Budget may clarify on coal import duty - Quoted in the Mint

The Union budget may announce a clarification on coal imports meant for electricity generation that would resolve the confusion resulting in Indian customs authorities denying importers of the fuel duty concessions granted in last year’s budget.

Mint reported on Monday about customs authorities issuing notices to companies importing coal.

A person aware of the development said on condition of anonymity, “The Central Electricity Authority (CEA) is working on the definition. A clarification may be issued shortly.”

 

CEA is India’s apex power sector planning body. The issue stems from the interpretation of the exemption which was granted specifically to steam coal. Customs authorities have taken the view that the coal being imported for power generation is not steam coal, but bituminous coal and, therefore, liable for higher duty than the concessional duty of 1% announced in last year’s budget. Customs duty on bituminous coal is 55%.

 

Under the Customs Tariff Act, coal has been classified as anthracite, bituminous, coking and steam coal. While steam coal is only used for electricity generation, most bituminous coal is used for power generation and can also be used to produce sponge iron and as a partial substitute for metallurgical coal.

 

“The issue has come up to us. We have issued clarifications. A lot of people have been served notices. Since the last year’s budget meant this for power sector, announcement to this effect will come in this year’s budget. The issue will be sorted out,” said a senior CEA official who also didn’t want to be identified.

 

The finance ministry’s position could not be confirmed as it is under quarantine during the last phase of preparations for the budget, which will be announced by finance minister P. Chidambaram on 28 February.

 

“Domestic producers of thermal power have been under stress because of high prices of coal. I propose to ease the situation by providing full exemption from basic customs duty and a concessional CVD (countervailing duty) of 1% to steam coal for a period of two years till 31 March 2014,” then finance minister Pranab Mukherjee had announced in last year’s budget.

 

This confusion comes at a time when India has been projected to be the world’s second largest consumer of coal after China by the International Energy Agency.

 

“The upcoming Union budget offers an urgent opportunity to remedy this problem and allow industry the benefit announced last year,” said Gokul Chaudhri, a partner at BMR Advisors, a consultancy.

 

The industry’s concern stems from power generation companies depending on imports to tide over inadequate domestic fuel supplies. India faced an electricity shortage of 8,200 megawatts (MW) in January due to fuel constraints, according to CEA.

 

The country has a power generation capacity of 210,952MW, of which 57.3%, or 120,873.38MW, is coal based. The power sector is the major consumer of the fossil fuel, absorbing nearly 78% of total domestic production.

 

Coal India Ltd, the world’s biggest coal miner, produced only 431 million tonnes (mt) in 2010-11 against a target of 461.5 mt. It had failed to meet its 2011-12 target of 440 mt as well, mining 435.84 mt, but has set a target of producing 468.74 mt in 2012-13 in the face of various hurdles.

 

In order to tide over the problem, the government is looking at various temporary solutions such as pooling imported and domestic coal prices, which may increase electricity tariffs by up to 13 paise a unit.

 

In such a scenario, imports hold the key. The size of the market for imported coal that goes into power generation in India is around 80 million tonnes per annum (mtpa). Coal demand in India is expected to grow from 649 mtpa now to 730 mtpa in 2016-17. The availability of local coal is estimated at 550 mt in 2016-17, with the shortage largely expected to be met through imported coal. India’s overall demand for imported coal is growing and stands at an annual 137 mt.

 

“The reason for the budgetary proposal for reduction of duties on imported coal for power generation was to make imports relatively more affordable, and the possible legal interpretation to levy duties went against that intent. Setting the relevant circulars right will make the legal text aligned with the context,” added Dipesh Dipu, a partner at Jenissi Management Consultants, a Hyderabad-based energy- and resources-focused consulting company.

 

India has a known gross resource base of 264,000 mt of coal, the fourth largest in the world, of which proven reserves are around 101,000 mt.

Customs duty tangle to hit power from imported coal - Quoted in the Mint

Indian customs authorities have started denying coal importers a duty concession they were granted in last year’s budget and have issued notices to them, said several people aware of the development, raising the possibility of worsening electricity supply in a country where a shortage of domestic coal has already hit power producers.

The issue stems from the interpretation of the exemption, which was granted specifically to steam coal.

 

Customs authorities have taken the view that the coal being imported for power generation is not steam coal but bituminous coal, and therefore liable for higher duty than the concessional duty of 1% announced in last year’s budget. Customs duty on bituminous coal is 55%.

