Energy norms for urea units gokak 2003

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Published on March 27, 2014

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Fertilizer manufacture needs energy efficient processes.

REPORT OF THE COMMITTEE ON EFFICIENT ENERGY LEVELS ETC. FOR UREA UNITS MAY, 2003

Index S.No. Topic Page Nos. I. Introduction 1 - 2 II. Recommendations of ERC 2 - 3 III. Constitution of the Committee 3 - 4 IV. Deliberations of the Committee 4 – 12 V. Pre-set energy levels for Stage – I 12-13 VI. Pre-set energy levels for Stage – II 13 – 17 VII. Raw material mix of inputs 17 -19 VIII. International energy levels 19 – 21 IX. Mechanism for computation of escalation/de-escalation 21 - 25 X. Switchover of non-gas based units to Gas/LNG in Stage – III. 25 -28 XI. Energy level benchmarking (beyond Stage – II) 28 – 31 XII. Recommendations 31 – 37 XIII. Chairman‟s comments on certain issues raised by two members 38-48 Annexures I. Annexure-I Executive Summary of ERC recommendations 49-56 II. Annexure-II-A DOF‟s OM dated 25.6.2002 57-59 III. Annexure-II-B DOF‟s OMs dated 28.8.2002, 23.3.2003 and 1.4.2003. 60-66 IV. Annexure-II-C 67-71

DOF‟s OM dated 30.1.2003 V. Annexure-III List of 32 urea units under different groups 72 VI. Annexure-IV to IX Data regarding energy levels and raw material mix of inputs for urea units in different groups 73-113 VII. Annexure-X International energy levels. 114-120

FOREWORD I have great pleasure in writing the foreword to the Report of the Committee which was appointed by the Department of Fertilizers to suggest energy norms for urea units and other related matters, keeping in mind the need to do away with individual unit based Retention Pricing Scheme and introduce a Group Concession Scheme. The Committee met on eleven occasions in Delhi and had the benefit of interaction with the representatives of the industry. The data was collected from the industry on the pattern of F.I.C.C. The Committee has made its recommendations after taking into account the developments that have taken place since the submission of the report by the Expenditure Reforms Commission. The Committee noted during the deliberations that the heterogeneity of the industry is a major constraint in evolving any model based on uniform norms. There are significant differences even within the same group or category. The Committee, however, has made an earnest effort to bring about as much uniformity as possible, despite this handicap. The Committee has also noted that the enactment of the Energy Conservation Act, 2001 has introduced a qualitative change in the situation. The declaration of the fertilizer industry as an energy intensive industry under the Act and the constitution of the Bureau of Energy Efficiency are significant developments. Now that the Act has came into force, the major decisions in regard to the subject matter of the Committee can be taken only by the newly created/designated agencies, which are sure to initiate such action as they deem fit under the Act.

I would be failing in my duty if I do not place on record, my deep appreciation of the participation in the deliberations of the Committee, of Ms. S.K. Sekhon Executive Director, FICC, Shri Sudhir Krishna Joint Secretary (Fertilizers) and Shri S. Chandra, Joint Adviser, Department of Fertilizers. Indeed the richness of their experience has contributed greatly in formulating its recommendations. The Committee is also grateful to the Chairman, Vice- Chairman and the Director General, Fertilizers Association of India and the Chief Executives of HFC, NFL, MFL, SFCL, RCF and FACT for making presentations before the Committee and Shri S. Nigam, Economic Adviser, Ministry of Commerce and Industry for attending a meeting of the Committee as a special invitee. I am also deeply grateful to all the members of the Committee but for whose meaningful participation in the deliberations, it would not have been possible to finalize the Report. I also appreciate the assistance I got from Shri Manoj Kumar, Director in the Department of Fertilizers, who is also Member Secretary of the Committee. I also thank Shri S.P.S. Tomar, SO Department of Fertilizers for providing backup support and efficient secretarial assistance. Finally, the Committee would like to thank FACT, RCF and IFFCO for making available their premises at New Delhi for holding most of the meetings of the Committee. ( A.V. Gokak ) Chairman

I. INTRODUCTION The objective of providing fertilizers to farmers at affordable prices, while simultaneously ensuring an adequate return on investment to the entrepreneurs has been the aim of the fertilizer pricing policy of the Government. The introduction of the Retention Price Scheme (RPS) w.e.f. 1st November, 1977 has been one of the early initiatives in this direction. Under the Scheme, the difference between the statutorily notified sale price and the retention price (cost of production as assessed by the Government plus a reasonable return on net- worth) is paid as subsidy. The retention prices are determined unit-wise based on a combination of norms and actuals pertaining to the project cost, capacity utilization, cost of raw materials and such other factors. Presently, the RPS is operating in respect of urea manufacturing units only. Though, the RPS has, over the years achieved, to a remarkable degree, its professed objectives of increasing investment in the fertilizer industry and thereby creating new capacities and enhanced production along with increasing use of chemical fertilizers especially, nitrogenous fertilizers, some of the deficiencies of the Scheme have also become too obvious; nor is the Scheme any longer in tune with the current trend of deregulation and decontrol. There have been many attempts in the past to remove the deficiencies of the RPS. Some of the most prominent ones are incorporated in the recommendations of the High Powered Committee (HPC) of Secretaries on RPS in 1986, HPC on Fertilizer Consumer Prices, 1987, Joint Parliamentary Committee in 1991, study of the Bureau of Industrial Costs and Prices (BICP), 1992 and the High Powered Review Committee in 1998. The last major attempt to suggest a viable alternative to the RPS for urea units was made in September, 2000, in the report of the Expenditure Reforms Commission (ERC), headed by the former Finance Secretary, Shri K.P. Geethakrishnan. The recommendations of the ERC were all encompassing in nature and covered almost all the vital issues pertaining to the urea industry. The ERC

report, inter alia, delineated the contours of a new urea pricing policy in detail and even gave a vision of the goal to be reached in a none too distant future, i.e. eventually bringing fertilizer prices charged to farmers to the level of import parity price; protecting the real incomes of the small farmers, maintaining food security and promoting a balanced use of N, P & K. The executive summary of the recommendations of the ERC on „Rationalising Fertilizer Subsidies‟ is given in Annexure-I to this Report. II. THE ERC RECOMMENDATIONS In brief, the ERC report envisages dismantling of the control system in a phased manner, leading at the commencement of the fourth phase, to a decontrolled fertilizer industry which can compete with imports albeit, with a small level of protection and a feedstock cost differential compensation to naphtha/LNG based units to ensure self-sufficiency. The ERC postulated four phases in the proposed new pricing policy for urea units, beginning with the discontinuance of the RPS w.e.f. February 1, 2001, along with the introduction of the group based concession scheme. The scheme of ERC was as follows: (i) First Phase (a) In this phase, beginning February 1, 2001, the existing units are to be grouped into five categories – pre-1992 gas based units; post-92 gas based units; naphtha based units, FO/LSHS based units and mixed feedstock based units. (b) Individual retention price scheme will be scrapped and in its place a urea concession scheme with a fixed amount of concession for each of these groups will be introduced. (c) The distribution control mechanism will be done away with, though the maximum retail price arrangement will be continued. (d) The sale price of urea in real terms to be increased by 7 per cent every year w.e.f. 1.4.2001.

