Start power reforms from the pit

The symbiotic link between reforms in the power and coal sectors needs greater attention. The policy framework in the coal sector has a direct bearing on the performance of the power sector. Sixty per cent (62,631 MW) of power generating capacity is coal based and the coal industry is virtually operated by a monopoly. Of the total domestic coal production of 328 million tonnes (MT) in 2001-02, about 74% was consumed by power utilities alone. In 2001, the Indian railways, again a monopoly, carried about 53% of the coal, accounting for 48% of all revenue traffic. All these have a bearing on the power tariff. There can be no reasonable power tariff for the ultimate consumer if huge inefficiencies beset the coal sector. The problem gets compounded when the share of hydel, much cheaper over a longer period, falls way below the originally envisaged ratio of 60% thermal against 40% hydel. The actual ratio is 82% thermal against 15% hydel. So the impact of reforms in the coal sector is even more on the power sector. Thus, the delivered fuel cost at power plant level is very important. It, inter alia, includes basic coal price, and the relevant transportation cost. Any efficiency improvement on these accounts will have a favourable impact on end users. Unfortunately, coal and railways are government owned monopolies and exhibit inefficiencies. For example, the efficiency of men and machine is dismally low for both underground and open-cast mines, and is nowhere near international standards. Neither liberalisation in the coal sector since 1995-96 has dramatically improved its performance, nor has decontrolling of its prices resulted in immediate reduction of basic prices of coal. The basic coal price in general relates to quality of coal, its grade and related heat value. The coal quality at power plants is at least one or two grades lower than what it is billed for. Shortages in transit are in excess of 5%, but Indian Railways (IR) does not accept any responsibility for that. Power utilities are hence obligated to pay for this loss, which is subsequently passed on to the consumers. Second, the royalty on coal gets revised upward every third year, and the consumer bears that cost too. The consumer is also burdened with the annual increase of already high freight charges although rail transportation rates are falling internationally. In fact, Indian coal freight rates show substantial annual increases over the last six years, in constant terms at over 20%. The average realisation of freight from coal/tonne-km is higher than the average cost of all other goods transported by the railways. Reduction in telescopic effect in freight has also caused comparatively higher cost of delivered coal to long distance users. That especially holds for distant SEBs, which are unlike the (mostly pit-head) central power generators. IR is always short of capacity, but alternative modes of transportation do not exist. Also, despite the freight liberalisation that has occurred in this sector, the price rationalisation exercise has been very limited. Issues like multiple, or irrational, linkages and others also directly impact the cost of coal and, thus, the cost of power generation. The reduction of working capital in a power plant can also affect the level of power tariff in a positive manner. For this, coal inventory at the utilities has to be rationalised. Until recently, coal based power stations were required to carry coal stocks equivalent to either of 15 or 30 days? consumption, depending on whether they were pithead or rail-fed utilities. The distance from the coal source, logistics of transportation or capacity to stock were not considered when formulating this ad hoc norm, which has been lowered marginally by the central government recently. In fact, the practice of building huge inventories started since 1996-97, when the total coal stocks for all coal-fired power stations rose from less than 3 million tonne in January 1996 to more than 17 MT in April 1998 with no corresponding rise in generating capacity. Since then, total closing stocks of coal at power utilities has been hovering at around 14 MT. At times, supply at plant level can vary from 80-150% of the quantity as fixed by the official expert body. Large plant level coal inventories also result in their deterioration, resulting in increased generation costs. Roughly estimated, more than Rs 2,000 crore of working capital have been permanently locked up in the coal inventory of all power utilities in recent years. The ultimate consumers obviously are paying for these inefficiencies. All the existing inefficiencies in coal and rail sector do impact input costs of electricity production since the delivered fuel cost at the plant gate is the largest component in the electricity tariff. For example, the procurement cost of electricity by a transmission company is roughly around Rs 2 per unit for a typical coal based supply utility. Of this, fuel cost alone accounts for 60 to 80% of the total tariff, depending on the age of the plant and other factors. Under the ?Merit order dispatch? as mandated by electricity regulators, the power purchase is now based on the lowest cost, but this is definitely not an efficient cost. The electricity regulator should scrutinise the efficiency of total input costs. Since they have no jurisdiction on the coal sector under the existing statute, this exercise will not yield optimum and quick results. However, by such a scrutiny, they can always bring out the inefficiencies for a public debate, and subsequent resolution by the government. Secondly, government should explore positioning an energy sector regulator having jurisdiction over the coal sector too. Thirdly, coal sector restructuring has to be initiated by allowing competition within the seven coal producing companies. Finally, a legally enforceable tripartite contract between the power, rail and coal sectors must be in place for rationalised supplies with built in bonuses and penalties, thus reducing wastages and benefiting the ultimate consumer.