysisWhy Worry?But the PRICE of coal is rising sharply

PRICE

SUPPLY

And the SUPPLY is unable to keep pace with DemandTo supply Power for All, India needs to ensure coal availability at cheap rates.

Coal Conundrum The AnalysisImport Addiction?

This is almost 20% of India’s requirement.!When we have the world’s 3rd largest reserves!

$5,000,000,000 (5 billion) of forex and jobs

INDONESIA

AUSTRALIAINDIA

Last year we imported: 110,000,000 (110 million) tonnes of Coal

Coal Conundrum The AnalysisImport Addiction?Between 2008 and 2013,!Coal Imports grew by 37%, while!Domestic Coal production grew by 2.1%!!

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And in 2011-12, !7,800,000,000 KWH of Power!was lost due to shortage of coal

37%2.1%

7.8bn KWH

Source: Salva Report, Australia

Coal Conundrum The AnalysisThe Price EscalationFrom 2000 to 2013, Coal prices have tripled

Source: CIL’s Annual Reports, AskHow Analysis for sample state of Haryana

Price: Rs / tonne of coal

2000

2013

0 500 1000 1500 2000

This price increase, would translate to an electricity tariff increase of:

This means an !increase of:Rs 1 / KWH 60% to 25%

Coal Conundrum The Analysis

Recoveries!for 2012-13!!

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!Excise Duty!4,674 cr

Why High Price?1. Govt of India treats Coal India Ltd as a Cash Cow

Income Tax!7,623 cr

Dividend!7,957 cr

From another point of view, !this translates to:

Rs 0.34 !per unit (kwh)

Source: Mint http://www.livemint.com/Companies/LupU2C1VURIZ6tk5ejeFkI/Coal-India-declares-special-dividend-of-29-a-share.html

Coal Conundrum The Analysis

Recoveries!for 2012-13!!

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!Excise Duty!4,674 cr

Why High Price?1. Govt of India treats Coal India Ltd as a Cash Cow

Income Tax!7,623 cr

Dividend!7,957 cr

From another point of view, !this translates to:

Rs 0.34 !per unit (kwh)

Also, in 2013-14 CIL declared a Special dividend Rs 18,317.46 crores, of which the Govt of India got Rs. 16,485 crore.

This !adds to:

Rs 0.30 !per unit (kwh)

Source: Mint http://www.livemint.com/Companies/LupU2C1VURIZ6tk5ejeFkI/Coal-India-declares-special-dividend-of-29-a-share.html

Coal Conundrum The AnalysisWhy High Price?2. State Govts treat Coal India Ltd as a Cash Cow

Source: http://www.pfcindia.com/writereaddata/userfiles/file/ResearchReport/Report%20on%20the%20Performance%20of%20State%20Power%20Utilites%20for%20the%20years%202009-10%20to%202011-12.pdf!

The collection of Royalties, Cess, Tax and Duties by State Govts:!15,303 cr

But, all State governments, are not lucky. Only those where Coal mines operate,

would benefit from these inflows.

Coal Conundrum The AnalysisWhy High Price?

Source: http://www.pfcindia.com/writereaddata/userfiles/file/ResearchReport/Report%20on%20the%20Performance%20of%20State%20Power%20Utilites%20for%20the%20years%202009-10%20to%202011-12.pdf!

However, the flip side is that while some Stage goats benefit from inflows, most states have to eventually pay subsidies to Power companies, for power supplied cheaply to agriculture / domestic consumers.

And the big coincidence is that there is a near perfect balance of these inflows and subsidies! The receipts of the State and Central govts, and the subsidies paid by all the State govts,

both added up to roughly Rs 30 thousand crores in 2011 -12.

Coal Conundrum The AnalysisWhy High Price?3. Raw Material transported, instead of Final Product!If we take the sample of a Power Plant in Haryana …

Source: http://www.fois.indianrail.gov.in/foisweb/view/RateDtls.jsp?txtRateClss=150, HERC Order on Distribution & Retail Supply ARR & Tariff of UHBVNL & DHBVNL for FY 2013-14, and AskHow Analysis!

>Coal is transported at Rs 1.172/km ton, which adds to 40-45% of the coal cost! !• The charges for transmission and the cost of the transmission losses would be one third of coal transport!!• The lower cost alternative is to generate power at pit head / near coal mining regions, and transmit the

generated electricity. !- But States want Power plants within their borders so that they are not dependant other states!- However on the flip side, States also don’t want to mine coal because of the environmental impact!