 

Steam coal, which once fuelled railway steam engines, is now only used for electricity generation. While most bituminous coal is used for power generation, it can also be used for to produce sponge iron and as a partial substitute for metallurgical coal.

 

The denial of the budget sop for coal imports would put power utilities in a bind because they have priced electricity after factoring in the concessional duty. Tata Power Co. Ltd, Reliance Power Ltd (R-Power), Adani Power Ltd and JSW Energy Ltd run power plants fired by imported coal. The demand for a higher duty may lower coal imports because producers may not be able to pass on the cost to their customers.

 

“Yes, all in Gujarat including CGPL (Coastal Gujarat Power Ltd) have received notifications from custom authorities to deposit differential amount on custom duty,” a Tata Power spokesperson said in an emailed statement.

 

“However, we have taken up the issue with MoP (ministry of power)/MoF (ministry of finance) through industry association to get finance ministry’s classification. Unfortunately, this will amount to a change in law in India and will raise customer tariffs and (will be) against the intent stated by the finance minister in his last budget speech that steam coal for power generation would be exempt from custom duty,” the spokesperson said.

 

CGPL, a unit of Tata Power, and R-Power are developing large plants capable of generating up to 4,000 megawatts (MW), known as ultra-mega power projects (UMPPs), at Mundra in Gujarat and Krishnapatnam in Andhra Pradesh, respectively, to be fuelled by imported coal.

 

“This is more activism than enforcement,” a person aware of the development said about the customs department’s stand. “With power generation utilities having burned imported coal all the year round and selling that electricity, how will they recoup expenses (for higher duty) from the buyers with retrospective effect?” The person didn’t want to be named.

 

The chief executive officer of a power firm, also on condition of anonymity, confirmed the denial of concessional duty on coal imports by customs authorities.

 

The customs authorities’ move comes in the backdrop of a government decision to grant environmental clearance only to the import of high-grade coal, which could stymie the plans of boosting power generation capacity at UMPPs that rely on overseas coal.

 

“The regulation of imposition of duty needs to clearly state the basis and cutoff, as also the formulae to establish correlation the bases since coal from various sources may be invoiced on different bases. Disputes are unavoidable in absence of such clarity,” said Dipesh Dipu, a partner at Jenissi Management Consultants, a Hyderabad-based energy- and resources-focused consulting company.

 

India faces a chronic shortage of the fuel. The country has a power generation capacity of 210,952MW, of which 57.3%, or 120,873.38MW, is coal based. The power sector is the major consumer of the fossil fuel, absorbing nearly 78% of total domestic production.

 

“Domestic producers of thermal power have been under stress because of high prices of coal,” then finance minister Pranab Mukherjee announced in last year’s budget. “I propose to ease the situation by providing full exemption from basic customs duty and a concessional CVD (countervailing duty) of 1% to steam coal for a period of two years till 31 March 2014.”

 

The size of the market for imported coal that goes into power generation in India is around 80 million tonnes per annum (mtpa) a year. Coal demand in India is expected to grow from 649 mtpa now to 730 mtpa in 2016-17. The availability of local coal is estimated at 550 mt in 2016-17, with the shortage largely expected to be met through imported coal. India’s overall demand for imported coal is growing and stands at an annual 137 mt.

 

“Some issues have come up. The exemption to steam coal has been loosely defined,” a government official, who also didn’t want to be identified, said. “While the budget last year had mentioned steam coal, this exemption was meant for the power sector.”

 

Questions emailed to the chairman of Central Board of Excise and Customs and spokespersons of R-Power, Adani Power, JSW Energy and state-owned trading firm MMTC Ltd late on Tuesday evening remained unanswered.

 

An unexpected rise in the price of imported coal has caused work to halt at R-Power’s plant in Krishnapatnam, and Tata Power has approached the Central Electricity Regulatory Commission, India’s apex power sector regulator, to consider increases in power tariffs. Both plants were envisaged as fast-track projects requiring investments of around Rs.20,000 crore each.

“Fuel is a major issue and domestic coal availability is unlikely to reach optimal levels in the near term,” wrote UBS Global Equity Research in a 13 February report.

India has a known gross resource base of 264,000 mt of coal, the fourth largest in the world, of which proven reserves are around 101,000 mt.

