INTRODUCTION TO COAL PRICING MECHANISM LECTURE- II.pptx

The document talks about the fundamentals of coal pricing methods

1. PRICING MECHANISM OF COAL LECTURE-V

2. BACKGROUND Pricing of coal was controlled by the Central Government under Colliery control order 1945 section 4. The pricing of coal was depending on input cost, mining cost, inflations and other cost. Pricing was amended in 1996 and Government started deregulation of all types and grades of coal. During 2000, total deregulation was done and CIL & SCCL was given authority to fix the price of coal under colliery control order 2000. Following de-regulation there were number of revisions in notified coal price since 2001, and the latest revision was made in 2018/ 2023. The grading of coal is done on the Gross calorific value. Till 2012 it was on the basis of useful heat value. Ministry of Power and other state electricity Board strongly advocates for a independent regulatory body for rationalize the monopoly of coal pricing.

3. INPUT PRICE The production cost includes cost of only mining activities. The mined coal is processed for use by sizing, crushing, washing etc. The component of cost are as follows: Run of Mine (ROM) price of coal (cost & equity); Transportation cost along with distance to the end use power plant (rail, road and other modes separately) Washery charges, if any; Crushing charges; Royalty/duties and levies etc.; Other charges (Royalty and statutory duties), if any. The Run of Mine (ROM) coal comes directly from a mine without going through the filtering of the impurities and other processing associated with it and transportation upto loading point. Elements of b) to f) are mine specific and therefore input price varies between the mines

4. INPUT PRICE The Annual extraction cost is worked out as sum of following components: Depreciation; Interest on Debt capital; Interest on working capital; O&M Expenses including mine closure cost (with and without MDO); and Statutory Charges, if applicable. Similarly Annual Crushing charges, Annual Handling Charges, Annual Transportation Charges and Annual Washing Charges are worked out accordingly ROM Price (Rs/ Tonne ) = [(Annual Extraction Cost)- (Adjustment on account of Grade Slippage)] / Quantity Crushing Charges = Annual Crushing Cost/Annual Quantity crushed (Coal); Transportation Charges= Annual Transportation cost/Annual Quantity Transported; Washing Charges= Annual Washing Cost/Annual Quantity of washed coal

5. INPUT PRICE The Statutory Charges comprises of following components: Upfront payment; Fixed Reserve price of Rs.100/ton or escalated price. Cost of Performance Bank Guarantee; and Statutory levies and duties like royalty, CESS, GST as legally payable to Government of India and State Government. The extraction cost in an opencast project depends on quantum of coal and overburden (OB) extracted from the mine. Stripping ratio (ratio of volume of overburden to be removed to win one unit tonne of coal) dictates the economic mine ability of an opencast mine. The formula for recovery of input price is worked out as under: For quantity supplied up to NAUF: Input Charges= Input Price (Rs/T) x Quantity Supplied (for quantity ≤ NAUF) If quantity supplied beyond NAUF: Input Charges = Input Price (Rs/T) x Quantity Supplied (for quantity ≤ NAUF) + O&M Expense (Rs/T) x Quantity Supplied (for quantity> NAUF) Normative Annual Utilization Factor (NAUF)

6. COMPUTATION OF CAPITAL COST CAPITAL COST Nature of capitalization in mining industry is different. Capital costs in mines can be split up into development cost (up to commercialization) and ongoing development cost (after commercialization). Initial development cost is on account of accessing seam body, infrastructure creation, equipment procurement and licensing costs. Cost of Land: The cost of land comprises the cost of Compensation for Project affected people (PAP), Rehabilitation &Resettlement (R&R). Civil and Building: Includes cost of Residential Building and service Building Plant and Machinery: Comprises Heavy Earth Moving Machinery (HEMM) and other equip. Miscellaneous: Railway siding, Development expenditure (capitalized), Revenue expenditure (capitalized), Additional capital expenditure (if any)

7. COMPUTATION OF EXTRACTION COST Consists of Annual Extraction cost, Annual Crushing Cost, Annual Handling Cost, Annual Transportation Cost and Annual Washing Cost as applicable. Each component of the extraction cost is further drilled down to following components; Depreciation – Depreciation is charged as per the provisions of the Companies Act 2013 for the assets other than Specialized Mining equipment. Specialized Mining equipment as notified by Ministry of Corporate Affairs Land other than the land held under lease shall not be a depreciable asset. The value of leasehold land are to be amortized on the basis of lease period or balance life of the project, whichever is earlier. The Straight Line Method is widely accepted in the Coal Industry. Return on Equity (ROE) In case of coal mine integrated with generation project, the funding from equity is capped to 30%.

8. COMPUTATION OF EXTRACTION COST Return on Equity (ROE) As per the guideline of MOC, criteria for approval of coal mining project is considered at minimum 12% FIRR (Financial internal rate of return) at 85% capacity utilization. ROE for integrated project is different. It is proposed to be 16% or calculated as per CAMP (capital asset pricing model). [Expected return on security (Ra) = Risk free rate( Rrf )+ (Beta of the security (Ba)x (Rm – Rrf )], where Rm is expected return of the market. Interest on Loan – as per original schedule O&M expanses - Salaries and Wages, Administrative Overheads, Stores, Power, Miscellaneous, TA/DA, water cess , workshop expenses and Coal & Overburden removal (if outsourced). No normative figure . Subject to prudence check. The escalation rate in Operation & Maintenance expenses may be estimated based on indices.

