In what could reduce mineral rich states’ revenue from coal royalty temporarily and bring down power cost to consumers by up to 5 paise/unit, an inter-ministerial committee has recommend revising the ad valorem royalty on the fuel by 3 percentage points to 11% for the next three years, government sources told FE. The recommendation will be brought before the Cabinet for approval soon.
Royalty rates are usually revised every three years. The last revision took place in 2012 when the rate for thermal coal was set at 14% of the fuel’s notified price and that for lignite coal at 6%. The proposed reduction in rates is primarily aimed at offsetting the impact of miners’ outgo on district mineral fund (DMF) on the mineral’s prices. The DMF is levied at 30% of the applicable royalty for specified minerals including coal.
Additionally, reduction in royalty rate is also expected to enable the industry to step up coal purchases. Currently, Coal India is finding it hard to quickly dispose of the fuel as the off-take has reduced in a tepid market.
According to the sources, the states’ losses from a royalty reduction could be temporary and these could be more than offset by the higher volume of coal being produced by the state-run miner as demand picks up. Additionally, the coal block auction completed last year would fetch coal-bearing states more than Rs 3 lakh crore in revenue over the next 30 years.
Coal India paid Rs 7,700 crore as royalty to coal-bearing states in 2015-16 at the rate of 14% on an annual production of 550 million tonnes. If the production level remains the same, the company would pay only around Rs 6,000 crore to states if the royalty is reduced to 11%.
“The primary objective of the new coal royalty rates, along with several measures taken by Coal India to boost output is to bring down the cost of power further,” a government official said.
On its part, CIL has already started rationalisation of linkages offered to government-owned plants. “We have streamlined certain linkages for NTPC which is estimated to translate into savings of nearly Rs 1,100 crore for the company. This has also been done for some of the plants in Uttar Pradesh bringing in cost efficiency of about Rs 140 crore,” S.N Prasad, director of marketing, CIL told FE. Coal linkage rationalisation refers to allowing thermal plants under common ownership to swap coal sources, irrespective of existing fuel supply agreement with subsidiaries of CIL. This is expected to reduce fuel transportation cost.
Further, the coal miner has also notified special forward e-auction for both power and non-power industry to bring certainty and facilitate advance planning. In the forward e-auction, the company has declared the availability of coal for auctioning at different locations in a month-wise schedule that extends from August to March next year.
“Power generation companies and other industries with no long-term fuel supply rely mostly on coal auction for their fuel needs. With the declaration of detailed information on coal availability along with auction schedule, Coal India has solved a major headache for such consumers,” Prasad said.
Additionally, coal ministry has also ordered the company to start providing 100% of domestic coal to non-power companies that have fuel supply pacts. These pacts signed during coal production shortage in 2011 were circumscribed by a caveat that the miner would provide half of the requirement of the non-power firms from domestic coal and the remaining will be substituted by imported coal. However, with increased production and prodding from the ministry, the company has offered to meet the entire fuel requirement of both power and non-power companies from domestic coal.
The Mines and Minerals (Development and Regulation) Amendment Act, 2015, which enforced the auction route for issuance of mining leases, mandated the setting up of DMFs in all districts in the country affected by mining activities. The proceeds from this fund would go towards minimising the adverse impact of mining in the affected area.