 

“Increasing demand of coal in coal-based power plants in India is estimated to grow 7% annually to lead a demand-supply gap of 266 mt in FY2017 (fiscal year 2017),” according to an Icra Management Consulting Services report dated 14 February.

 

“The import could comprise of 35.5 mt of coking coal and 230 mt of thermal coal. Import demand would be primarily be accounted for by power utilities (190 mt) and steel (36 mt). Although India’s coal needs will continue to be largely met domestically, the share of imports in domestic demand is forecast to increase to 27% in FY2017,” the report said.

Coal shortage to trim 12th plan power target - Quoted in the Financial Chronicle

The government may have to lower the 12th plan target for 76,000 mw power generation from conventional and non-conventional sources. This is because the rising cost of fuel such as coal and gas and cost of funds have begun to impact the upcoming projects.

Experts Financial Chronicle spoke to said if things did not improve by the end of this year, the government might be forced to lower the 12th plan generation target to 54,000 mw.

To avert this, the government will have to accord top priority to raising production at Coal India’s existing mines, allocating new coal blocks through competitive bidding and even allowing mining in blocks with large prospects in no-go areas on a case-to-case basis. Shubhranshu Patnaik, senior director of power at Deloitte, said the government had plans to allocate 53 new coal blocks through auctions last year, but this did not fructify.

Besides, delays in and controversies over environment clearance also impacted sentiment.

“Companies are not getting coal linkages and there are no takers for power generated with costly imported fuel. New capacity expansion plans are stranded,” he said.

He pointed out that plants with the potential of running at more than 90 per cent plant load factor were running at under 50 per cent. “More than 10,000 mw capacity is working at less than 50 per cent PLF,” he added.

By 2016-2017 about 842 million tonnes of coal will be required but the availability will be 604 million tonnes, including 54 million tonnes imported, leaving a gap of 238 million tonnes. Even if Coal India increases production to 461 million tonnes from 415 million tonnes now, the shortage will still be 192 million tonnes, according to experts.

Repeated attempts to get comments from Union power secretary P Umashankar and also the additional secretary of power elicited no response.

Dipesh Dipu, partner of the Hyderabad-based Jenissi Management & Consultants, said if all the positive things accruing from policy changes were taken into account, there would still be a shortage of 120 million tonnes in 20-2017, impacting generation of 24,000 mw.

There is a limit to how much coal can be imported since existing power plants can blend only 15 per cent imported coal. This is because older plants have boilers designed for low quality Indian coal, which has high ash content. Imported coal traded in global markets tends to have a higher calorific value. Such coal will not be burnt completely or efficiently in the old boilers.

New power plants being set up use the supercritical boiler technology that can use up to 30 per cent of imported coal.

Investment bankers say issues like land, coal and now cost of funds will discourage at least the private players from setting up new plants during the 12th plan. Companies that have already commissioned new plants are finding it difficult to run at full capacity, according to an investment banker in SBI Capital Markets.

According to Central Electricity Authority data, PLF in coal-based thermal plants was 68.27 per cent in April-September last year, down from 71.2 per cent in the same period a year before.

The government is planning to start price pooling of coal where high-calorie imported coal will be blended with domestic coal to reduce the cost of operations and cost of power, especially for companies dependent on imported coal.

State electricity boards are not buying costly power, making it difficult for independent power producers to run plants at full capacity, say the experts.

Power projects face high-grade coal hurdle - Quoted in the Mint

India will grant environmental clearance only to the import of high-grade coal, which could stymie plans of boosting power generation capacity at large plants that depend on overseas fuel supply.

In the face of chronic and severe power shortages, India aims to build at least 16 power plants capable of generating as much as 4,000 megawatts (MW) each, referred to as ultra-mega power projects (UMPPs). Of these, the government has awarded four to private firms. Two of these plants, being developed by Tata Power Co. Ltd at Mundra in Gujarat and Reliance Power Ltd (R-Power) at Krishnapatnam in Andhra Pradesh, are to be fuelled by imported coal to produce electricity.

 

Many others, including Adani Power Ltd, JSW Energy Ltd and GMR Energy Ltd, are also setting up power plants to be fired by imported coal.

 

After coal prices rose faster than anticipated in the past couple of years, some companies have started looking at importing lower-quality coal to maintain the financial viability of their projects. These plans may now be jeopardized.

