Consumer-centric rectification

The recently announced wage hike to around 2.7 lakh coal workers in Coal India Ltd (CIL) and Singareni Collieries (SCCL) assures 19 per cent rise in minimum guaranteed benefits and 25 per cent rise in allowances. In line with earlier practice, the resultant impact will be passed on to the coal consumers, largely power utilities, through price revision sooner or later. The consequential impact on the rise in power tariff is somewhat inevitable. Is there a way to mitigate, if not largely eliminate the impact? The answer is affirmative if only we take a hard look at the price trend of various grades of coal supplied to power stations. Domestic thermal coal is available in 17 grades from G1 to G17, in decreasing order of Gross Calorific Value (GCV). Nevertheless, the bulk of supply of around 76 per cent is limited to 5 grades from G9 to G14. These grades are mostly supplied for power generation. The average Gross Calorific Value (GCV) of these grades vary from 4,750 KCal/kg (G9) to 3,150 KCal/kg (G14). In other words, the GCV of G9 coal is 50 per cent higher than G14.

Coal prices are notified in Rs/tonne. However, for the consumer, the relevant price is in Rupees per energy unit or Giga Calories — Rs/Gcal to be precise.

The current price of these grades of coal at pithead are Rs 1,150 per tonne or Rs 242 per GCal (G9); and Rs 758 per tonne or Rs 233 per GCal (G14). The pithead price of other intermediate grades from G10 to G13 hover in the narrow range of Rs 232-233 per GCal. In other words, the coal price in Rs per GCal remains flat for the entire range of power grade coal, even as the GCV varies by around 50 per cent.

The variation of GCV is mainly on account of ash percentage. As a rule of thumb, every 1 per cent rise in ash leads to reduction of GCV by 100 Kcal/kg. In other words, the rise in ash percentage from G9 to G14 is of the order of 15 per cent.

The net heat available from burning of coal equals the gross heat generated from burning of the fixed carbon content (C) as reduced by the heat consumed by the ash (A) content when coal is fired. For every 1 per cent rise in A, a corresponding reduction takes place in C. This impacts the net heat available in two ways, namely lower generation of gross heat and higher loss for heating more ash. As a result, the net heat availability reduces faster than the reduction in GCV. This is without considering the other consequences of higher ash, namely rise in ash handling and disposal expenses, more wear and tear of the boilers etc.

Quite obviously, a flat coal price in Rs/GCal with drop in GCV fails to capture the substantial impact of lowering of GCV on the consumer. To capture the impact, the price in Rs/GCal with rise in GCV should be upward sloping. This requires the price in Rs/tonne to slope upwards even more steeply in a non-linear fashion (since price in Rs/GCal is the first derivative of price in Rs/tonne).

Incidentally, the rail freight for a specific distance and the GST compensation cess of Rs 400 pt are fixed in Rs per tonne and hence slope downwards with rise in GCV. Added to the flat pithead price in Rs/GCal, it leads to a downward sloping landed price in Rs/GCal at every destination (ignoring other taxes and duties for the present). The consumer pays a lower price for higher GCV coal and vice versa at all destinations! This is a serious distortion in the price structure akin to Perverse Pricing that demands correction.

The average rail transport currently is for about 400 kms that commands a rail freight of Rs 926 per tonne. Thus, the rail freight plus GST compensation aggregating to Rs 1,326 works out to Rs 309 for G9 & Rs 437 for G14 in Rs/GCal terms. Hence, the landed price to the average coal consumer considering only the pithead price, rail freight & GST compensation works out to Rs 551/GCal for G9 and Rs 669 for G14. An example of Perverse Pricing!

A look at the imported coal prices under stable conditions, i.e., before the Russia Ukraine war, tells a completely contrary tale. If we consider Indonesian thermal coal of GAR 5,000 KCal/Kg and 3,800 KCal/kg, the FOB price of USD 84 and USD 41.50 (as notified in ICMW of June 14, 2021), converted at an exchange rate of USD1 = Rs 73 yields price of Rs 6,132 and Rs 3,030 per tonne respectively (102 per cent differential!). With an ocean freight of USD 15.30 per tonne, the corresponding CFR prices are Rs 7,249 and Rs 4,147 per tonne respectively (75 per cent differential). The prices in Rs/GCal thus work out to 1,226 and Rs 797 respectively (54 per cent differential) for FOB and Rs 1,450 and Rs 1,091 (33 per cent differential) for CFR. There is no case of Perverse Pricing either at the Port of origin or at the port of destination. The rise in coal price in Rs/tonne by 102 per cent for rise in GAR Calorific Value by 32 per cent at the Port of origin is over 3 per cent for 1 per cent as opposed to 1 per cent for 1 per cent in domestic coal. This makes all the difference.

The impact of Perverse Pricing becomes worse in case of grade slippage which happens for around 35 per cent of the coal supplied. In such cases, the coal producer fails to realise the billed grade price and the consumer pays a higher price in Rs/GCal terms for lower grade coal! A clear 'lose lose' proposition.

While the adverse impact of the prevailing pattern of domestic price on the consumer has been highlighted, the impact on coal producers is no less adverse. The flat Rs/GCal price across power grades leaves no pay off for expenses incurred in improving coal quality. Viewed differently, the pricing pattern largely dilutes the impact of quality variation on sales realisation to the producer to a point of indifference. No wonder that quality complaints surface periodically.

A revenue-neutral correction of the price structure by substantially depressing the price of lower grades and raising the price of higher grades to create a steep nonlinear upward rising curve for Price in Rs/tonne vs GCV and a less steep linear curve of Price in Rs/GCal vs GCV will go a long way in creating adequate incentive for adoption of quality improvement measures as a Profit Centre as opposed to being a Cost Centre. Introduction of auto samplers, fixed or mobile crushers, and CHPs, universally, with adoption of dry processing or coal washing as the situation demands, will enable the coal companies to move the current grade conformity level of 65 per cent to upward of 90 per cent within a limited timeframe. The associated capex and operating expenses will fetch assured pay back for the coal producer and the consumer will be relieved of quality problems as well as from the vagaries of Perverse Pricing.

The resultant emphasis on coal quality shall facilitate adoption of High Efficiency Low Emission (HELE) technology for power generation, reduce ash handling and disposal expenses, reduce wear & tear of power equipment and improve uptime of boilers. These changes will eventually align the coal-power ecosystem to the climate commitments of the country. Adoption of price vs GCV variation trend, as observed internationally, may provide a ready benchmark to carry out such correction.

The Coal & Power sector should join hands to take a deep dive into the pricing structure and carry out the structural change that can largely annul the impact of wage hike-induced price revision for the consumer and offer the coal companies a fair and justifiable opportunity to enhance realisation by moving up the ladder of higher-grade conformity and coal quality.

Views expressed are personal