January 27, 2012

GCV (Gross Calorific Value) based coal pricing under review at the demand of power companies

The differential pricing strategy adopted by state-run Coal India Ltd (CIL), while raising prices last February, is at the root of the controversy surrounding the latest decision to switch over to the gross calorific value (GCV)-based pricing mechanism, according to the coal ministry. Responding to complaints by power companies that the new methodology had pushed up input costs to unmanageable levels, the ministry said it would review it.

The findings would determine the economic viability of investments worth thousands of crore in the power sector and could impact the profitability of some of Coal India’s subsidiaries. This has come at a time when CIL is set to take an additional annual hit of Rs 4,000 crore — due to the recently settled 25 per cent increase in wages for workers, effective from July last year.

CIL decided to do away with the useful heat value (UHV) system of pricing a month ago in an attempt to align Indian coal pricing system with global practices. The new system that came into effect on January 1, had fuelled large-scale protests from the power industry. NTPC, India’s largest power producer, had said the GCV system would push up input costs by 40 per cent.

In a recent letter to coal secretary Alok Perti, the power ministry had raised concerns over the 150 per cent jump in coal prices resulting from the new system. The system would lead to windfall gains of Rs 25,000 crore for CIL, the ministry had argued.

The coal ministry rejected the allegation, arguing the switch over was in response to complaints of inferior quality supply from consumers, apart from aligning domestic pricing with the global system. “The move was not at all a cover-up for profiteering,” a senior ministry official said.

CIL had adopted the differential pricing strategy in February last year, where prices were raised by 30 per cent for non-regulated sectors such as cement, steel and paper. The regulated sectors of power and fertiliser were largely spared. But coal from Mahanadi Coalfields was made costlier for the power sector by Rs 90, or 20 per cent, a tonne due to a parallel decision to bring parity in the prices of E and F grades.

The differential pricing mechanism meant A and B grades fetched high prices, while prices remained low for the rest — C, D, E, F and G. This distorted the ideally smooth curve of increasing prices across grades.

“This distortion got amplified while switching over to the GCV, which prescribes more bands. And thus, CIL had to increase prices for C and D grades a bit more than for others,” another senior coal ministry official said. He admitted some errors did occur in assessing the impact of the new system.

While coal minister Sriprakash Jaiswal said this week a downward revision of prices was likely before the month-end, the ministry is concerned about the implications of such a move. “Going back on GCV would mean the government’s attempt to ensure consistency in quality of coal supply would get scuttled. This is because diluting GCV would allow uncrushed coal, including boulders, and other impurities to be supplied,” the official said. The GCV system divides available coal into 17 grades, against seven in the UHV system, thereby forcing coal companies to maintain precise levels of quality in a given sample.

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