 

“The proposals for environmental clearance of imported coal-based ultra-mega thermal power projects would be considered taking into consideration the following quality parameters of imported coal, namely gross calorific value (5,000 minimum); ash content (12% maximum) and sulphur content (0.8% maximum),” the ministry of environment and forests said in a 5 February notice put up on its website. “The validity of environmental clearance granted is subject to compliance with the

coal quality parameters indicated above.”

 

Due to the unexpected rise in fuel price, work has halted at Krishnapatnam and Tata Power has approached the Central Electricity Regulatory Commission, India’s apex power sector regulator, to consider increases in power tariffs. Both plants were envisaged as fast-track projects requiring investments of around Rs.20,000 crore each.

 

Coal with a higher calorific value reduces wastage and improves generation efficiency of power projects. Analysts estimate that one tonne of imported high-grade coal is equivalent to 1.56 tonnes of domestic coal, which has high ash content.

 

“In the aftermath of the price benchmarking regulation of the Indonesian government for high-grade coal, lower-grade coal found favour from Indian power generation companies, and coal supply agreements have been signed for supply of these grades,” said Dipesh Dipu, a partner at Jenissi Management Consultants, a Hyderabad-based energy- and resources-focused consultancy. “Lower-grade coal from Indonesian assets has been sought after for acquisition as well.”

 

Both Tata Power and R-Power bought coal mines in Indonesia to feed their plants. But imports became expensive when the Indonesian government last year started levying higher royalty and income tax.

 

“Indian power companies may have to consider alternative options in the wake on the new environmental regulation, which may be relatively scarce and expensive,” Dipu said. The environment ministry’s latest notification may rule out the lower-grade coal from Indonesia, he said.

 

“Such specifications were not apparent at the time of bidding of imported coal-based projects, including UMPPs,” said Shubhranshu Patnaik, senior director, consulting, energy and resources, at Deloitte Touche Tohmatsu India Pvt. Ltd, an audit and consulting firm. “With not all imported coal having a calorific value of 5,000 kilocalories and above, this will impact projects with sourcing strategies already in place.”

 

Coal demand in India is expected to grow from 649 million tonnes per annum (mtpa) now to 730 mtpa in 2016-17, making the country heavily dependent on imported coal, given the projected local availability is only 550 mtpa.

 

By 2025, India will be the world’s second largest consumer of the fuel after China, playing a major role in international energy pricing, the International Energy Agency projected in its World Energy Outlook 2012 report.

 

“The environment ministry wants to ensure that imported coal in the country is of good value. Better quality of coal is an additionality that they have included. All these parameters like calorific value, ash content and sulphur content will become part of the conditions before environment clearance is given,” a government official said, requesting anonymity. “The quality of coal in the country needs to be of acceptable standards.”

 

“A lot of the Indonesian coal is high in sulphur content, sometimes to the extent of 0.7-0.9%, though the ash content is low,” the official added. “This circular is a revision of the November 2010 circular by the environment ministry. It has been revised because UMPPs weren’t kept in kind then, but now their numbers are growing.”

 

Spokespersons for R-Power and the JSW Group didn’t respond to questions emailed on Friday.

“We have gone through the notification by MoEF (ministry of environment and forests) and are studying the implications of the same,” a Tata Power spokesperson said in an emailed response. “There are certain clarifications required, which we will seek from MoEF.”

 

“Specifications as mentioned by the ministry of environment will only be available from Indonesia and Russia. It will exclude Australia and South Africa, which will be major exporting countries in the future and from where huge imports are projected to India,” an Adani Group spokesperson said by email. “A buyer can get competitive prices on long-term (contracts) when he is given flexibility in specification.”

 

Adani Power has also approached CERC to consider an increase in power tariffs after customers declined to pay higher rates for the electricity generated from its imported coal-based power plant in Mundra.

 

“Since fuel is going to be a pass-through in new UMPP tenders, a restriction in specification of imported coal should be in line with restrictions as specified in specification of Indian coal. In Indian coal, the restriction is only on ash (desired below 30%) and the same should only be specified in imported coal to give the developer an opportunity to secure coal on competitive basis,” the Adani Group spokesperson said.

 

“We are not aware of any such notification, and we will study it on receipt of the same,” a GMR spokesperson said. “We are yet to start import of coal for our plants.”