(ii) Second Phase In the second phase, beginning April1, 2002, the concession rates are reduced to reflect the possibility of reasonable improvement in feedstock usage efficiencies and reduction in capital related charges (CRC). (iii) Third Phase The third phase will begin on April 1, 2005 and reflects the feasibility of all non gas based plants to modernize and switch over to LNG. For plants which do not switch over to LNG as feedstock, only the level of concession that the unit would have been entitled to if it had switched over to LNG, would be allowed. (iv) Fourth Phase The fourth phase begins on 1.4.2006, when the industry is decontrolled. The farm gate prices will reach Rs. 6903 by 1.4.2006, a level at which the industry can be freed from all controls and be required to compete with imports, with variable levy ensuring availability of such imports at the farm-gate at Rs. 7,000 per tonne of urea. While no concessions will be necessary from this date onwards for gas based, FO/LSHS and mixed feedstock plants, existing naphtha plants converting to LNG as also new plants and substantial additions to existing plants will be entitled to a feedstock differential with that for LNG plants serving as a ceiling. III. CONSTITUTION OF THE COMMITTEE The ERC, in addition to recommending a group concession scheme for urea manufacturing units, had also envisaged improvement in the energy efficiency in Phase-II. The report had also indicated certain energy consumption norms for the non gas based units. While examining the proposals of ERC, the Department of Fertilizers (DOF) decided to work out pre-set energy consumption

norms for each group, including the gas based units. This Committee was accordingly constituted to give its recommendations on the following issues concerning the urea industry, keeping in view, the recommendations of the ERC: i) Efficient energy levels for the urea manufacturing units, keeping in view the existing norms and the norms which the modern plants are expected to achieve. This exercise was to be undertaken also by examining the desirability of feedstock/technology based efficient energy levels and possible milestones in terms of achieving international standards. ii) Mechanism for determining the escalation and de-escalation in the feedstock cost for various units/groups. iii) Mechanism for feedstock differential cost in respect of various non-gas based units after Stage-II keeping in view the likely scenario about availability, pricing and infrastructure required for the LNG. iv) Mechanism for treatment of substitution of feedstock due to non-availability of gas/LNG etc. A copy each of the Department of Fertilizers‟ Office Memoranda dated 25th June 2002 and 28th August, 2002, 24th March, 2003 and 1st April 2003 issued in this regard is placed at Annexure-II-A and II-B respectively. IV. DELIBERATIONS OF THE COMMITTEE In deliberating on the issues covered by the terms of reference of the Committee, a composite approach was followed, comprising, inter-alia, the following:-  Collection of actual operating data for last five years, (1997-98 to 2001-02) from all the thirty-two urea-manufacturing units and its classification in analyzable components.

 Examination of the report of the ERC titled „Rationalizing Fertilizer Subsidy‟ to serve as the backdrop for formulation of its recommendations.  Interaction with representatives of fertilizer industry and the Fertilizer Association of India (FAI), the apex body of the fertilizer industry.  Analysis of background notes, suggestions and notes/memoranda submitted by the members of the Committee and by the representatives of the industry. In all, the Committee met in New Delhi eleven times between July, 2002 and March, 2003 before finalizing its recommendations. The Committee has also taken cognizance of the following developments that have taken place after the ERC submitted its report: (i) ERC had assumed that the fertilizer industry would be able to obtain naphtha and Fuel Oil/LSHS at import parity prices. However, the fertilizer industry could not meet the expectation largely on account of the non-availability of the required infrastructure for handling import of naphtha and FO/LSHS. The necessary infrastructure was available only with the oil companies and they were generally unwilling to permit the fertilizer industry to make use of the same. The significant saving that the ERC had expected on account of import of naphtha and FO/LSHS at import parity prices has, therefore, not accrued. (ii) The ERC had estimated that LNG would be adequately available in the country to facilitate conversion of non-gas based plants to LNG by the year 2004. This assumption has not materialized. The recent discovery of gas in deep waters of Krishna Godavari offshore and in Rajasthan is still to be further appraised to determine firm reserves in the area from the point of view of commercial production. As of now, it is difficult to get a firm idea about either the quantum or timing of availability of gas in different locations to facilitate conversion of non- gas based fertilizer plants to gas for feedstock.

(iii) The Government‟s decision on the new pricing policy for urea units to replace the RPS is now available and the Government of India, Department of Fertilizers have vide their OM dated 30.1.2003 announced the new pricing policy for urea units which would be implemented from 1.4.2003. A copy of DoF‟s O.M. dated 30.1.2003 is appended as Annexure-IIC. The Committee noted that the new pricing policy for urea units is group based in sharp contrast to unit-specific Retention Price Scheme. a) Stages considered in the Report The Committee has considered the same stages for its recommendations as considered by the Government for its new Group Concession Scheme for urea units, namely: I. Stage-I – 1.4.2003 to 31.3.2004 II. Stage-II – 1.4.2004 to 31.3.2006 III. Stage-III – 1.4.2006 onwards. b) Grouping of plants i) Gas based plants: Gas based plants have been divided into two groups, namely, i) Pre-92 Gas based plants and ii) Post-92 Gas based plants, in line with the recommendations of ERC. ii) Naphtha based plants: Naphtha based plants have been divided into two groups namely i) Pre-92 Naphtha based plants and ii) Post-92 Naphtha based plants. The naphtha based plants which were set up after 1992, have a larger size and are more energy efficient, but also entailed higher capital costs. On the other hand, the older plants i.e. pre-1992, had lower capital costs but are less energy efficient. These will have to make very intensive efforts in order to improve

efficiency in the use of energy and cannot be expected to be as energy efficient as the post-1992 plants unless they undertake substantial capital investments. Therefore, it was considered prudent to divide the naphtha based plants into two different groups i.e. pre-1992 and post-1992 naphtha based plants. iii) FO/LSHS based plants: FO/LSHS based plants have been kept in a single group in line with the recommendations of ERC. iv) Mixed Energy based plants: In line with the recommendations of the ERC, the Committee has considered such of the gas-based units to be in the mixed energy based group, whose consumption of naphtha/FO/LSHS is more than 25% of the total energy consumption. NFCL-II was included by ERC in this group as its consumption of raw material was assumed in the ratio of 30:70 for gas and naphtha, respectively. Simultaneously, ERC had observed that this ratio was likely to change in future in view of additional allocation of gas. The ERC had accordingly, recommended that the actual mix needs to be reviewed for this unit periodically at the time of grant of concession. The Committee has scrutinized the data pertaining to the NFCL-II unit and has found that this unit has been using less than 25% of non-gas energy in the last year taken up for analysis, i.e. 2001-02. Hence, NFCL-II has been included in the post-92 gas based group and not in the mixed energy based group. Based on the above definitions regarding grouping, all the plants have been divided into six groups as given below: Groups Description No. of plants

