The 60 per cent jump in imported coal prices between April and October current financial year is likely to negatively impact the power sector value chain. The distribution companies (discoms), independent power producers (IPPs) with non-escalable fuel cost, merchant power producers and ports relying on imported coal for the bulk of their volumes will face volume and profitability pressures, research agency India Ratings has said.
The increase in imported coal prices was more pronounced in October 2016, where prices rose by 25 per cent to around $85 per tonne from $68 per tonne in September 2016.
“Anecdotal evidence suggests that most state regulatory commissions have not allowed for Power Purchase and Fuel Cost Adjustment (PPFCA) 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,” India Ratings said in a report.
Historically, the ability of the distribution companies to pass on fuel cost increases to the end-consumers has been limited and delayed due to the political intervention in the tariffs. The regulatory commissions can allow a pass-through of such costs, by way of PPFCA, since power purchase cost is an uncontrollable expense for the discoms.
Merchant IPP’s which sell power through the merchant route will be impacted significantly since the prices on the exchanges or bilateral trades have not moved up at the same rate as the rise in variable cost of generation in October 2016, on account of the imported coal price increases, the firm said. This will lead to a significant compression in their gross margins, which have fallen to zero in October 2016. Hence, the viability of merchant IPPs on imported coal is doubtful in the current price scenario.
REGULATED POWER PLANTS
The research firm also said it expects the hike in fuel costs to be credit neutral for power generators which operate their plants on the cost plus return on equity (ROE) model. The plants running on cost plus ROE are allowed a complete pass-through of such costs to the consumers by way of the 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 including station heat rate and auxiliary consumption is likely to lead to a higher level of absolute disincentives or incentives respectively.
IMPACT ON COAL IMPORTS
The overall dependence of imported coal in India declined during 2015-16 as the output from Coal India Limited increased significantly over 2014-15 and 2015-16, leading to a 10 per cent decline in the overall non-coking coal imports in India to 156.4 million tonne last fiscal. “The volume de-growth of non-coking coal was not 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 or 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 power generation is likely to remain benign,” the report said.
IMPACT ON IPPs WITH NON-ESCALABLE FUEL COST
With the decline in coal costs, the stress on the imported coal-based plants namely Adani Power’s 1980 Megawatt plant in Mundra and Tata Power Limited’s 4,000 MW 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. Samaje Perine Authentic JerseyShare This