Rationalizing coal prices

Although the last few months have seen international prices of almost all energy resources spiralling, the focus of all debates and discussions has been crude oil price and its impact on the economy and the consequent inflationary pressures. But beneath the headlines, a silent crisis is brewing on the coal front with far-reaching consequences for the power sector and, ultimately, the economy. We are facing a double whammy here with coal imports for the power sector shooting up even as its international prices have zoomed about 125% in the past eight months or so. Coal is the mainstay of energy resource of our economy: Of the total installed power capacity, more than 50% is coal based and the power sector consumes about 75% of domestic coal production. Yet locally mined coal isn’t enough for our needs. Coal imports have shot up by almost 130%, an increase of almost 17 million tonnes between 2004-5 and 2006-7, and India’s appetite for coal is growing at a particularly fast clip. The power industry is the sector most vulnerable to the country’s increasing dependence on coal imports. Many power plants are facing shortages of coal with the level of stocks barely enough to generate power for seven to ten days, while a stockpile for 30 days is considered comfortable. According to recent news reports, the National Thermal Power Corporation (NTPC) is facing a critical shortage of coal and is planning to import eight million metric tonnes during this fiscal year. This vulnerability has been exacerbated with coal prices touching a high of almost $180 per tonne in June 2008 compared to $80 in November 2007 — and is projected to rise even further. Many international organisations including the Australian Bureau of Agricultural and Resource Economics (ABARE) and Macquire Research, Canada have projected that the coal prices are expected to remain high for the next three to four years. Looking at the impact of escalating coal prices on power generation cost, it is clear that this trend may not be sustainable for the economy in the medium to long term. On normative basis, the cost of generation at a non-pit head thermal power station using 100% domestic coal is around Rs 2.60 per unit and that for pithead is Rs 1.54 per unit. But using only imported coal, the cost of a unit is as high as Rs 3.65 per unit (with imported coal at $180 per tonne). Therefore, plants using imported coal that do not have long-term contracts for supply of coal would be the worst affected. Making things worse, indigenous coal is short in supply and power plants using a mix of indigenous and imported coal have to increasingly use more imported coal than what is suited to the technical design of the plant adding to inefficiencies as well cost of fuel. To provide one unit of electricity to the consumer, 1.5 units need to be generated to make up for transmission losses and if the increase in coal prices is passed on to the consumer, the cost of delivery of this unit of electricity to the consumer is approximately Rs 7.35 per unit with imported coal and Rs 5.12 per unit with domestic coal (non pit head plants). If these higher fuel costs are not passed on the consumer, plants dependent on imported coal will become unviable, and while the public sector will continue to somehow survive with support from the government, the private sector will have to sooner or later ‘shut shop’. While generation cost is going up rapidly, consumer tariff is not keeping pace. Between 2003-4 and 2005-6, the Wholesale Price Index (WPI) (annual average) increased by 5.42% compound annual growth rate (CAGR). An analysis of the states where tariff orders were issued by the state regulators in 2003-4 and 2005-6 reveals that average tariff was not adequately adjusted. In fact, in Andhra Pradesh and Kerala, there has been a decline in overall average tariffs by 1.89% and 2.48% respectively. In Uttarakhand, the increase was 3.47%, much lower than the increase in the WPI. Clearly, such a situation is not sustainable in the long run. If increasing fuel prices are not passed on to consumers, the financial performance of the Indian power sector will continue to worsen. According to the Economic Survey 2007-8, commercial losses in the power sector are projected to increase to Rs 26,462 crore in 2008-9 from Rs 25,701 crore in 2007-8. This becomes a vicious cycle as insufficient tariff increase translates into lower investments leading to higher losses over a period of time. Regulators need to ensure that utilities are financially viable for the reform process to succeed and this can be achieved only if tariffs are rationalised keeping in view the costs and loss levels.