Group-I Pre-92 Gas based plants 6 Group-II Post-92 Gas based plants 7 Group-III A Pre-92 Naphtha based plants 8 Group-III B Post-92 Naphtha based plants 2 Group-IV FO/LSHS based plants 6 Group-V Mixed Energy based plants 3 Total no. of plants 32 The list of all the thirty-two urea plants is given in Annexure-III. Given the uncertainty about the availability of gas, at least in the near future, the extent of alternative fuel/feedstock is also likely to keep on changing. The Committee recommends that in case consumption of alternative feedstock/fuel in a gas based unit exceeds 25%, the classification of the unit should be shifted from gas based to the mixed energy group until the mix again changes warranting its inclusion in the gas based group. Likewise, the classification of a unit in the mixed energy group may also undergo similar change. The Committee recommends that this exercise should be undertaken on an annual basis. c) Collection of actual operating data: The data about energy consumption figures was collected for the last five years i.e. from 1997-98 to 2001-02 from all the thirty-two urea manufacturing units. Units were asked to furnish the break-up of energy consumption data in terms of various energy inputs used for the manufacture of urea. In order to maintain uniformity and comparability in the collection of data, proformae were devised and the units were requested to provide the data in the prescribed

proformae on FICC pattern and as furnished to FICC earlier. The data collected from the units and their group-wise analysis is enclosed as Annexure-IV to Annexure-IX. The Committee has based its observations and recommendations on the data so collected. The Committee noted that the basic figures as also the conversion calculations into Gcal of energy as given by each urea unit are liable to be scrutinized by the Government at its own level. d) Outlier Plants: During group-wise analysis of the five years‟ energy consumption data, it was observed that some plants were having too high or too low specific energy consumption than the average of the group. These variations arise, on the one hand, due to technological obsolescence, besides operational inefficiencies leading to high consumption of energy and, on the other hand, due to economies of scale and adoption of improved technology leading to lower energy consumption. The Committee felt that inclusion of such plants in calculating the average energy of the group would give abnormally high or low values for the group. In order to remove this aberration, the Committee decided that the plants having more than 20% deviation in weighted average specific energy consumption as compared to the weighted average specific energy consumption of the group for the five years under consideration (i.e. 1997-98 to 2001-02), shall not be considered for arriving at the group weighted average energy consumption and such plants shall be termed as Outlier Plants in the group. It was further decided that such Outlier Plants shall be dealt with separately. In order to identify such plants, all plants in a particular group, including outlier plants, were considered for calculating the weighted average specific energy consumption. Thereafter, the plants whose own weighted average specific energy consumption was having a deviation of more than 20% from the group weighted average, i.e., outlier plants were excluded while re-computing the weighted group average. Based on above, the group-wise list of Outlier Plants is given below:

Group Outlier plants Group specifi c energ y consu mptio n (5 years’ weighted average) (Gcal/MT Urea) Percentage deviation from 5 years’ weighted group average Name of the plant Energy consumption (5 years’ weighted avg.) (GCal/MT Urea) Group-I i)HFC, Namrup-III* ii)RCF, Trombay-V 17.291 10.433 6.665 159.43 56.53 Group-II - - 5.857 - Group-III A FACT 11.320 8.116 39.48 Group-III B - - 6.263 - Group-IV i)FCI, Sindri ii)NLC, Neyveli iii)GNFC, Bharuch 17.459 16.259 8.170 10.426 67.46 55.95 (-) 21.64 Group-V - 7.129 - * The Namrup units of the erstwhile HFC now constitute a separate company namely, the Brahmaputra Valley Fertilizer Corporation Limited. e) Analysis of data:

The Committee worked out the following six alternative scenarios for all the six groups (Please refer Annexure-IV to Annexure-IX for details): - Case-I Weighted average specific energy consumption of all the plants of the groups considering last five years‟ operating data (1997-98 to 2001-02). Case-II Weighted average specific energy consumption of all the plants of the groups (excluding outlier plants) considering last five years‟ operating data. Case-III Weighted average specific energy consumption of all the plants of the groups considering last 3 years‟ operating data (1999-2000 to 2001-02). Case-IV Weighted average specific energy consumption of all the plants of the groups (excluding outlier plants) considering last 3 years‟ operating data. Case-V Weighted average specific energy consumption of all the plants of the groups considering only last year‟s operating data (2001-02). Case-VI Weighted average specific energy consumption of all the plants of the groups (excluding outlier plants) considering only last year‟s operating data. Group-wise weighted average specific energy consumption (Gcal/MT urea) for all the six alternative scenarios is given below (please refer Annexure- IV to Annexure-IX for details):

Groups Case-I Case-II Case-III Case-IV Case-V Case-VI 5 years’ average (1997-98 to 2001-02) 5 years’ average excludin g outliers 3 years’ average (1999- 2000 to 2001-02) 3 years’ average excluding outliers Last year’s average (2001-02) Last year’s average excluding outliers Group-I 6.665 6.110 6.566 6.066 6.267 5.970 Group-II 5.857 5.857 5.796 5.796 5.734 5.734 Group-IIIA 8.116 7.915 7.964 7.773 7.787 7.732 Group-IIIB 6.263 6.263 6.206 6.206 5.902 5.902 Group-IV 10.426 10.190 10.163* 10.067* 9.546 9.982 Group-V 7.129 7.129 7.103 7.103 7.032 7.032 * For NFL Bhatinda, the lowest specific energy consumption of 10.210 Gcal/MT urea and urea production of 567367 MT, achieved during the year 1997-98 have been considered for each of the three years for calculation of three years‟ group average for group-IV. This is because in the remaining years, the consumption of energy in this plant was significantly higher, and the inclusion of these figures would have unduly inflated the group weighted average. V. PRE-SET ENERGY LEVELS FOR STAGE-I: The recommendations for pre-set energy levels for Stage-I (1.4.2003 to 31.3.2004) are not one of the specific terms of reference of the Committee. The ERC has also not given any normative pre-set energy level for this stage but has only considered the actual energy consumption levels of each group for Stage-I. The Committee, therefore, does not wish to recommend any efficiency norms for various groups for this stage. Moreover, this stage begins from April 1, 2003 and urea units do not have any time to adjust to any new norms. It is recommended that the FICC may calculate escalation/de-escalation in the variable cost for

