FUEL PRICING.

Coal-As Fuel Option

Figure 1 : Demand-Supply Gap of Electricity

750000 700000
Energy (in MU)

719097 631025 591373 522537 483350 545983 559264 578511 548115 497890 519398 623087

650000 600000 550000 500000 450000 400000 1999-00 2000-01 2001-02 2002-03 Demad 2003-04 Supply 2004-05
480430 450594 507216 467400

2005-06

2006-07

11th Plan : Capacity Addition Plan

Tentative/- type wise

Type Hydro
Thermal Indigenous Coal Imported Coal Lignite Gas/ LNG Nuclear

Total (MW) 12,000

46905 28155 10000 1750 7000 3160

Total

62065

Factors Affecting Choice of Fuels

Fuel Options determinants:
Availability Affordability Reliability Environment friendliness

Major Options Available

Coal
Domestic Imported

Lignite Gas
Domestic LNG Transnational piped gas

Hydro Nuclear

Why coal?
safe
safe

affordable

affordable

reliable

reliable

plentiful

plentiful

increasingly clean

increasingly clean

23%
energy

of world primary

39%

of the worlds

electricity is produced using coal. Main fuel for electricity in USA, Germany, China, India, South Africa, Australia, much of central Europe

70

of the

worlds steel is produced using coal

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)

COALIFICATION

As geological processes apply pressure to dead matter over time, under suitable conditions, it is transformed successively into Peat Lignite Sub-bituminous Bituminous Anthracite

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

Coking Coal

These are such coal which when heated in absence of air from coherent bead, free from volatiles, with strong and porus mass, called coke.
These have coking properties mainly used in Steel making and metallurgical industries

Non-Coking Coal

Such coals which do not have coking properties, are Non-Coking Coal. Mainly used as thermal grade coal for power generation. Also used for Cement, Fertilizer, Glass, Ceramic, Paper, Chemical, Bricks manufacturing and for other heating purpose.

COAL MINING
Coal is mined by two methods

1. Surface or Opencast Mining 2. Underground or Deep Mining

The choice of mining method is largely determined by the geology of the coal deposit.

Coal Transportation
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

CIL have 8 subsidiaries

1) 2) 3) 4) 5) 6) 7) 8)

Eastern Coalfields Limited ( ECL ) Central Coalfields Limited (CCL ) Bharat Coking Coal Limited ( BCCL ) Northern Coalfields Limited (NCL) South Eastern Coalfields Limited (SECL) Mahanadi Coalfields Limited (MCL) Western Coalfields Limited (WCL) Central Mine Planning and Design Institute Limited (CMPDIL)

COAL RESERVES IN INDIA

(As on 1.1.2007)
TYPE OF COAL Prime Coking PROVED INDICATED INFERRED 4.6 0.7 0.0 (Billion T) TOTAL 5.3

Medium Coking
Semi Coking Non coking TOTAL Lignite

11.8
0.5 81.0 97.9 4.3

11.6
1.0 105.7 119.0 12.7

1.9
0.2 36.2 38.3 20.1

25.3
1.7 222.9 255.2 37.1

Proved resource is around 10% of worlds proved reserves

CHARACTERISTICS OF INDIAN COAL DEPOSITS

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

2. HIGH ASH AND LOW CALORIFIC VALUES + ASH & AVERAGE UHV 4000 K.CAL./KG)
UHV = Useful Heat Value

(40%

3. MISMATCH IN LOCATION OF DEPOSITS AND MAJOR CONSUMPTION CENTRES 4. HIGH COST OF TRANSPORT
PIT HEAD PRICE 43%

LANDED PRICE OF COAL --------

ROYALTY/CESS/SALES TAX 13%

TRANSPORTATION 44%

CHARACTERISTICS OF INDIAN COAL DEPOSITS

5. Low sulfur < 0.5%

6. Low energy content

7. CO2 emissions > 1 kg per kWh

8. Issues with coal:

- Ash disposal: annual ash generation > 90 million tons - CO2 emissions

Comparison of Energy Demand for Electricity by Fuel 1995 vs 2020 India

12
Quadrillion Btu

9.8

10 8 6 4 2 0 Oil Natural Gas Coal Nuclear Renew ables 0.2 0.4 0.4 2.4 0.2 0.6 0.7 4.2 3

Btu : British Thermal Unit 1 Btu = 1 055.05585 joules

Fuel
1995 2020

Quadrillion = 1016

ALL INDIA COAL CONSUMPTION/DEMAND

Mt SECTOR CONSUMPTION IX PLAN (01-02) X PLAN (06-07) DEMAND (11-12) XI PLAN % Share DEMAND (16-17) XII PLAN % Share

POWER
POWER (CAPTVE) CEMENT

249.23
16.02 15.22

312.80
26.30 18.33

483
57.06 31.90

66.06
7.80 4.36

750
85 50

66.67
7.56 4.44

STEEL
OTHERS TOTAL

29.84
41.6 351.91

17.60
45.18 420.21

68.50
90.64 731.10

9.37
12.4 100

105
135 1125

9.33
12.00 100

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 coal consumption of 0.70 kg/kWh the coal requirement for power sector utilities works out to 483 mt in 2011-12.

