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7
November 2016
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Coal (The Total Investment & Insurance
Solutions)
The 60% rise
in imported coal prices (Richard Bay Index) between April and October 2016 is
likely to negatively impact the power sector value chain, says India Ratings
and Research (Ind-Ra).
In a
research note, Ind-Ra says, "The increase in imported coal prices was more
pronounced in October 2016, where prices rose by 25% to around $85 per tonne
from $68 per tonne in September 2016. The distribution companies (discoms),
independent power producers (IPPs) with non-escalable fuel cost, merchant IPP's
and ports relying on imported coal for the bulk of their volumes will face
volume and profitability pressures." The Total Investment & Insurance Solutions
According to
Ind-Ra, historically the ability of the distribution companies (discoms) 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 power purchase and fuel cost
adjustment (PPFCA), 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 PPFCA 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, the report says.
Ind-Ra
expects merchant IPP's, which sell power through the merchant route, to be
impacted significantly since the prices on the exchanges/bilateral trades have
not moved up at the same rate (2% mom, see figure below), 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, it says, the
viability of merchant IPPs on imported coal is doubtful in the current price
scenario. The Total Investment &
Insurance Solutions
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Coal Chart(The Total Investment & Insurance
Solutions)
According to
Ind-Ra the hike in fuel costs would be credit neutral for the 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/over-recovery, if any, on
the variable cost due to lower/better performance than the operating normative
parameters (station heat rate, auxiliary consumption) is likely to lead to a
higher level of absolute disincentives or incentives, respectively," it
added. The Total Investment &
Insurance Solutions
The overall
dependence of imported coal in India declined during FY16, as the output from
Coal India Ltd 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. The Total Investment & Insurance
Solutions
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| Coal Chart 2(The Total Investment & Insurance Solutions) |
Ind-Ra says
that 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/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, it added.
As per the
ratings agency, decline in coal costs, the stress on imported coal based plants
like Adani Power's 1980MW plant in Mundra and Tata Power Ltd's 4000MW plant in
Mundra under its subsidiary Coastal Gujarat Power Ltd 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," the research
note concluded.The Total Investment
& Insurance Solutions
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