all the urea units for Stage-I on the pattern of the current practice under RPS. VI. PRESET ENERGY LEVELS FOR STAGE-II: In analyzing the last five years‟ actual operating data of the urea plants of different groups, the Committee observed that in line with the trend over the last three years, most of the plants achieved the lowest energy consumption figures in the last year considered, i.e. 2001-02. However, for recommending the preset efficient energy levels for Stage-II for the urea units in different groups (including units considered outliers), the Committee has not considered the performance of that one year only, i.e. 2001-02. This is because analysis of the data reveals wide fluctuations from year to year. It may be emphasized that a single year‟s data may not be true representative of a performance that can be sustained over a long period as the same is influenced by internal as well as external factors: internal factors like on-stream days achieved depending upon, among others, whether annual turn around was taken or not and external factors like availability of feedstock, particularly gas. Unlike plants located in other parts of the world, gas based plants in India do not have 100% assured supply of gas and this has in fact forced some of the units to install dual feed facility so that they may be able to make up for this shortfall of gas by naphtha, whenever it is necessary. The level of production and consequently, efficiency of operation also depends on demand influenced by seasonal condition etc. It is against this background that the norms for Stage-II have been worked out on the basis of three years‟ weighted average, (1999-2000 to 2001- 02), excluding outliers. Based on the above, the recommended preset energy levels for Stage- II along with those recommended by the ERC are given below:-

Group Energy levels for Stage-II (Gcal/MT Urea) Recommended by ERC Based on Actual data (3 years’ weighted average energy consumptio n including outliers) Based on Actual data (3 years’ weighted average energy consumpti on excluding outliers) Recommended by the Committee Group-I 6.62 6.566 6.066 6.07 Group-II 5.93 5.796 5.796 5.80 Group-IIIA 7.0 7.964 7.773 7.77 Group-IIIB 7.0 6.206 6.206 6.21 Group-IV 9.75 10.163 10.067 10.07 Group-V 7.0 7.103 7.103 7.10 It has to be emphasized that the outliers on the higher side face a number of problems - technical, managerial and financial - which affect their techno- economic viability in the short run as well as in the long run. The percentage of deviation from the weighted average of the concerned group is nothing but a symptom of deeper malaise that plagues them. Only one year is not enough for such units to equip themselves to tackle this problem. The Committee is, therefore, of the view that these plants deserve a separate treatment for the first year of Stage-II (i.e., 1.4.2004 to 31.3.2005) in order to prepare them to attain the efficiency driven group energy consumption norms. The Committee, therefore, recommends that the specific energy consumption norms for these outlier plants on the higher side, for the first year of Stage-II should be the same as considered by the FICC in respect of these units for the 8th pricing period and thereafter respective group energy norms should be made applicable in respect of these outlier units also. This, in addition to giving the outlier plants reasonable time to rectify their deficiencies, would also enable them

to take a commercial decision about continued operations. However, the specific energy consumption norm for both the years of Stage-II for GNFC, Bharuch, which is an outlier on the lower side in the FO/LSHS group, should be the same as considered by the FICC for the 8th pricing period in order to avoid any undue gain to it in adopting the principle of group energy consumption norm for the outlier plants in the second year of Stage-II. In view of the recommendations for the pre-set energy norms for Stage-II as given above, the Committee recommends that the concession rates for the urea units for Stage-II may be reworked by the FICC taking into account the recommended pre-set energy norms for Stage-II. The Committee recommends that in order to reward efficiency in energy consumption as also to offer incentive to all urea units to attain the pre-set levels of energy consumption in each group during Stage-II, the pre-set group energy consumption norms may be taken for all the urea units in the group, excluding the outliers (which have been dealt in the preceding paragraph) irrespective of their individual energy consumption level, for working out base concession for Stage-II as well as for escalation/de-escalation. Note 1: The energy levels in all the groups have been recommended as the weighted group average of the last three years‟ actual energy consumption excluding the outliers but limited to two decimal places. Note 2: The last three years‟ weighted average energy consumption level for groups II, IIIB and V does not show any variation both with or without outliers as there are no outliers in these groups. Note 3: While the energy consumption levels recommended by the ERC for Stage-II have guided the Committee in its deliberations, the Committee has not been able to follow the ERC recommendations in their entirety. This is mainly due to the ready availability of the actual operating data of all the urea units for the last three years‟ (1999-2000 to 2001-02)

pertaining to their specific energy consumption. It is also due to the differences in the composition of the different groups as proposed by ERC and as considered by the Committee. It can be seen that for the groups I, II and IIIB, the recommended preset energy consumption levels are lower than those recommended by the ERC. However, in the case of groups IIIA, IV and V, the recommended pre-set energy consumption levels are higher than ERC recommendations. Note 4: The naphtha based group of the ERC report has been split into two groups, namely, group IIIA and IIIB and the weighted average of the specific energy consumption has been calculated separately for both the groups. Group IIIA, which consists of pre-92 naphtha based plants, shows higher weighted average group energy consumption level than ERC recommendation whereas group IIIB comprising post-92 naphtha based plants shows lower weighted average group energy consumption level than ERC recommendation. However, the combined weighted average energy consumption of groups IIIA and IIIB is comparable to the recommendations of the ERC for this group as a whole. Note 5: In group IV (FO/LSHS), the weighted average group energy consumption works out to be higher than that recommended by the ERC. This is due to the fact that GNFC, Bharuch, included in this group, has been considered an outlier on the lower side by the Committee in determining the weighted average energy consumption level in this group as per the actual operating data for the last three years. This is due to the fact that GNFC plant differs significantly from NFL units at Bhatinda, Panipat, Nangal Expansion and FCI‟s Sindri Modernization, both in respect of size and technology. GNFC plant capacity is 1350 MT ammonia per day while the capacity of other plants is 900 MT ammonia per day.

GNFC has adopted Texaco Process technology with two gasifiers while other plants have adopted Shell Gasification Process with three gasifiers. Note 6: The weighted average group energy consumption level of group V (mixed energy) works out to be higher than ERC‟s recommendation for this group as NFCL-II which was included in group V by the ERC and whose weighted average specific energy consumption is lower than the weighted average of the group, i.e. group V, has been placed in group II, i.e., post-92 gas based. VII. RAW MATERIAL MIX OF INPUTS: In view of the Government‟s decision to adopt a group based urea pricing policy to replace the RPS, the Committee considered the possibility of recommending group wise weighted average specific energy consumption norm per tonne of urea based on percentage mix of inputs for the last three years‟ (i.e. 1999-2000 to 2001-02) for each group, excluding outliers. This is on the same basis as adopted for recommending total energy consumption. In line with the above, the Committee considered last three years‟ (1999- 2000 to 2001-02) weighted average energy consumption figures (excluding outliers) for computing the raw material mix of inputs in each group as given below: Group % Raw material mix (Based on energy) Gas (NG, AG) Naphtha (Naphtha, NGL) Fuel Oil (FO, LSHS, HSD) Coal Purchased power Group-I 3 years‟ average 89.39 9.38 1.18 0.00 0.05 Group-II 3 years‟ average 89.72 10.23 (-) 0.02 0.00 0.07

