Fuel Pricing

7/31/2019 Fuel Pricing

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FUEL PRICING.


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11th Plan : Capacity Addition Plan

Tentative/- type wiseType Total (MW)

Hydro 12,000

Thermal 46905Indigenous Coal 28155

Imported Coal 10000

Lignite 1750

Gas/ LNG 7000

Nuclear 3160

Total 62065


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Factors Affecting Choice of Fuels

Fuel Options determinants:

Availability

Affordability

Reliability

Environment friendliness


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Major Options Available

CoalDomestic

Imported

Lignite

GasDomestic

LNG

Transnational piped gas

Hydro Nuclear


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Why coal?

39%of the worldselectricity is produced using

coal. Main fuel forelectricity in USA, Germany,

China, India, South Africa,

Australia, much of central

Europe

70%of theworlds steel is

produced using

coal

23%of world primaryenergy

safe affordable reliable plentiful increasingly clean


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COAL FIELDS

Talcher (39.6 b.t ),

Raniganj (25.5 b.t.),

Ib-River (22.4 b.t.),

Jharia (19.4 b.t.) and

Mand-Raigarh (19.10 b.t.).

Godavari Valley (17.46 b.t.),

North Karanpura (15.86 b.t),

Rajmahal (14.12 b.t.),

Singrauli (12.91 b.t) and

Korba (10.12b.t)


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COALIFICATION

As geological processes apply pressure to dead

matter over time, under suitable conditions, it is

transformed successively intoPeat

Lignite

Sub-bituminousBituminous

Anthracite


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Questions ?

What is a fossil? What is a fossil fuel?

What do you know about how coal is formed?

Explain that coal is an example of a fossil fuel


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Coking Coal

These are such coal which when heated in

absence of air from coherent bead, free from

volatiles, with strong and porus mass, calledcoke.

These have coking properties mainly used inSteel making and metallurgical industries


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Non-Coking Coal

Such coals which do not have coking properties,

are Non-Coking Coal.

Mainly used as thermal grade coal for powergeneration.

Also used for Cement, Fertilizer, Glass,

Ceramic, Paper, Chemical, Bricksmanufacturing and for other heating purpose.


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Coal is generally transported

by conveyor or truck over

short distances. Trains are

used for longer distances

within domestic markets.

Ships are commonly used for

international transportation


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(Billion T)(As on 1.1.2007)

Proved resource is around 10% of worlds proved reserves

TYPE OFCOAL

PROVED INDICATED INFERRED TOTAL

Prime

Coking

4.6 0.7 0.0 5.3

MediumCoking

11.8 11.6 1.9 25.3

Semi Coking 0.5 1.0 0.2 1.7

Non coking 81.0 105.7 36.2 222.9

TOTAL 97.9 119.0 38.3 255.2

Lignite 4.3 12.7 20.1 37.1


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1. LIMITED RESERVES OF COKING COAL(32.3 BT).

2. HIGH ASH AND LOW CALORIFIC VALUES (40%

+ ASH & AVERAGE UHV 4000 K.CAL./KG)

UHV = Useful Heat Value3. MISMATCH IN LOCATION OF DEPOSITS AND MAJOR

CONSUMPTION CENTRES

4. HIGH COST OF TRANSPORT


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0.2 0.4

4.2

0.2 0.70.4

2.4

9.8

0.6

3

0

2

4

6

8

10

12

Oil Natural Gas Coal Nuclear Renewables

Fuel

Quadrillion

Btu

1995 2020

Comparison of Energy Demand for Electricity byFuel 1995 vs 2020 India

Btu : British Thermal Unit

=


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SECTOR CONSUMPTION DEMAND

(11-12)

DEMAND

(16-17)

IX PLAN

(01-02)

X PLAN

(06-07)

XI PLAN %

Share

XII

PLAN

%

Share

POWER 249.23 312.80 483 66.06 750 66.67

POWER(CAPTVE)

16.02 26.30 57.06 7.80 85 7.56

CEMENT 15.22 18.33 31.90 4.36 50 4.44

STEEL 29.84 17.60 68.50 9.37 105 9.33

OTHERS 41.6 45.18 90.64 12.4 135 12.00

TOTAL 351.91 420.21 731.10 100 1125 100

Mt


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DEMAND POWER SECTOR

Power Survey projected energy requirement of 975 BU in

2011-12.

going by the trend that around 70% of the projected energy

requirement to be coal based working group assessed that

the most likely coal based generation in the terminal year

2011-12 of the XI Plan could be of the order of 690 BU.

