IR needs to lessen its unsustainable dependency on Coal freight for revenue purposes: Brookings India

The cost to rise from 10 paise/kWh for passenger cross-subsidy in 2017 to 18 paise/kWh by 2030 in real terms, for all power across India. Unit cost of electricity also gone up by an average 10 paise owing to the high freight rates of Indian Railways – revealed the study!

NEW DELHI: Indian Railways (IR) has traditionally been saddled with dual expectations: being a public utility that transports citizens of a largely poor country on the one hand and a commercial entity that must be profitable on the other. Walking this tightrope has entailed IR overcharging its freight customers to compensate for under-recoveries in its passenger segment. But this exercise may be a counter-productive one, a recent research report has suggested.

According to a study conducted by Brookings India, IR overprices coal freight by about 31% to offset its “social obligation”. This, in turn, raises the tariffs people have to pay for the power they consume. The math is quite simple. Coal comprises 44% of IR’s freight revenues. With every unit of electricity requiring about 63 grams of coal, the transportation cost of coal ranges from Rs 0.13/unit to Rs 1.85/unit, depending on the distance it is ferried by railway rakes – the average cost at which states buy power from non-renewable sources is Rs 3.53/unit.

Discussions on the future of the relationship between IR, Coal & Power Sectors. Panelists include Rakesh Mohan, Distinguished Fellow, Brookings India; Vivek Sahai, ORF online; HS Bajwa, ED (Coal), Indian Railways & Dr Tongia, distinguished Fellow

In FY17, the Rs 10,800 crore “overcharge” on coal thermal power plants had to bear increased the cost of power, on average, by about 10 paise per unit. Going by the current per capita consumption of 1,149 units, every person in India thus ends up paying an additional power tariff of about `115 a year to compensate for subsidised rail tickets.

As per the report, if passenger fares maintain the current CAGR of 4.5% and railways continues to overcharge freight to recover passenger losses pro rata, power users would end up paying an additional 18 paise for every unit of electricity consumed in FY30.

Significantly, IR has to shell out more money on passenger services given the higher staff requirements, need to maintain safety standards, and expenses on station maintenance, etc. The cost of passenger services increased at a CAGR of 13.3% to `85,000 crore in the FY06-17 period. Elaborating on the complexities of raising passenger fares, Vivek Sahai, former chairman, Railway Board, said at a recent event, “when we talk of increasing passenger fares, which category of passengers should be charged more?” About 91% of railway passengers in India travel in the non-AC segment. “It is the call of the government,” he felt.

Speaking on the issue of freight being overcharged, H.S.Bajwa, Executive Director-Coal, Railway Board, acknowledged that further hike in coal freight rates would impact the dynamics of the power sector. However, things might change with the shift in railways’ freight mix after the launch of the freight corridors, he added.

To cut power generation costs, the government has introduced the policy of coal linkage rationalisation, which allows thermal power plants to transfer existing coal linkages to generation units nearer to mines. Coal and Railways Minister Piyush Goyal said recently that by shortening transportation distances for 55.7 MT of fuel in the last four years, the policy had ensured annual potential savings of Rs 3,359 crore.

It is another thing that IR needs to lessen its dependence on coal freight for revenue purposes. For, the average distance of coal transport has fallen 30% in five years. Compounding the problem are the growth of renewable power’s share in the energy basket and upgrade of technologies ensuring a dip in coal consumption at thermal power plants.