The rise in imported coal prices is likely to have a negative impact on the power sector value chain as higher rates create “volume and profitability pressures” on discoms that are not able to pass on fuel cost increase to end-consumers due to “political intervention”.
“The 60 per cent rise in imported coal prices between April-October 2016 is likely to negatively impact the power sector value chain,” Ind-Ra has said.
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 rating agency said.
The distribution companies, 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, it said in a statement.
“The increase in imported coal prices was more pronounced in October 2016, wherein prices rose by 25 per cent to around USD 85/t (tonne) from USD 68/t in September 2016,” it said.
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, it added.
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 rating agency said.
“Ind-Ra 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…as the rise in variable cost of generation (25%) in October 2016, on account of the imported coal price increases,” it said.
“Thus leading 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,” it added.