Course correction needed

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

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 five grades from G9 to G14. These grades are mostly supplied for power generation. The average Gross Calorific Value (GCV) of these grades vary from 4750 KCal/Kg (G9) to 3150 KCal/kg (G14).

The current price of these grades of coal at pithead are Rs 1150 per tonne or Rs 242 per GCal for G9; and Rs 758 per tonne or Rs 233 per GCal for G14. The pithead price of other intermediate grades from G10 to G13 hovers in the narrow range of Rs 232-233 per GCal. In others, 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 one per cent rise in ash leads to a 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 the coal is fired. For every one 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! In the absence of a better word, this may be described as Perverse Pricing!

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 and Rs 437 for G14. Hence, the landed price to the average coal consumer, considering only the pithead price, rail freight and 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 tells a different tale. If we consider Indonesian thermal coal of GAR 5000 KCal/Kg and 3800 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 USD 1 = Rs 73, yields the price of Rs 6,132 and Rs 3,030 per tonne respectively. 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. The price in Rs/GCal thus works out to 1,226 and Rs 797 respectively for FOB and Rs 1,450 and Rs 1,091 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 three per cent for one per cent as opposed to one per cent for one 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 moderates 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 non-linear upward rising curve for price in Rs/tonne vs GCV and a less steep 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 as at present. Introduction of auto samplers, fixed or mobile crushers, 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 payback 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 the adoption of High Efficiency Low Emission (HELE) technology for power generation, reduce ash handling and disposal expenses, reduce wear and tear of power equipment and improve the 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. With the aforesaid measures in place, the Coal companies will be in a position to consider coal exports as a new opportunity on the horizon. In that market, the coal price can be set at a much higher level, benchmarked to the FOB price of coal of similar GCV. This can become a distinct lifeline for CIL in future.

Views expressed are personal