Group-IIIA 3 years‟ average 0.00 62.91 18.03 12.40 6.66 Group-IIIB 3 years‟ average 0.74 88.09 6.42 4.39 0.36 Group-IV 3 years‟ average 0.00 0.75 55.42 39.78 4.03 Group-V 3 years‟ average 60.63 30.03 6.03 0.00 3.30 The Committee initially considered the desirability of recommending normative energy mix for various groups, but later dropped the idea after envisaging the following distortions: (i) For Gas based units under groups I and II, some of the units could be compelled to use naphtha for their feed/fuel requirements due to short supply of gas which may continue for considerable period of time. As naphtha costs four times compared to natural gas per million Kcal, the liquidity and the cost structure of the units would be affected adversely if significant fluctuations/changes occur in the supplies of gas. (ii) For mixed energy based units under group V, the mix of feed/fuel used by each unit varies widely with respect to other units in the group. Therefore, pre-set mix, if applied, for these plants shall lead to undue losses and gains. (iii) As far as group IIIA is concerned, the Committee noted that some of the units particularly SFC-Kota, IFFCO-Phulpur-I and DIL- Kanpur, use significant quantities of coal as fuel for generation of power and steam. Though coal is a less efficient fuel as compared to naphtha/FO, the average total cost of energy per MT of urea is far less in case of these units as compared to other units in this group using naphtha/FO for generation of power and steam. The Committee noted that such units would benefit considerably by

adoption of notional fuel mix of the group which would entail significant weightage for naphtha/FO, which is costlier than coal in terms of equivalent energy. However, if their actual energy mix is taken into account, these units will suffer significant financial loss as, on one hand, their overall consumption would be reduced to the group norm, they also would not get any weightage for use of cheaper energy source like coal (which, in turn increases the energy consumption per tonne of urea). The Committee also noted that the remaining units in group IIIA, which do not use coal at all, would also suffer undue loss on the basis of preset energy mix as to that extent their usage of naphtha/FO would be artificially suppressed. The Committee, therefore recommends as follows: i) In case of three plants in group-IIIA, namely, SFC-Kota, IFFCO- Phulpur-I and DIL-Kanpur, their energy consumption and raw material mix as recognized for 8th pricing period should continue to be recognized even in Stage-II so that these units do not suffer either undue loss or get undue benefit; ii) In respect of other units in group III A as well as all units in other groups, within the recommended group energy consumption norm, the actual raw material mix of each unit should be taken while working out base concession as well as escalation/de-escalation. Any change in the raw material mix of each unit should be continuously monitored by the FICC and adjusted on annual basis. This system would ensure that the actual mix of energy is reflected thereby eliminating any chances of manipulation between different sources of energy unlike the alternative of preset energy mix. VIII. INTERNATIONAL ENERGY LEVELS:

While recommending the energy levels for Stage-II, the Committee has kept in view the energy levels being achieved internationally for various feedstocks. While making the international comparisons in this regard, one has to note that the fertilizer plants in India do not depend on one single feedstock/fuel unlike their counterparts elsewhere in the world. The differences in methodology of computation may not always give a like to like comparison. Notwithstanding the above, the Committee carried out comparison of energy consumption figures of ammonia and urea plants of the three largest producers in the world namely, USA, China and India on the basis of published data and found that Indian plants compare favourably with plants outside India in terms of the specific energy consumption. The detailed analysis carried out by the Committee is attached as Annexure-X. The results are summarized below: Comparison with plants in USA Feed Product Specific energy consumption (Gcal/MT of urea) USA India Gas based plants Ammonia 9.94 9.16 Urea 7.27 6.63 Comparison with plants in China Feed Product Specific energy consumption (Gcal/MT of urea) China India Gas based plants Ammonia 8.77 8.51 Urea 6.29 6.10

Naphtha based plants Ammonia 9.25 9.28 Urea 6.76 6.43 FO based plants Ammonia 10.92 11.45 Comparison with 25% most efficient plants in the world Particulars Average energy consumption (Gcal/MT of urea) World India 25% most efficient Indian ammonia plants 8.49 8.41 25% most efficient Indian urea plants 6.22 6.06 Note: - There is a slight difference in the figures quoted in the above tables. This is because, as indicated in Annexure-X, the data in various tables has been taken from different published sources. While the international comparison does reveal that the Indian fertilizer industry compares favorably with international energy consumption levels, the improvement in the efficient use of energy is an ongoing process. As per the new pricing policy for urea units as announced vide DoF‟s letter dated 30.1.2003, there shall neither be any reimbursement of the investment made by a unit for improvement in operations nor will there be any mopping up of gains of the units as a result of operational efficiency. The fertilizer industry in the country will, therefore, have to keep abreast of the state of the art technology in this regard. IX. MECHANISM FOR COMPUTATION OF ESCALATION/DE- ESCALATION The ERC had recommended that escalations/de-escalations should be given only in relation to main feedstock of the concerned group namely, gas,

naphtha, and FO/LSHS as the case may be. The ERC had also advocated that escalations/de-escalations should be sanctioned based on import parity price of naphtha and FO/LSHS. As has been pointed out earlier, the ERC had assumed that the industry would be able to procure naphtha and FO/LSHS at import parity price. This assumption has, however, not materialized. The Committee noted that though the Government have decided to dismantle the Administered Price Mechanism (APM) for the petroleum sector, the decision has not been fully implemented in as much as the price of natural gas still continues to be administered by the Government. Further, though the price of naphtha and FO/LSHS is determined on the basis of import parity based formula, there are substantial differences of perception between the fertilizer industry and the supplying oil companies over the nuances of pricing of naphtha. Attempts made in the past by the Ministry of Petroleum & Natural Gas to resolve the matter in consultation with the other concerned Ministries have not borne fruit so far. In fact, it is understood that the Ministry of P & NG have taken the stand that fertilizer companies should deal directly with oil companies with regard to pricing of naphtha and that after the dismantling of the APM, the Ministry would not intervene in the matter. Of now, the oil companies are determining the price of naphtha and FO/LSHS on their own and communicating the same to the concerned fertilizer units. In the absence of a full-fledged regulator for the petroleum sector as yet, it would not be possible to determine the disputes between the two parties on the pricing methodology unless Government chooses to intervene or there is judicial adjudication. In view of the above, the Committee feels that there is no level playing field for the fertilizer industry vis-à-vis the suppliers of naphtha and FO/LSHS who have so far not been willing to permit the fertilizer industry to make use of their infrastructure for import of naphtha and FO/LSHS. Therefore, the Committee does not recommend escalations/de-escalations on the basis of import parity price in respect of naphtha and FO/LSHS.

