Domestic coal quality as the new battleground in India

BRISBANE, Australia - April 29, 2013 - PRLog -- Coal India Limited (CIL) is India’s largest near monopoly miner and NTPC (National Thermal Power Corporation) is the country’s largest power generation company and CIL’s single biggest consumer.

CIL and NTPC are publicly listed companies with Government of India owning a commanding majority in both the companies - 90% and 84% respectively. Such an acrimonious debate between two (effectively) state owned companies over an issue is unusual. Resolving the spat has required involvement across the highest level of government.

Although the issue had been slowly brewing for a year, it took an acrimonious and public turn after Eastern Coalfields Limited (ECL), a fully owned CIL subsidiary, cut off supplies to NTPC’s Farakka and Kahalgaon power plants. ECL claimed that NTPC had withheld payment of about US$370M.

NTPC on the other hand claims that it is being incorrectly billed. Company representatives have said that it is being charged for approximately 5,000 kCal/kg GAR type coal when it is actually receiving coal with 3,000 kCal/kg. NTPC has claimed that it has not withheld any payment once the quality is corrected.

To some extent, NTPC had been anticipating this issue since Government directed CIL to switch coal pricing from Useful heating value (UHV) to GCV in 2011. NTPC initially resisted the change saying that the infrastructure required (i.e., legal framework and third party testing) for GCV pricing was not yet in place. Although it received invoices for coal supplied on a GCV basis, it paid CIL based on the old useful heat value (UHV) system, withholding the rest in an escrow. It was not until the third quarter of the last financial year that it released about $100M it had held in escrow and began paying on a GCV basis.

Following assurances from the Union Ministry of Power and the Union Ministry of Coal that the issue will be resolved, CIL has resumed supplying the two NTPC plants. joint sampling for quality is underway.

Both CIL and NTPC are claiming victory in their own ways: CIL claims that the joint sampling confirmed that its quality had been acceptable; NTPC claims that at least it got CIL to agree to third party sampling to commence from September or October.  

But the wound that this little spat exposed runs much deeper.

First, coal transport falls in the grey area of no-man’s land. CIL says that it will continue to charge based on what it loads and it is clear that its liability for quality cannot extend to what happens during transport.

Companies like NTPC have been requesting for sampling at both ends, loading and at discharge. CIL has refused. Railways, the agency solely responsible for transport has chosen to remain quiet through this whole debate.

Considerable pilferage and even large scale adulteration, wherebythe coal is stolen and replaced with stones or very poor quality) is often reported during transport. Unless the Indian Railway provides some assurance for security during transport, it is unlikely that a clear resolution will be immediately available.

Second, many industry representative feel that full-proof fair sampling will not even be possible at loading points, even if it were done jointly or by independent third party. They point to complex local relationships between labour, transport managers and political interests, often involving well organized coal smuggling gangs. In many of the harder to reach mines and loading points, breaking through such entrenched interest to conduct fair sampling will not be impossible but very challenging. At best, it will be a solution that will only materialize slowly over time.

The problem with variations in coal quality is straining power generation companies that need to increasingly achieve target generation efficiency in order to be profitable. In the past, most state electricity regulatory commissions allowed generators to recover the cost when there were differences between contracted and actual fuel quality. Now, they are holding back, which means that the difference between projected and actual coal quality is directly hitting the bottom line of power plants.

For example, in its filing for “True up  for FY 2011-12 and Tariff Determination for FY 2013-2014” before the state electricity regulatory commission, Gujarat State Electricity Corporation Limited (GSECL) requested fuel cost adjustment of $32M, about 5% of its total coal cost because it had to burn lower quality coal than it had projected.

The fuel adjustment for “FY 2011-12 was due to the difference between the actual calorific value of coal received at power stations of GSECL and the calorific value of coal considered for energy charges. Calorific value being an uncontrollable factor, GSECL is required to recover the same through revenue gap, which may please be approved,” the company said in its tariff filing.

The spat between NTPC and CIL opens the door for many other generators to air their long standing issues on coal quality. NTPC and CIL may resolve their differences, but the issue is unlikely to go away soon.      

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