Further considering the current trend of specific coalconsumption of 0.70 kg/kWh the coal requirement for

power sector utilities works out to 483 mt in 2011-12.


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By 2031-32 power generation capacity must

increase to nearly 8, 00,000 MW from the current

capacity of around 1, 60,000 MW inclusive of allcaptive power plants. Similarly requirement of

coal, the dominant fuel in Indias energy needs

will need to expand to over 2 billion tones perannum based on domestic quality of coal.

DEMAND POWER SECTOR


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MEETING THE GAP

Gap between the projected demand of 731.10 mt andthe projected domestic availability of 680 mt works outto 51.10 mt in 2011-12.

This comprises of 40.85 mt of coking coal and 10.25 mtof thermal coal.

This requirement would need to be met from imports.

Further increasing production from captive blocks tobridge the gap also remains as a distinct possibility.


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- Classification into .Grades

(A, B, C, D, E, F & G)


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GoI has notified the following formula for

determination of Useful Heat Value (UHV):

UHV = 8900 -138 x (A+M)

Where A = Ash % & M = Moisture %


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GoI has Categorised Non Coking coal into various Gradeshaving Useful Heat Value range as under:

GRADE UHV RANGE

(KcaI/Kg)

A > 6200

B > 5600 upto 6200

C > 4940 upto 5600

D > 4200 upto 4940

E > 3360 upto 4200F > 2400 upto 3360

G > 1300 upto 2400


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Basic Issues in Coal Pricing

Classification of coal under various grades

Grading of coal is based on the concept of coaly matter and

the non-coaly matter in the coal. Moisture , and ash representthe non coal content and the volatile matter plus the fixedcarbon represent the coal proper.

Grading of coal was conceived in the year 1917.Subsequently coal grading Board was established in 1924.

Systematic grading started in the year 1944 based on ash plusmoisture at 60% relative humidity and 40 deg.C.


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Basic Issues in Coal Pricing

In 1956 coal board was formed who categorized coal on

the basis of moisture content.

a) Low moisture coal with moisture 2% and below.

b) High moisture Coal having moisture content above 2%

Low moisture coals including coking coal were graded on

the basis of ash content and the high moisture coal on thebasis of ash plus moisture content.


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Administered Price Mechanism (APM)

The system of notifying the coal prices by theGovt. by issuing gazette notification was known asAdministered Price Mechanism.

Coal pricing was guided by the Colliery Control Order 1945and Essential Commodities Act 1955 .

As per these orders Central Govt. first of all shall prescribethe Classes, Grades and specifications of Coal

Central Govt shall fix a retention price for each colliery onper tonne basis for different class, grades and sizes of Coal.

Central Govt. shall notify in the official gazette the maximumor minimum sale price at which coal may be sold by thecolliery owner.


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If the retention price is lower than correspondingsale price, the colliery owner shall pay into thecoal pricing regulation account, an amount

equivalent to the difference between the two prices. If the retention price is higher than the colliery

owner shall be paid from the coal pricing regulationaccount, an amount equivalent to the difference

between the two prices


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Cost of production was lower/higher than the average cost of

production of CIL as a whole.

To avoid such anomalies the concept of Retention Price wasintroduced under the aforesaid Colliery Control Order by anotification dated 30 March 1982.

Under this system, CIL had to monitor and administer CoalPrice Regulation Account (CPRA) under which low costmines were to contribute the difference between the notifiedprice and the cost and the high cost mines were to getcompensation for the shortfall in price to cover the cost.


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Guidelines for determining coal price by BICP.

Subsequently, the pricing under APM, were being

determined as per guidelines of the BICP report 1987 byupdating the cost indices as per the escalation formula

contained in the 1987 report of the Bureau of Industrial

Costs and Prices.


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Guidelines of BICP

STEP-I: An weighted average price (WAP)calculation for all mines (UG/OC) together, as

applicable.

