Hike in coal royalty may make power costlier by 10-12 p/kwh

States' demand to hike royality rates on coal to 30 per cent, if accepted, would push up the cost of electricity by 7 per cent or 10-12 paisa/kWh, a report has said.
The government has constituted a study group to consider the revision in the royalty rates based on the request from Chhattisgarh for a royalty hike to 30 per cent from the existing 14 per cent ad-valorem, India Ratings and Research (Ind-Ra) said in a release
Ind-Ra believes the royalty hike looks quite steep at 30 per cent, and if accepted, it will lead to coal attracting the highest ad-valorem duty compared to all other minerals.

Assuming a pithead price of Rs 720/t for coal, the royalty increase will also lead to higher contribution towards district mineral foundation (DMF) at 30 per cent of royalty and National Mineral and Exploration Trust (NMET) at 2 per cent of royalty, which translates into a higher cost of electricity generation by around 10-12 paisa/kWh, it said.
It said that since January 2015, coal consumers have been hit by rising prices due to the imposition of DMF and NMET (effective January 2015) taking the effective royalty rate up to 18.48 per cent from 14 per cent.
Additionally, if the royalty rates were to increase to 30 per cent, the effective royalty rate would be 39.6 per cent including DMF and NMET contribution.

Furthermore, the clean energy cess increased to Rs 400/t from Rs 200/t in the Union Budget 2016.

During May 2016, Coal India Limited (CIL) increased the run-of-the-mine prices for the most widely supplied grades of coal to the power sector by an average of 16 per cent.
Similarly from April 1, 2015, freight charges for coal were hiked by 6.3 per cent. Therefore, the variable cost of generation for a plant situated 500kms from the mine which used to receive grade G13 coal, has increased by 24 per cent to Rs 1.69/kWh.
If the revised royalty rates were to be accepted as proposed by Chhattisgarh, the variable cost of generation can increase by another 7 per cent. On the positive side, coal linkage rationalisation for companies has led to a decline in the transportation costs thus easing some impact, it said.

Ind-Ra believes that as alternate sources of power namely solar see further reduction in tariffs, the competition between thermal and solar will intensify, with a high probability of solar winning.
The states will benefit at the expense of consumers paying more for electricity.
Ind-Ra estimates that the increase in royalty upto 30 per cent for the top three states could result in additional income between Rs 5 billon to Rs 39 billion, depending on the final royalty rate.