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Revision In Coal Prices To Raise Power Procurement Costs: ICRA

Coal price hike announced by Coal India (CIL) is likely to result in a 6 paise per unit increase in power procurement cost for distribution companies

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Coal price hike announced by Coal India (CIL) is likely to result in a 6 paise per unit increase in power procurement cost for distribution companies.

"ICRA estimates that Coal price increase would result in an increase in cost of thermal generation by 9-10 paise per unit. Given that coal based generators with an automatic pass through of fuel costs account for about 60 per cent of the total power procured by discoms & assuming a partial pass-through by other IPPs with competitively bid PPAs which account for balance, this translates into about 6 paise per unit increase in power procurement cost for discoms", said Sabyasachi Majumdar, Senior Vice President, ICRA Ratings.

In turn, assuming the average AT &C loss level at around 25% in the country, we estimate the impact on cost of power supply per unit sold and retail tariffs (assuming full pass through by state regulators) at around 8 paisa per unit or 1.4 per cent tariff hike," added Majumdar.

Coal India Limited (CIL) issued a notification on May 29, 2016 revising the prices of pit head run of mine (ROM) prices of all grades of non-coking coal effective from midnight of May 30, 2016. The price of thermal grade coal for supply to power sector has been increased by about 15-18 per cent and this in turn is estimated to increase the cost of generation for coal based power plants by about 9-10 paise per unit, as per ICRA estimates.

Power generating companies (Gencos) / Independent Power Producers (IPPs) which have cost plus based PPAs would be able to pass on such increase in cost of fuel to their off-takers, which are mainly state owned distribution utilities.

For domestic coal based IPPs which have competitively bid based PPAs, the impact on the margins will be dependent on the extent of escalable energy charge component in the tariff structure.

From a distribution company (discom) perspective, ICRA notes that the increase in the price of coal by CIL is a negative development as this would increase its cost of power procurement and in turn, the overall cost of supply.

However, the state-wise extent of increase in cost of power supply and hence, in retail tariff for a distribution utility would be dependent upon the mix of coal based generation in its overall power procurement.

Given the increase in cost of power procurement, the ability of the discoms to pass on such variation to the consumers through timely tariff adjustment under the fuel and power purchase cost adjustment (FPPCA) framework remains important from their cash flow perspective. ICRA however notes that FPPCA has not been implemented in many of the key states, and in states where it has been implemented, there has been a significant lag in recovery of the same

"Despite the hike in domestic coal prices, power generation based on domestic coal still remains the cheapest source of power supply in India. ICRA is of the view that coal based generation will continue to remain the major source of power supply in the country in the foreseeable future to meet the base load power requirements, despite the growing share of renewable, which apart from being somewhat more expensive than domestic linkage coal based thermal generation, is also variable & intermittent in nature", said Majumdar.


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