WAP is calculated by taking sample opencast and

underground mines in a certain ratio and taking

average cost for opencast mine and corresponding

cost for underground mines


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Guidelines of BICP

STEP-IV: Normative correction of the costs based on

norms to derive fair prices developed by BICP or

CMPDIL.

To achieve uniformity of prices among different mines ofsame Coal Companies, BICP used norms for price

finalizations (its own norms as also CMPDI norms)

For this purpose Normated levels of production, Stripping

Ratio, Annual Capacity, Interest, Power consumption,Consumption of explosives and detonators, Requirement of

Working capital etc were prescribed.


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Guidelines of BICP

STEP V: Grade wise distribution of cost &

price fixation for different Grades of Coal andClasses of Mines.


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Coal Price Trend during the 5 years before de-control

From the years 1989-1994 Coal companies brought out their own

notifications. The rise in coal prices during this period was as under

CoalCompany

Grades ofCoal

Price as on1-1-1989

Price as on17-6-1994

5 Yr avg- %increase in

prices

NCL D 284.2 438.2 4.52 %

NCL E 207.20 329.2 4.91%

CCL D 284.20 438.2 4.52%

CCL E 207.20 329.2 4.91%


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Price De-control and Dismantling of APM

Govt. of India decided to decontrol the prices of coal based

on recommendation of BICP1996

While decontrolling the Prices of Coal Govt. allowed theCoal Companies to fix and notify the prices

No clear guidelines or mechanism were prescribed by

Govt.

In certain guidelines Govt. suggested negotiated pricesbetween Buyers and Sellers


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Coal Price Trend during the last 12 years

As compared to Price rise in the range of 4% to 5% during

1989 to 1994, the average for 12 years shot up as under

Coal

Company

Grades of

Coal

Price as on

1-1-1989

Price as on

1-2-2001

12 Yr avg- %

increase in prices

NCL D 284.2 760 13.95%

NCL E 207.20 547 13.67%

CCL D 284.20 778 14.48%

CCL E 207.20 559 14.15%


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Price De-control and Dismantling of APM

(How so much jump in Price ?)

From the years 1996-1997 Coal companies brought out

their own notifications. The rise in coal prices during this

period was as under

Coal

Company

Grades of

Coal

Price as on

30-12-1995

Price as on

31-3-1997

% increase

in prices

NCL D 486 604 24.28%

NCL E 342 436 27.49%

CCL D 486 604 24.28%

CCL E 342 436 27.49%


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Pricing under De-control regime

As per Govt. of India(Ministry of Coal) letter dated

17.7.1997 Coal Companies were delegated powers for

determination of prices of E, F & G grades of non-coking

coal only till Ist Jan2000

Coal Companies have been now notifying coal prices

individually and in some places mine wise.

There is no transparency in the system being followed

by the Coal Co., for determination of coal prices

It was needed to be determined using an escalation

Formula to be mutually agreed,

However the coal prices continued to be determined by

coal companies.


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Pricing principle for new mines from 1997 (IRR

Based pricing )

As per the new policy guidelines laid down vide Ministry

of Coal , Govt. of Indias letter dated 17.7.97, the Govt.

has stipulated certain stipulations for the coal companies

for fixing the prices of coal produced from new coal

mines.

As per the policy Coal Companies would take up the new

projects provided the IRR i.e. Internal Rate of Return is

not less than 16% at 85% capacity utilization or at the

average capacity utilization for that category of mines inthat company whichever is less.


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Pricing principle for new mines from 1997 (IRR

Based pricing )

So far IRR mechanism was used by Coal Companies in

justifying the viabilities of these projects.

As per MOC notification dt 7-11-2001 the IRR to beachieved is 12%- pre-tax in place of 16% -pre-tax

mentioned above.


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IRR based pricing

Even the text book illustrates the method of IRR as a

mechanism for appraisal of a project or for the purpose of

comparison between two competing projects.

The Ministry did not specify the various parameters and norms

to be applied for the purpose of calculation of IRR basedpricing.

So far only one subsidiary (I.e. NCL) have opted for IRR based

this mechanism

Other subsidiaries of CIL prefer the coal price notification withescalation formula as compared to the IRR Based Pricing.