The Committee also explored the possibility of using Wholesale Price Index (WPI), for naphtha for purposes of escalation/de-escalation. It, however, found that the application of the formula based on WPI would at times, result in large overpayment to some units and at other times, in significant underpayment. The methodology for computation of WPI was discussed at length with Economic Advisor of the Ministry of Industry, who agreed that there was scope for further improvement in the computation of the index so that it may reflect the variations in the price of naphtha and FO/LSHS in a more realistic manner. Similar problems exist when the WPI is sought to be applied to other feedstock/fuel. As the fine-tuning of WPI would take some time, the Committee does not find it possible to place any reliance on this index for according escalation/de-escalation in the price of naphtha/FO/LSHS in the immediate future. In view of this, the Committee recommends that escalation/de- escalation in respect of feedstock/fuel should be determined on the basis of existing methodology followed by the FICC for the first year of Stage-II. It should be possible to take a final decision with regard to the formula for escalation/de-escalation based either on import parity price or the refined Wholesale Price Index before the end of the first year of Stage-II. The Committee is of the view that the option of indexing to the import parity price (FOB) should not be ruled out as the prices of other feedstock/fuels are fixed largely on import parity pricing principle and the petroleum sector cannot be insulated from the international economy beyond a certain period. Even the price of indigenous natural gas which is administered by Government now is proposed to be linked to market/international prices. The Committee is of the view that the methodology recommended by it requires constant monitoring. The methodology based either on import parity pricing formula, after such modifications as may become necessary in the light of the policy decisions to be taken by the Government on the pricing of natural gas, or the refined Wholesale

Price Index, may be more scientific and objective. The Government may take appropriate decision on this after an in-depth study of the matter. The formula given by the Committee, thus, is purely an interim one. Accordingly, the Committee recommends that for the 1st year in Stage- II, the formula for escalation/de-escalation in the price of feedstock/fuel be determined as follows: (i) (a) Escalation/De-escalation on variable cost should be worked out based on specific energy consumption of the group. (b) Escalation/De-escalation should be calculated on quarterly basis. (c) The sales tax on inputs should be calculated and paid separately to each unit on actual basis. (d) Escalation/De-escalation is to be calculated for each unit in respect of variation in the prices of some components of the variable cost namely feedstock, fuel and purchased power only. (ii) Escalation/De-escalation for variation in the cost of inputs: a) Escalation/De-escalation factor Escalation/De-escalation factor (Rs./MT urea) = A x ( C – B ) A = Base weighted average specific energy consumption of the group (Gcal/MT of Urea) B = Base rate of energy for the unit (Rs/Gcal) C = Actual rate of energy for the unit (Rs/Gcal)

b) Rate of energy (Rs/Gcal) Base rate of energy (B) and actual rate of energy (C) for the unit shall be calculated from the base data (base energy, actual mix of raw materials and base/actual rates) as shown below: Input Base percent mix of input, % Actual percent mix of input,% Base rate of input (Rs/Gcal) Actual rate of input (Rs/Gcal) Base rate of energy (Rs/Gcal) Actual rate of energy (Rs/Gcal) a b c d e = (axc)/100 f = (bxd)/100 NG Naph tha Fuel Oil Coal Purch ased power Total B C c) Calculation of Escalation/ De-escalation i) Base/ Actual rate of energy for the quarter shall be calculated for each unit. ii) Escalation/De-escalation factor shall then be calculated as Rs/MT urea separately for each unit. X. SWITCHOVER OF NON-GAS BASED UNITS TO GAS/LNG IN STAGE- III

It has been envisaged by ERC that all the non-gas based plants shall modernize and switchover to LNG by end of Stage-II. The terms of reference of the Committee included suggesting a method for working out the differential cost of feedstock for non-gas based units after Stage-II. Furthermore, the likely scenario of the availability, pricing and infrastructure for LNG was also to be considered by the Committee. LNG is likely to become available in a phased manner depending upon the infrastructure for distribution of LNG, plant technology and geographical location of the urea units. However, the scenario about availability and pricing of LNG is not very clear at present. In the discussions held with fertilizer industry and FAI, it was revealed that there was no appreciable progress with regard to supply and availability of LNG in the country and that a clear picture may emerge by year 2006. The representatives of some of the pre-1992 naphtha based as well as FO/LSHS based urea units expressed the view that even if LNG becomes available, switchover to LNG may not necessarily be a cheaper option considering the initial heavy capital investment as well as the supply prices indicated by the prospective suppliers of LNG. The projection made by the Ministry of P&NG with regard to the supply and demand for petroleum products and natural gas indicate that while the surplus availability of naphtha may increase from 1.0 MMT to 4.1 MMT during the 10th Plan Period, the deficit in respect of FO/LSHS may increase from 0.5 MMT to 5.6 MMT. In so far as LNG is concerned, the projections reveal that 3 to 4 LNG terminals, those at Dabhol, Dahej and Hazira are under construction, out of 15 which have been sanctioned, and the one at Cochin can be considered to belong to the mature category. The Dabhol terminal is expected to commence market gas sales from 2004-05 onwards. The other terminals appear to be doubtful starters. On the assumption that 3 to 4 terminals will get commissioned during the 10th Plan Period, it has been assessed that the overall potential for imports of LNG would be in the range of 40 to 50 MMSCMD by the terminal year

of the 10th Plan. An important observation made by the Ministry of P&NG is as follows: “The critical requirement of successful implementation of LNG projects is the identification and aggregation of linked bankable projects which can pay for expensive LNG on long term basis. Hence, existence of a robust market is a pre-requisite for LNG imports. In India, since power sector would be the anchor market for LNG terminals, the present structure and pricing/tariff of the Indian electricity sector may have dampened the efforts to create new power generation capacity and thereby the demand for fuel. Under this scenario the outlook for various LNG initiatives at this stage is difficult to establish”. (Source: Para 8.5.8 of „Report of the Working Group on Petroleum and Natural Gas for the Tenth Five Year Plan, Government of India, Planning Commission‟) The projected demand-supply position of natural gas at the end of the 10th Plan almost balances at the level of supplies in the range of 140-145 MMSCMD which are inclusive of LNG supplies (50 MMSCMD) and commencement of the pipeline gas imports (10 MMSCMD). Further, most of the incremental domestic supplies are expected, not from ONGC and OIL, but from the fields/discoveries of private and joint venture companies. There are recent reports about discoveries of large reserves of natural gas in the Godavari basin, but their authenticity is not yet known. It is possibly in view of the above that the Govt. of India O.M. on pricing policy for urea units dated 30.1.2003 stipulates that the modalities of Stage-III would be worked out after review of the implementation of Stage-I and Stage-II. The Committee is of the view that the Government should announce the broad features of the policy for the Stage-III at the earliest, as the industry, especially the FO/LSHS based units, have to make substantial capital investment, if they decide to switch over to LNG. While the construction of LNG terminals would no doubt be a critical factor, bankable projects for LNG would be an important pre-requisite for LNG imports for which the initiative has to come from the industry. However, the industry can