Coal Conundrum The AnalysisWhy High Price?4. Coal India Limited is a Monopoly!And whether public or private, Monopolies seldom perform efficiently

Source: http://businesstoday.intoday.in/story/coal-india-chairman-narsing-rao-interview/1/196164.html

• When Power producers asked for a penalty when CIL fell short of promised supply…!! ! ! … CIL offered 0.01%! !

• Imported coal, the only option to CIL, is approximately 70% costlier!

Coal Conundrum The Analysis

Privatisation seems like an option, but …• If coal allocation to a private (or public

sector) company is on a nominated or non-competitive basis, it stands to make windfall gains. !

• Such windfall gains increase the probability of corruption in allocation.

Why High Price?

Coal Conundrum The AnalysisWhy High Price?5. Delays in Environmental Clearances!For mines, and for railway tracks to reach them, environmental clearances take time

Environmental concerns of local citizens and their desire for appropriate compensation, are legitimate. !But we need a transparent and swift system for environment clearances and land acquisition, which balances the local people’s concerns and the nation’s development needs.

Coal Conundrum The AnalysisWhy High Price?Summarising!The Reasons for High Coal Prices …

So agreeing that price of coal is high, then: !What should be the price of Coal?

Coal India Ltd treated as Cash Cow by Central and State governments

Transportation of raw material instead of the finished product

Monopoly operating environment stifles efficiency

Environmental clearances unclear, and take time

Coal Conundrum The AnalysisThe Price PuzzleTypically Price is at the equilibrium of the upward pressure of Costs, the downward pressure of Customers and the balancing influence of Competitor pricing

But for Coal - the dynamics of Costs, Customers and Competitors just does not exist. So then: !How should we decide the price of Coal?

Customers

Costs

Competitors PRICE

Coal Conundrum The AnalysisThe Price PuzzleWe have seen the Reasons for high Coal prices, but does that mean that Coal should be sold at the lowest price possible?

NO. Because if domestic Coal prices crash then power will be cheap, and there will be no incentive for energy conservation.!!

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And the unbridled use of energy would have it’s own set of repercussions, for India’s economy and environment.

Coal Conundrum The AnalysisThe Price PuzzlePricing is at the core of the Coal Conundrum, and the coal price must be fine tuned through Policy and Politics to…

Reduce the burden on Industry! to cross subsidise tariffs

Incentivise the States who mine coal while helping them to deal with the environmental impact

Maximise the evacuation of coal to !meet India’s goal of Power for All

Tip the balance in favour of domestic, rather than imported coal

Incentivise the conservation of energy

Penalise States who narrow mindedly insist on generating power inefficiently within their borders

Coal Conundrum The AnalysisThe Solutions

1. Reduce taxes or use the tax money to combat environmental impact.  

2. Break CIL into many independent companies and have both private and public miners so that their efficiencies can be compared. !

Coal Conundrum The AnalysisThe Solutions

3. Encourage development of power plants near coal mines so that coal does not need to be transported thousands of miles.

4. Have a transparent price for next 20 year’s. The price should be high enough to incentivize efficiency and low enough to encourage industry.

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X

Coal Conundrum The AnalysisThe Solutions

5. Auction coal blocks with the future pricing known and with stringent environmental

conditions. !!

Auction mines after buying land and getting environmental clearances. !

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Stick to the auction rules. !!

An auction without fixing a price cap could lead to very high prices. !

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An allocation which is not an auction could lead to windfall gains for the producer.

IN CONCLUSION!

Please Ask your Lok Sabha MP

www.AskHowIndia.

org

Creative Partner!MeriMaaCineMAA

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AskHow

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How should we price coal?

How can we eliminate imports

of coal?How can we

generate power near the mines to reduce

transport of coal?

How can we !eliminate Coal India’s

monopoly?

Coal Conundrum The AnalysisASSUMPTIONSAll calculations in this analysis are ‘back of the envelope’, so that we understand the Coal Conundrum, without getting lost in the details.

Assumption 1: Coal India Ltd sells many grades of coal. The price an approximation arrived by dividing Gross Revenue by Total Coal Dispatch.

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Assumption 3: Electricity tariff depends on many factors such as the coal price, the power plant’s efficiency (Station Heat Rate), the energy content of Coal (Calorific Value) and also the distance of power plant from coal mine. Calculations assume an indicative SHR (2800 kcal / kwh) and Calorific Value (3500 kcal / kwh)

Assumption 2: Coal is of 2 types: Coking & Thermal. Coking coal is used for converting iron ore to steel, while Thermal coal’s energy content is used for electricity generation. This Analysis assumes broader numbers to be applicable for Thermal coal.

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