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Typical Price Clause of Coal Supply

Agreement

The price of coal delivered shall be-

A. Basic Price

+

B. Other Charges

+

C. Statutory Charges


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A. BASIC PRICE OF COAL

I. EXISTING PRICING STRUCTURE

Under price notifications

OR

II. COAL PRICE UNDER DE-CONTROL REGIME

with price escalation provision


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B. OTHER CHARGES

i. Transportation Charges

+

ii. Sizing/Crushing Charges

+

iii. Rapid Loading Charge


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i. Transportation Charges

Where coal is transported by the Seller beyond the

distance of 3 Kms from the pit-head to the

delivery/unloading point

the Purchaser shall pay transportation charges as

applicable from time to time


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ii. Sizing/Crushing Charges

Where the coal is crushed by mechanical means for

limiting the top size to 200mm 250mm.- depending on

Coal Agreement

the Purchaser shall pay sizing/crushing charges as

applicable from time to time


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iii. Rapid Loading Charges

Where coal is loaded through Rapid Loading System

either into Indian Railways system or into the

Purchasers own MGR,Purchaser shall pay Rapid Loading charges as

applicable from time to time.

Note: Rapid Loading Charges should be paid only if aRapid Loading system which automatically loads coal

i.e. 3500 or more tonne per hour


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C. STATUTORY CHARGES

The StatutoryCharges shall comprise-

- royalties,

-cesses,

-duties,-taxes,

-levies etc., if any,

shall be payable by the PurchaserSubject to :

- Provisions of relevant statute

- not included in the basic price


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COMPENSATION

COMPENSATION FOR EXCESS SUPERFICIAL MOISTURE

COMPENSATION FOR SUPPLY OF STONES & FOREIGN /METALLIC MATERIAL

The Seller shall compensate the Purchaser

for the quantity of (+) 200 mm stones and foreign/metallicmaterial received by the Purchaser alongwith the coal supplies

during the month

Sellers representative to be deputed by 4th day of following monthfor joint assessent - a jointly signed statement is to be prepared


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BILLING AND PAYMENTS

Modalities for Billing & Claims

The Seller shall raise source wise Monthly Coal Bills by the

tenth day of the following month, for day to day coal delivered bythe Seller to the Purchaser during the period from First Day of a

month to the last day of such month based on

(a) quantity of coal

(b) adjustment for excess Total Moisture(C) adjustments for stones / foreign material/metallic material


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ANNUAL RECONCILIATION / ADJUSTMENTS

The parties shall jointly reconcile all payments made forthe monthly coal supplies during the financial year (1stYear)

by end of April of the following year (2nd Year )

The parties shall forthwith give credit / debit for the

amount falling due, if any, as assessed during such jointreconciliation and payments made within 5 days thereafter.

The annual reconciliation statement shall be jointly signedby Seller & purchaser.


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FORMULA FOR COAL PRICE ESCALATION

Yearly Escalated Price of coal in terms ofRs / tonne may be

determined by the following formula:

Let P0 = Price of Coal on a mutually agreed date to be termed as Base Date

(from which date price escalation to be calculated for the first time or any

subsequent times)P1= Escalated price of Coal to be calculated annually on the date of revision.

P1 = P0 dP1 dP2


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FORMULA FOR COAL PRICE ESCALATION

where

dP1 = Price escalation Part-1

Applicable on components of cost of Coal comprising : Salaries& Wages, Explosives, Power, Other items including Stores &

Spares which are linked to published indices/ SEB tariff

notifications

dP2 = Price escalation Part

2Applicable on components of cost of Coal comprising :

Depreciation, Interest and Pre-tax return which are based

on Net Block per tonne of Coal and are related to the capacity


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PRICING

Changing grading and pricing of thermal coal from the

existing Useful Heat Value system to the international

practice of Gross Calorific Value system is under

consideration. A pilot study on migration from UHV toGCV based gradation of coal has been carried out and

completed by Central Fuel Research Institute. The draft

report is being over-viewed by a Committee comprising

of members from Ministry of Coal, CEA, NTPC, CIL andCFRI.

