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Spurt in imported coal prices to negatively impact the power value chain: India Ratings.

Date: 08-11-2016
Subject: Spurt in imported coal prices to negatively impact the power value chain: India Ratings
KOLKATA: A 60% rise in imported coal prices between April and October 2016 is likely to negatively impact the power sector value chain, said India Ratings and Research.

Power distribution companies (discoms), independent power producers (IPPs) with non-escalable fuel cost, independent power producers and ports relying on imported coal for the bulk of their volumes will face volume and profitability pressures.

Increase in imported coal prices was more pronounced in October 2016, wherein prices rose by 25% to around $85 per tonne from $ 68 per tonne in September 2016.

Distribution companies’ ability to pass on fuel cost hike to end-consumers has been limited and delayed due to the political intervention in tariffs.

The regulatory commissions can allow a pass-through of such costs, by way of power purchase and fuel cost adjustment, since power purchase cost is an uncontrollable expense for the discoms. However, anecdotal evidence suggests that most state regulatory commissions have not allowed for such adjustments on an actual and timely basis, which has led to an escalation in the power purchase cost of discoms, without a commensurate increase in revenues.

Merchant power producers, which sell power through the merchant route, are likely to be impacted significantly since prices on the exchanges and bilateral trades have not moved up at the same rate, as the rise in variable cost of generation (25%) in October 2016, on account of the imported coal price increases. Thus leading to a significant compression in their gross margins, which have fallen to zero in October 2016. Hence the viability of merchant power producers on imported coal is doubtful in the current price scenario.

Impact on regulated power plants as a result of hike in fuel costs is likely to be credit neutral for the power generators, which operate their plants on the cost plus return on equity model. The plants running on cost plus return on equity model are allowed a complete pass-through of such costs to the consumers by way of monthly fuel cost adjustment in the bills, thus insulating these plants from any adverse movement in coal prices. However, with higher fuel costs, the impact of under-recovery or over-recovery, if any, on the variable cost due to lower or better performance than the operating normative parameters is likely to lead to a higher level of absolute disincentives or incentives respectively.

The overall dependence of imported coal in India declined during FY16, as the output from Coal India increased significantly over FY15 and FY16, leading to a 10% decline in the overall non-coking coal imports in India to 156.4mt in FY16. Ind-Ra notes, that the volume de-growth of non-coking coal wasn’t as sharp in FY16, despite the lower prices, because other end-user industries namely cement and non-ferrous metals found it cheaper to use imported coal to fire their kilns and boilers.

However, with the rise in prices of imported coal, these end-user industries are looking at alternative fuel sources, which could pressurise imported coal volumes from these players. Moreover, in a scenario of power surplus with adequate domestic coal availability, the use of imported coal for the power generation purpose is likely to remain benign.

Ind-Ra notes, that with the decline in coal costs for independent power producers with non-escalable fuel cost, the stress on the imported coal based plants namely Adani Power’s 1980MW plant in Mundra and Tata Power Limited’s 4000MW plant in Mundra under its subsidiary Coastal Gujarat Power Limited had reduced, despite the absence of compensatory tariff.

However, with the prices of imported coal rising again and judgement awaited on the applicability of the force majeure clause in the power purchase agreement, the stress levels would start building up again on these generators with non-escalable fuel costs.

Source : economictimes.indiatimes.com

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