Pass-through of coal cost positive for IPPs: Nomura

Last week, the Cabinet approved a new coal supply mechanism to power producers wherein the entire additional cost of imports would be passed on to the consumers

The government’s recent decision to allow independent power producers to pass on the hike in the cost of imported coal to consumers would be positive for the industry, brokerage firm Nomura has said. The CCEA had last week approved a new coal supply mechanism to power producers, wherein the entire additional cost of imports would be passed on to the consumers.

“Although modalities will take time to be finalised and the fine-print therein needs to be examined, the measures are positive for the IPPs as they seek to mitigate fuel security risk for coal-fired projects,” Nomura said.

The move is positive for Coal India also as major IPPs are likely to opt to import coal themselves rather than routing the import through the PSU. “The 11 GW projects with tapering linkage stand to gain as they would be assured a base minimum domestic coal supply and ability to pass-through the higher cost of imported coal as well,” it said.

For CIL, the onus of supplying base minimum domestic coal under fuel supply agreement to an additional 18 GW capacity, is a risk, given production and offtake constraints, Nomura said. “On a positive note, CIL’s minimum domestic coal supply commitment under the new FSAs has been trimmed to 67 per cent in FY16 from 70 per cent pegged earlier. Although the measures impact only a few listed IPPs, it clearly signals government’s intent to make coal cost a pass-through in the upcoming revised standard bidding documents (SBDs) for both Case-I and Case-II