COMPARATIVE DELIVERED COST OF COAL


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COMPARATIVE DELIVERED COST OF COAL

Name ofTPS

Source of Supply Grade of Coal Rail Freight

Rs/Te

LandedPrice

Rs/Te

GCV

Kcal/Kg

LandedEnergy

PriceRs/ Kcal

NationalCapital

Region TPS(North)

ECL

BCCL

CCL

NCL

INDONESIA/ MAGDALLA

B PRM ROM

W-IV ROM

PPWR-W/C

BINA-W/C

THERMAL

1021.40

963.80

925.30

752.10

905.90

3231.54

2114.40

2149.87

1810.59

3920.00

6049

4524

4200

4200

6200

534.23

467.37

511.87

431.09

632.26SIKKA(West)

SECL

INDONESIA/OKHA

C PRM ROM

THERMAL

1408.30

0.00

2733.76

3014.10

5597

6200

488.43

486.14

KORADIH(Central)

WCL

SECL

MCL

INDONESIA/MAGDALLA

D ROM

C PRM ROM

F ROM

THERMAL

87.60

609.60

524.90

609.60

1425.03

1935.06

1081.73

3623.70

5089

5597

3865

6200

280.02

345.73

279.88

584.47

TUTICORIN (South)

MCL/TUTICORIN

BCCL/TUTICORIN

INDONESIA/TUTICORIN

F ROM

W-III ROM

THERMAL

201.50

332.40

0.00

1334.33

2128.14

2752.10

3865

5089

6200

345.23

418.18

443.89

CESC

(East)

ECL

INDONESIA/HALDIA

B PRM ROM

THERMAL

186.10

151.50

2396.24

2990.60

6049

6200

396.14

482.35


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India is the Fifth largest

energy consumer in the world

Primary Energy Consumption

(2005) 387.3 MMTOE

Oil and gas accounts for 44%

of Indias primary energy

consumption

Supply has failed to keep pace


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Supply has failed to keep pace

with demandCrude Oil (MMT)

107 135172

368

32 35 34 610

100

200

300

400

2001-02 2006-07 2011-12 2024-25

Year

Oil Demand Production

Natural Gas (MMSCMD)

151231

313391

81 95158 170

0

100

200

300

400

500

2001-02 2006-07 2011-12 2024-25

Year

Demand Supply


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Sedimentary Area 3.14 million sq km

Only 19% of the area extensively explored

Domestic Hydrocarbon Scenario (as on 1.04.2006):

Prognosticated Resources (Oil

+ Oil Equivalent Gas)

28-32

BMTEstablished Geological

reserves (O + OEG)

8.2 BMT

O + OEG already produced 1.42 BMT

Balace Recoverable Reserves(O + OEG) 1.85 BMT

Current Oil Production 32.19

MMT

Current Gas Production 88.22

MMSCMD

Intensive Exploration & Production a must


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Governments exploratory measures bearing fruits..

GSPC RIL

OILHOEC

ONGC

Cairn

BritishGas

Year Discovery Opera

tor

2000 GasGulf of Cambay Cairn

2001 Oil & Gas Krishna Godavari

Deep waters

Cairn

2002 Gas KG Basin Deep waters

(Worlds biggest discovery for

the year)

RIL

2003 Oil in Barmer-Sanchor basin

(Rajasthan)

Cairn

2004 Gas in Mahanadi basin shallowwaters

RIL

2005 Gas in KG Basin shallow

waters

GSPC

2005 Oil in KG Basin shallow

waters

RIL

Major Upstream Players Major Discoveries


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Mode of Transportation

India

43%

42%

11%4%

Rail Pipeline Coastal Road


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Price of Gas in IndiaGas Suppliers $/MMBTU

NOCs : 1.84 to free pricing with restrictions

JVs : 4.75 to free pricing

Private : 4.08-5.00

LNG : 3.86

Spot LNG : 10-11

Gas prices becoming market driven


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"I'd put my money on the sun and solar energy.

What a source of power! I hope we don't have

to wait 'til oil and coal run out before we

tackle that." - Thomas Edison

(The sunlight that intersects the earth in 24

hours contains more energy than all the

conventional oil that has been or ever will be

extracted from the earth.)


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THANK YOU

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Fuel Pricing