9. COMPUTATION OF EXTRACTION COST Interest on Working Capital (IWC) 20 days stock in mines 12 months consumption of spares 01 month O&M expanses Base rate of SBI+350 points Mine Closure Expenses: Driven by the statutory guidelines in coal industry. A mine closure plan along with indicated activities and cost thereof is approved by competent authority before taking up actual mining operations. The mine owner is required to deposit a sum based on land required for project area and life of mine with annual escalation in an Escrow Account with the Coal Controller. After carrying out the scheduled activities, in respect of mine closure plan, the owner can claim re-imbursement upto 80 % of accumulated amount at the end of every fifth year period from the escrow account. Hence apart from mine closure cost in built in the mining operational cost and recovered through input cost mechanism, another financial cost towards mine closure is limited to differential between the cost of fund for deposit in the escrow account and interest earned from the deposit.

10. COMMERCIAL OPERATION DATE The commercial operation date is deemed to be declared if it satisfied following conditions: From beginning of the financial year immediately after the year in which the project achieves physical output of 25% of the rated capacity as per approved project report; 2 years of touching of coal, or From the beginning of the financial year in which the value of the production is more than total expenses Treatment of Coal Supplied Prior to COD: during the capitalization period, any revenue earned from coal produced, is adjusted against the Revenue Expenditure Capitalized. Prior to attaining commercial readiness, the Coal supplied may be charged at estimated price as per approved DPR subjected to true up.

11. TRANSPORTATION CHARGE Railway charges: Distance Rs / Ton 1-100 226.80 101-125 409.10 126-150 471.30 151-175 513.10 501-600 1289.40 601-700 1468.70 Up to-1100 2164.10 Up to-1200 2342.10 Up to-3500 4356.40

12. SIZING AND CRUSHING CHARGE Rs. 35/ tonne subjected to coal size to 250 mm. Rs. 55/ tonne for sizes 50 to 100 mm. Rapid loading Charge: With nominal capacity of 3500 toons/ hour or more, Rs. 20.00/ tonne . Washing Charge : The average cost is around Rs. 120/ tonne . Statutory charges/ Tonne : Royalty (Approx. Rs. 70 + 5% of Run of mine project) National Clean energy CESS – Rs 50 (Fixed) Developing of abandoned mine – Rs. 20 (Fixed) CST (@ of 4% of ROM price) Excise duty – 5% of ROM

13. COAL PRICE ESCALATION Price escalation part 1 – Salaries, wages, explosives, power, stores and spares Price escalation part 2 – Depreciation, interest and pre tax return.  

14. LATEST NOTIFIED COST OF COAL

15. COAL VALUE CHAIN - ANALYSIS Domestic coal is subject to a number of levies per ton basis , including 14.5 percent royalties, 5 percent taxes (GST), and mineral dev fund charges. Additionally, domestic and imported coal are subject to a coal cess . Since its inception, the coal cess has been increased three times, from INR 50 per tonne in 2010 to INR 400 per tonne in March 2016. With the introduction of GST, a new cess on coal production, called the GST Compensation Cess , was put in its place at the same rate of INR 400 per tonne and is aimed at filling in the budget deficits that Indian states faced following the GST introduction. Total levies are about 859 rupees per tonne , a figure higher than the 2017 retail price of Western coal in the United States. Levies on energy basis will reduce the disproportionality for low grade. Proposal has been raised to wave cess charges for FGD compliant plants.

16. COAL VALUE CHAIN - ANALYSIS Railways account for roughly 87 percent of the cost of coal transportation. Average transportation distance is 496 Km. 2017 transportation costs across Indian coal power plants. Courtesy Brookings report Calculations assume national average specific coal consumption of 0.63 kg/kWh for all states Coal is the highest-volume commodity carried by Indian Railways. In 2017 its share was 39.6 percent of freight volume and 44.1 percent of revenues Historical trend of the primary components of delivered coal prices

17. INTERNATIONAL COAL PRICING Deregulated market:

18. INTERNATIONAL COAL PRICING Atlantic market: The Atlantic market serves as an important model for global market trends as many OECD countries importing coal into this region have mining industries that serve power markets which operate under strict environmental regulations on air pollution Pacific market : Over the last two decades, the international trade in the Pacific market has achieved dramatic increases in coal commerce. This achievement is due to strong demand in Japan and North-east Asian countries and progressive coal export in Australia and Indonesia

19. INTERNATIONAL COAL PRICING (USD) Historical Prices DATE ▼ OPEN CLOSE DAILY HIGH DAILY LOW 09/08/21 168.15 169.00 169.00 168.15 09/07/21 167.75 168.20 168.85 167.50 09/06/21 169.00 168.00 169.00 168.20 09/03/21 164.00 165.15 165.50 164.00 09/02/21 158.00 162.20 163.25 158.00 09/01/21 160.00 156.25 160.00 157.00 08/31/21 150.00 153.75 154.00 150.00 08/27/21 0.00 148.95 0.00 0.00 08/26/21 0.00 149.00 0.00 0.00 08/25/21 148.50 148.90 149.00 148.50 08/24/21 148.50 148.50 149.00 148.35 08/23/21 148.30 148.35 148.75 148.30 08/20/21 0.00 144.50 0.00 0.00 08/19/21 0.00 145.90 0.00 0.00 08/18/21 150.00 149.95 150.00 150.00 08/17/21 151.10 149.90 151.10 151.10 08/16/21 152.15 151.85 152.15 152.15 08/13/21 149.65 149.70 149.65 149.65 08/12/21 0.00 150.00 0.00 0.00 08/11/21 0.00 147.60 0.00 0.00 08/10/21 145.50 146.00 146.25 145.50 Price change over selected period: 15.75%+23

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