legitimately expect the announcement of the policy well in time to enable it to take such initiative. The assumption with regard to imports of natural gas through the pipeline may not materialize. It is, therefore, suggested that the Government may announce its policy for the Stage-III by 1.1.2004, by which time a clear picture should emerge about availability, pricing etc. of LNG/NG, so that the industry may initiate necessary steps to come up with bankable projects, based on its commercial judgment. It is not clear as to why the power sector is considered to be anchor market for LNG by the Ministry of Petroleum & Natural Gas. The fertilizer sector too, is an important player. It would be advisable to ascertain the logic behind this perception and see that the fertilizer industry‟s case does not go by default. XI. ENERGY LEVEL BENCHMARKING (BEYOND STAGE-II) In fixing the preset energy level for each group for Stage-II, the Committee has considered the weighted average group energy consumption level (excluding outliers) arrived at on the basis of the actual operating data of the urea units in each group pertaining to the last three years (i.e., 1999-2000 to 2001-02). For benchmarking, it is recommended that the lowest weighted average energy consumption level attained by a urea unit in each group in the above 3 years‟ be considered as target energy norm beyond Stage-II for all the units in that group. The Committee recommends that the urea industry should aspire to achieve these target energy figures as a benchmark of efficiency. However, the benefits that accrue to the urea units as a result of higher efficiency due to capital investment should not be mopped up and the urea units in each group should continue to get the concession rates based upon the energy norms fixed for the group under Stage-II.

To achieve the benchmark energy norms, the existing urea units will have to carry out extensive modification/revamp involving considerable investments and import of equipment. The Committee notes that the new policy of the Government allows the industry to retain the gains in operational efficiency that accrue to the units due to capital investments etc. This should enable the units to attain the most efficient energy consumption level attained by a urea unit in each group in the three years‟ considered above. It was brought to the notice of the Committee that financial institutions are unwilling to entertain proposals for substantial capital investments in the fertilizer industry in the absence of clear-cut and well-defined long term policy for the fertilizer sector. The Committee would urge the Government to come out with such a policy at the earliest. The Committee recommends following target energy figures beyond Stage-II for each group: Group Lowest energy in the group (3 years’ weighted average energy consumption excluding outliers) (Gcal/MT urea) Target Energy levels recommended (Gcal/MT urea) Group-I 5.83935 5.84 Group-II 5.49325 5.49 Group-IIIA 7.35303 7.35 Group-IIIB 5.81048 5.81 Group-IV 9.96856 9.97 Group-V 6.71407 6.71

The targets recommended above are in the nature of milestones to be reached at the end of Stage-II. However, in view of the Government‟s decision neither to take cognizance of capital investments made by the units nor to mop up the gains that accrue to them from such investments, the targets may appear to be irrelevant. On the relevance or propriety of indicating these targets, it could be stated that these are relevant in the larger macro-economic context and especially in view of the increasing importance being attached to the conservation and efficient use of energy in the country. In fact, very recently, the Energy Conservation Act, 2001 (No. 52 of 2001) has come into force. The Energy Conservation Act, 2001 is relevant for the fertilizer industry on account of the following provisions it contains: (i) The fertilizer industry is included in the schedule appended to the Act, which gives the list of energy intensive industries and other establishments specified as “designated consumers”. (ii) The Central Government shall appoint the Bureau of Energy Efficiency by a notification which will act as the eyes and ears of the Central Government and enable the latter to discharge its responsibilities under the Act. (iii) The Central Government is authorized inter-alia, under the Act (a) to establish and prescribe such energy consumption norms and standards for different designated consumers having regard to such factors as may be prescribed (Section 14-g), (b) to direct the energy intensive industries included in the schedule to get energy audit conducted by an accredited energy auditor in such manner and intervals of time as may be specified by regulation (Section 14-h),

(c) to direct any designated consumer to furnish to the designated agency (any agency designated to coordinate, regulate and enforce provisions of the Act within the concerned State) the information with regard to energy consumed and action taken on the recommendation of the accredited energy auditor, and, (d) to direct any designated consumer to designate or appoint energy manager in-charge of activities for efficient use of energy and its conservation and also submit a report at the end of the financial year to the designated agency. The fertilizer industry would therefore, be very much subjected to the directions and control of the Central Government in matters relating to energy conservation and efficient use of energy. The targets that have been indicated would therefore be relevant as milestones on the road to achieve the national goal of energy conservation, notwithstanding the treatment these may receive under the pricing formula. XII. RECOMMENDATIONS To recapitulate in a nutshell, the Committee recommends the following: a) Stages The Committee has considered the following stages for its recommendations: I. Stage-I – 1.4.2003 to 31.3.2004 II. Stage-II – 1.4.2004 to 31.3.2006 III. Stage-III – 1.4.2006 onwards. b) Grouping of Plants Existing urea units shall be grouped into the following six groups based on feedstock and vintage:

i) Pre - 92 Gas based plants ii) Post - 92 Gas based plants iii) Pre - 92 Naphtha based plants iv) Post -92 Naphtha based plants v) FO/LSHS based plants vi) Mixed Energy based plants In case consumption of alternative feedstock/fuel in a gas based unit exceeds 25%, the classification of the unit should be shifted from gas based to the mixed energy group until the mix again changes warranting its inclusion in the gas based group. Likewise, the classification of a unit in the mixed energy group may also undergo similar change. This exercise should be undertaken on an annual basis. c) Pre-set Energy Levels for Stage-I No recommendations on any efficiency norms for various groups during this Stage are made. The FICC should calculate escalation/de-escalation in the variable cost for all the urea units for Stage-I on the pattern of the current practice under RPS. d) Pre-set Energy Levels for Stage-II The following pre-set energy levels at Stage-II for each group have been recommended based on weighted average group consumption figures of energy (excluding outliers) for the last 3 years (i.e., 1999-2000 to 2001-02): Group Energy levels for Stage-II (Gcal/MT Urea)