DEMAND POWER SECTOR

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 all captive power plants. Similarly requirement of coal, the dominant fuel in Indias energy needs will need to expand to over 2 billion tones per annum based on domestic quality of coal.

MEETING THE GAP

Gap between the projected demand of 731.10 mt and the projected domestic availability of 680 mt works out to 51.10 mt in 2011-12. This comprises of 40.85 mt of coking coal and 10.25 mt of thermal coal. This requirement would need to be met from imports. Further increasing production from captive blocks to bridge the gap also remains as a distinct possibility.

Consumption & Supply of Coal in 2005-06

Consumption Supply - Indigenous production 448.72 million tonnes (333.15) million tonnes 401.72 million tonnes (307.16) million tonnes 41.67million tonnes (17.78) million tonnes 443.39 million tonnes 47.0 million tonnes (26.0 million tonnes)

- Imports
Total Gap (domestic supply)

Figures in brackets pertain to coal used in power generation

Power Sector uses Non Coking CoaI.

- Classification into .Grades (A, B, C, D, E, F & G)

DETERMINATION OF UHV
GoI has notified the following formula for determination of Useful Heat Value (UHV): UHV = 8900 -138 x (A+M) Where A = Ash % & M = Moisture %

CATEGORISATION OF NON COKING COAL INTO GRADES

GoI has Categorised Non Coking coal into various Grades having 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 4200 F > 2400 upto 3360 G > 1300 upto 2400

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 represent the non coal content and the volatile matter plus the fixed carbon 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 plus moisture at 60% relative humidity and 40 deg.C.

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 the basis of ash plus moisture content.

Administered Price Mechanism (APM)

The system of notifying the coal prices by the Govt. by issuing gazette notification was known as Administered Price Mechanism.
Coal pricing was guided by the Colliery Control Order 1945 and Essential Commodities Act 1955 . As per these orders Central Govt. first of all shall prescribe the Classes, Grades and specifications of Coal Central Govt shall fix a retention price for each colliery on per tonne basis for different class, grades and sizes of Coal. Central Govt. shall notify in the official gazette the maximum or minimum sale price at which coal may be sold by the colliery owner.

Administered Price Mechanism (APM)

If the retention price is lower than corresponding sale price, the colliery owner shall pay into the coal 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 regulation account, an amount equivalent to the difference between the two prices

Administered Price Mechanism (APM)

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 was introduced under the aforesaid Colliery Control Order by a notification dated 30 March 1982. Under this system, CIL had to monitor and administer Coal Price Regulation Account (CPRA) under which low cost mines were to contribute the difference between the notified price and the cost and the high cost mines were to get compensation for the shortfall in price to cover the cost.

Guidelines for determining coal price by BICP.

Subsequently, the pricing under APM, were being determined as per guidelines of the BICP report 1987 by updating the cost indices as per the escalation formula contained in the 1987 report of the Bureau of Industrial Costs and Prices.

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

Guidelines of BICP
STEP II: Addition of other cost elements to WAP
Other cost elements are Interest on Working capital, Interest on Term Loan; and post tax return on equity. These element are calculated on the Net Block Per Tonne basis.

STEP III: Summation of I & II above and Distribution of the average price among various grades.
Allocation of cost amongst different grades based on an identified mechanism say heat value (UHV) basis.

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 of same 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.

Guidelines of BICP
STEP V: Grade wise distribution of cost & price fixation for different Grades of Coal and Classes of Mines.

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

Coal Company NCL NCL

Grades of Coal D E

Price as on 1-1-1989 284.2 207.20

Price as on 17-6-1994 438.2 329.2

5 Yr avg- % increase in prices 4.52 % 4.91%

CCL
CCL

D
E

284.20
207.20

438.2
329.2

4.52%
4.91%

Price De-control and Dismantling of APM

Govt. of India decided to decontrol the prices of coal based on recommendation of BICP 1996 While decontrolling the Prices of Coal Govt. allowed the Coal Companies to fix and notify the prices No clear guidelines or mechanism were prescribed by Govt. In certain guidelines Govt. suggested negotiated prices between Buyers and Sellers

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
NCL CCL CCL

D
E D E

284.2
207.20 284.20 207.20

760
547 778 559

13.95%
13.67% 14.48% 14.15%

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
NCL CCL CCL

D
E D E

486
342 486 342

604
436 604 436

24.28%
27.49% 24.28% 27.49%

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.

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 in that company whichever is less.

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 be achieved is 12%- pre-tax in place of 16% -pre-tax mentioned above.

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 based pricing. So far only one subsidiary (I.e. NCL) have opted for IRR based this mechanism Other subsidiaries of CIL prefer the coal price notification with escalation formula as compared to the IRR Based Pricing.

