lectricity is set to be costlier in India with states demanding higher royalty rates on coal. The latest of such demands has come from Chhattisgarh where the government is pressing for raising the royalty rates on coal to 30 per cent. The demand, if met, could push up power tariffs by 7 per cent or 10-12 paise per unit.
The government has constituted a study group to consider the revision in the royalty rates based on the request from the state government of Chattisgarh for a royalty hike to 30 per cent from the existing ad-valorem rate of 14 per cent of sale price at pitmouth. Analysts believe the royalty hike looks quite steep at 30 per cent and, if accepted, will lead to coal attracting the highest ad-valorem duty compared to all other minerals.
“Assuming a pithead price of Rs 720 per tonne for coal, the royalty increase will also lead to higher contribution towards District Mineral Foundation (DMF) at 30 per cent of royalty and National Mineral and Exploration Trust (NMET) at 2 per cent of royalty, which translates into higher cost of electricity generation by around 10-12paisa per unit,” said Salil Garg, Director-Corporates, at research firm India Ratings.
Coal consumers have been hit by rising prices since January 2015 due to the imposition of DMF and NMET, effective January 2015, taking the effective royalty rate to 18.48 per cent from 14 per cent. If the royalty rates were to increase to 30 per cent, the effective royalty rate would be 39.6 per cent including DMF and NMET.
Also, the Union Budget 2016 increased clean energy cess to Rs 400 per tonne from Rs 200 per tonne. Coal India Limited (CIL) also increased the run-of-the-mine prices for the most widely supplied grades of coal to the power sector by an average of 16 per cent in May.
Also, freight charges for coal were hiked by 6.3 per cent effective April 2015. As a result, the variable cost of generation for a plant situated 500 Kilometer from the mine which received grade G13 coal, has increased by 24 per cent to Rs 1.69 per unit. If the revised royalty rates were to be accepted as proposed by Chhattisgarh, the variable cost of generation can increase by another 7 per cent. However, the recent rationalization of coal linkage for companies has led to a decline in the transportation costs thus easing some impact.
Garg said industrial power rates are a critical pre-investment consideration for manufacturers and given that bulk of the coal based capacity in India is on a cost pass-through basis, the ultimate impact of such hikes is passed on to the consumers. “Such regular hikes in one form or the other is not a healthy sign for the thermal power generators. As alternate sources of power namely solar see further reduction in tariffs, the competition between thermal and solar will intensify, with a high probability of solar winning,” he said.
Interestingly, the price hikes have come at a time when the all India power situation is continuing to improve and CIL is looking at a coal surplus situation, with the possibility of coal also being exported. Even after the hike, coal supplied domestically by CIL continues to be cheaper than the imported coal.
Royalty rates of coal were last revised in 2012 when the royalty was changed to ad-valorem basis at 14 per cent from the earlier system of tonnage based and ad-valorem. According to India Ratings, states will benefit at the expense of consumers paying more for electricity due to the hike. The increase in royalty upto 30 per cent for the top three states could result in additional income between Rs 500 crore and Rs 3,900 crore depending on the final royalty rate.