Group-I 6.07 Group-II 5.80 Group-IIIA 7.77 Group-IIIB 6.21 Group-IV 10.07 Group-V 7.10 For outlier plants on the higher side in the relevant groups, the Committee recommends a separate treatment for the first year of Stage-II (i.e., 1.4.2004 to 31.3.2005) in order to prepare them to attain the efficiency driven group energy consumption norms. It is therefore, recommended that the specific energy consumption norms for these outlier plants for the first year of Stage-II should be the same as considered by the FICC in respect of these units for the 8th pricing period and thereafter respective group energy norms would be made applicable in respect of these outlier units also. However, the specific energy consumption norm for both the years of Stage-II for GNFC, Bharuch, which is an outlier on the lower side in the FO/LSHS group, should be the same as considered by the FICC for the 8th pricing period in order to avoid any undue gain to it in adopting the principle of group energy consumption norm for the outlier plants in the second year of Stage-II. The concession rates for the urea units for Stage-II may be reworked by the FICC taking into account the recommended pre-set energy norms for Stage- II. In order to reward efficiency in energy consumption as also to offer incentive to all urea units to attain the pre-set levels of energy consumption in each group during Stage-II, the pre-set group energy consumption norms may be taken for all the urea units in the group, excluding the outliers (which have been dealt with in the preceding paragraph) irrespective of their individual energy consumption

level, for working out base concession for Stage-II as well as for escalation/de- escalation. e) Raw material mix of inputs The recommendations are as follows: (i) In case of three plants in group-IIIA, namely, SFC-Kota, IFFCO-Phulpur-I and DIL-Kanpur, their energy consumption and raw material mix as recognized for 8th pricing period should continue to be recognized even in Stage-II so that these units do not suffer either undue loss or get undue benefit; (ii) In respect of other units in group III A as well as all units in other groups, within the recommended group energy consumption norm, the actual raw material mix of each unit should be taken while working out base concession as well as escalation/de-escalation. Any change in the raw material mix of each unit should be continuously monitored by the FICC and adjusted on annual basis. f) Mechanism For Computation Of Escalation/ De-escalation Escalation/de-escalation in respect of variation in the prices of some components of the variable cost namely feedstock, fuel and purchased power only may be worked out based on pre-set specific energy consumption of the group on a quarterly basis and should be linked to the actual cost, of inputs net of sales tax, for each unit for first year of Stage-II. The sales tax on inputs should be calculated and paid separately to each unit on actual basis. The Committee recommends that escalation/de-escalation in respect of feedstock/fuel should be determined on the basis of existing methodology followed by the FICC for the first year of Stage-II. The Committee feels that it should be possible to take a final decision with regard to the formula for escalation/de-escalation based either on import

parity price or the refined Wholesale Price Index before the end of the first year of Stage-II and the Government may accordingly take appropriate decision on this after in-depth study of the matter. g) Switchover of non-gas based units to Gas/LNG in Stage-III The Committee does not have any specific recommendation to make about Stage-III because of the uncertainty prevailing about availability, pricing etc. of LNG/NG. It is suggested that the Government may announce its policy for Stage-III by 1.1.2004, by which time a clear picture should emerge about availability, pricing etc. of LNG/NG so that the industry may initiate necessary steps to come up with bankable projects, based on its commercial judgment. h) Energy Level Benchmarking (Beyond Stage-II) The lowest weighted average energy consumption level attained by a urea unit in each group in the 3 year period i.e., 1999-2000 to 2001-02 be considered as target energy norm beyond Stage-II for all the units in that group. The Committee recommends that the urea industry should aspire to achieve these target energy figures as a benchmark of efficiency. However, the benefits that accrue to the urea units as a result of higher efficiency due to capital investment shall not be mopped up and the urea units in each group should continue to get the energy figures fixed for the group under Stage-II. The Committee recommends following target energy figures beyond Stage-II for each group: Group Target Energy levels (Gcal/MT urea) Group-I 5.84 Group-II 5.49 Group-IIIA 7.35

Group-IIIB 5.81 Group-IV 9.97 Group-V 6.71 The Committee feels that these targets are relevant as milestones to achieving the national goal of energy conservation as enshrined in the Energy Conservation Act, 2001. i) General Recommendation Whereas, the Committee has taken every care to analyze the various issues related to its terms of reference, it realizes that the calculation of concession to be paid to the urea units in different groups during Stages-I and II is a complex exercise and may involve consideration and calculation of innumerable factors which it has not been possible to cover in this Report. It is, therefore, suggested that in case of any anomaly or any calculation not specifically recommended in or covered by the Report, the FICC, in consultation with the Department of Fertilizers may take appropriate decision in the matter. (Pratap Narayan) (C. Ramaswamy) (G.B. Purohit) Member Member Member (V.K. Bali) (R.N.Choubey) (Manoj Kumar) Member Member Member Secretary

(A.V. Gokak) Chairman ***

Chairman’s comments on certain issues raised by two members I have gone through the dissenting note (enclosed), which was received on 2nd May, 2003 from Shri R.N. Choube, who was earlier a member of the Committee, in his capacity as Joint Secretary (Plan Finance-II), Department of Expenditure. It may be emphasized that the draft report of the Committee was circulated to the members earlier on 31.1.2003, much in advance of the next meeting on 14.2.2003 and the last meeting on 12th March., 2003. Neither any written comments were received nor was the meeting attended by Shri R.N. Choubey or his successor. I wish either Shri Choube or his successor had attended the meeting as it would have facilitated a better appreciation of every body‟s point of view at the final stage of deliberations. I have given careful consideration to the points raised by Shri Choube. In fact, most of the points raised by him were discussed in the course of the Committee‟s deliberations. The basic thrust of Shri Choube‟s note appears to be that if actual consumption is below the norms proposed by the Committee, the actuals should be recognized as otherwise it would lead to inefficiency and no reduction in subsidy due to unintended benefit accruing to such units. I would like to deal with this major issue first before dealing with the specific points raised in his note. In this context, the merits and demerits of pricing, based on both normative basis or actual cost basis have to be considered. The former has the advantage of increasing efficiency as any improvement over norm improves profitability, and discouraging inefficient performance, as the same results in lower profitability or even loss. Pricing on actual cost basis, however, does not offer any incentive for improved performance (as gains get mopped up) nor discourages inefficient performance due to recognition of actual cost. The concept of recognizing norm or actual, whichever is lower, conveys a wrong signal to the units that it does not pay to improve performance. Even ERC, which brought in the Group Pricing Concept, recommended a common norm for its

calculation and did not envisage recognition of actual or norm, whichever is lower. In a normative system, it is inherent that once the norm is fixed on a reasonable efficiency level, more efficient units are rewarded by better profitability while inefficient units are penalized by way of lower profitability or even loss. Another important consideration is that, under normative pricing mechanism, it has to be taken as a package; while there may be advantage under certain items, there is also disadvantage under certain other items and the loss and gain have to be taken together. If only gain under certain items is taken, ignoring loss under certain other items, it renders administered pricing mechanism irrational and un-remunerative to the industry. The points raised above become all the more relevant when a conscious effort is made to move away from individual unit based retention pricing scheme to a group pricing scheme. On this major issue, I have not been able to pursuade myself to the point of view expressed by Shri Choube. I now come to the specific points raised by Shri Choube. (I) Annual Review of Consumption Pattern: Shri Choube has opposed the recommendation of the Committee to annually review the placement of an individual unit in a particular group de

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