Typical Price Clause of Coal Supply Agreement

The price of coal delivered shall beA. Basic Price + B. Other Charges + C. Statutory Charges

A.

BASIC PRICE OF COAL

I. EXISTING PRICING STRUCTURE Under price notifications OR II. COAL PRICE UNDER DE-CONTROL REGIME with price escalation provision

B. OTHER CHARGES
i. Transportation Charges + ii. Sizing/Crushing Charges + iii. Rapid Loading Charge

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

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

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 a Rapid Loading system which automatically loads coal i.e. 3500 or more tonne per hour

C. STATUTORY CHARGES
The Statutory Charges shall comprise- royalties, -cesses, -duties, -taxes, -levies etc., if any,

shall be payable by the Purchaser Subject to : - Provisions of relevant statute - not included in the basic price

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/metallic material received by the Purchaser alongwith the coal supplies during the month Sellers representative to be deputed by 4th day of following month for joint assessent - a jointly signed statement is to be prepared

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 by the 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

ANNUAL RECONCILIATION / ADJUSTMENTS

The parties shall jointly reconcile all payments made for the monthly coal supplies during the financial year (1st Year) 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 joint reconciliation and payments made within 5 days thereafter. The annual reconciliation statement shall be jointly signed by Seller & purchaser.

FORMULA FOR COAL PRICE ESCALATION

Yearly Escalated Price of coal in terms of Rs / 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

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 2 Applicable 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

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 to GCV 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 and CFRI.

COMPARATIVE DELIVERED COST OF COAL

Name of TPS Source of Supply Grade of Coal Rail Freight Rs/Te Landed Price Rs/Te 3231.54 2114.40 2149.87 1810.59 3920.00 2733.76 3014.10 1425.03 1935.06 1081.73 3623.70 1334.33 2128.14 2752.10 2396.24 2990.60 GCV Kcal/Kg Landed Energy Price Rs/ Kcal 534.23 467.37 511.87 431.09 632.26 488.43 486.14 280.02 345.73 279.88 584.47 345.23 418.18 443.89 396.14 482.35

National Capital Region TPS (North)

ECL BCCL CCL NCL INDONESIA/ MAGDALLA SECL INDONESIA/OKHA WCL SECL MCL INDONESIA/MAGDALLA MCL/TUTICORIN BCCL/TUTICORIN INDONESIA/TUTICORIN ECL INDONESIA/HALDIA

B PRM ROM W-IV ROM PPWR-W/C BINA-W/C THERMAL C PRM ROM THERMAL D ROM C PRM ROM F ROM THERMAL F ROM W-III ROM THERMAL B PRM ROM THERMAL

1021.40 963.80 925.30 752.10 905.90 1408.30 0.00 87.60 609.60 524.90 609.60 201.50 332.40 0.00 186.10 151.50

6049 4524 4200 4200 6200 5597 6200 5089 5597 3865 6200 3865 5089 6200 6049 6200

SIKKA (West) KORADIH (Central)

TUTICORI N (South)

CESC (East)

Indian Oil and Gas Industry - Prime mover of the Indian economy

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 with demand

Crude Oil (MMT)
400 300 200 100 0 107 32 2001-02 135 35 2006-07 Year 172 34 2011-12 61 2024-25 368

Natural Gas (MMSCMD)

500 400 300 200 100 0

391 313 231 151 81 2001-02 95 2006-07 Year 158 170

2011-12

2024-25

Oil Demand

Production

Demand

Supply

Intensive Exploration & Production a must

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) Established Geological reserves (O + OEG) O + OEG already produced Balace Recoverable Reserves (O + OEG)

28-32 BMT 8.2 BMT 1.42 BMT 1.85 BMT

Current Oil Production

Current Gas Production

32.19 MMT
88.22 MMSCMD

Governments exploratory measures bearing fruits..

Major Upstream Players Major Discoveries

Year British Gas 2000 2001

Discovery Gas Gulf of Cambay Oil & Gas Krishna Godavari Deep waters Gas KG Basin Deep waters (Worlds biggest discovery for the year) Oil in Barmer-Sanchor basin (Rajasthan) Gas in Mahanadi basin shallow waters Gas in KG Basin shallow waters Oil in KG Basin shallow waters

Opera tor Cairn Cairn RIL

GSPC

RIL

2002

ONGC 2003 HOEC OIL 2004 2005 Cairn 2005

Cairn RIL GSPC RIL

Inland Petroleum transportation gradual shift from railways to pipelines

Mode of Transportation

India
11% 4% 43%

42% Rail Pipeline Coastal Road

Price of Gas in India

Gas Suppliers NOCs JVs Private LNG Spot LNG $/MMBTU : : : : : 1.84 to free pricing with restrictions 4.75 to free pricing 4.08-5.00 3.86 10-11

Gas prices becoming market driven

"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.)

THANK YOU