Coal news and updates

The 60 percent rise in imported coal prices (Richard Bay Index) between April-October 2016 is likely to negatively impact the power sector value chain, says India Ratings and Research.

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

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

India Ratings notes, that historically the ability of the 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.

India Ratings expects merchant IPPs, 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 percent month-on-month), as the rise in variable cost of generation (25 percent ) 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.

Source: Bloomberg