CIL’s shift to new pricing system may hit power sector hard

The thermal power generation sector, which is already suffering from short supply of coal and lower tariffs in some states, got yet another blow from Coal India as the monopoly decided to move to a new system of pricing from Januray 1. This has increased the number of coal category from the original seven to 17, thus increasing the possibility of price rise for almost all categories.

Although, chairman, NJ Jha said it will have marginal effect on generation costs, officials from power companies said prices could rise anywhere between 12% and 15% on an average. A 12% rise in coal prices is likely to raise cost of generation by about 40 paise per unit. A number of state power utilities may not be pass this on to consumers and suffer increased losses.

However, utilities that have been allowed to pass on a rise in coal costs through an ad-hoch mechanism, like Kolkata-based CESC, may pass on a portion of the hike to consumers from February 2012.

The restructuring followed a shift from Useful Heat Value (UHV) in determining price to Gross Calorific Value (GCV) based price mechanism since from January 1.

While GCV that measures the amount of heat liberated by carbon and hydrogen in the coal when it is heated, is an internationally accepted pricing mechanism, due to the high ash content in Indian coal, the UHV mechanism was followed that took into account the heat trapped in ash. Typically in Indian coal, GCV is 25% higher than UHV.

Against the seven varieties of UHV coal that was available till December 31, 2011, from January 1, coal will be sold in 17 price brands starting from the variety that produces 2,200 kilo calorie to one that produces 7,000 k cal. In between, there are 15 price bands, each at an incremental rise of 300 k cal.

Coal of B, G and F grades will not be affected as new prices will be either same or lower, those using other coal grades will be majorly affected. Power utilities that use different quantity of coal from across the grade spectrum, will be hit by the steep hike in A, D and E category coal.

Power utilities will also be doubly affected as the monopoly has decided to levy 6% extra on coal from Eastern Coalfields Ltd (ECL) since it’s a sick subsidiary listed with the Board for Industrial & Financial Restructuring (BIFR). ECL supplies coal to both CESC and WBPDCL.

“The restructuring is part of the proposal to move to the system of selling coal through GCV which is followed internationally. It is not likely to affect coal prices much. Nevertheless, we will review the prices once again after three months to make adjustments,” Jha said.

Officials said it may lead to additional 15% rise in revenue for the company.

Jha also said that the new pricing mechanism has made sure that no coal producing company will lose in revenue due to the restructuring. “However, some subsidiaries manages to increase the quality of coal produced, it will command a higher price for coal,” Jha said.

Coal India officials claimed that following the revision, coal price would be still be 77% lower than the international prices for power, fertilizer and defence and 25% for others.

Source: ET


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