Ind-Ra: Coal Price Hike to Pressure Margins & PLFs of Power Generators

The 13% to 19% hike in the base prices of lower grade coal (G6 to G17) by Coal India (CIL) this week will negatively impact the ailing thermal power generators in India and result in a shift to imported coal from domestic coal, especially for the coastal power plants, says India Ratings and Research (Ind-Ra). Ind-Ra believes this will squeeze thermal power generators operating margins, since they will need to absorb some of the increase in costs. Ind-Ra opines that some generators may be forced to reduce their plant load factors in order to cut losses.

Prices of the most consumed varieties of G11 to G13 grade coal will move up by INR100/t-INR150/t, translating into an increase of around eight paise per kWh. This comes over and above the INR300/t increase caused by the clean energy cess since 2015 and the recent increase in royalty to 18% from 14%.

Ind-Ra estimates that post the increase in domestic coal prices by CIL, domestic coal will cost around 5.75% more compared to imported coal for coastal plants on an average. The higher cost may cause many of these plants to shift their consumption to imported coal from domestic coal. Ind-Ra estimates, energy charge based on domestic coal at INR1.66 per kWh at FYE16, across a sample of power plants on the eastern and western coasts of India, which is around the same as the energy charge based on imported coal for coastal plants due to their proximity to ports. Around 10% of total coal consumed by the thermal power sector in India was imported in the last year.

On a Pan India basis (apart from coastal power plants), there exists an overhang in electric supply in the short term power market due to the paucity of long term Power Purchase Agreements for the last five years forcing power plants to supply power on a short term/merchant basis. The summer of 2016 has witnessed short term/merchant rates as low as INR1.6 per kWh on the power exchanges, which is barely sufficient to cover the variable expenses of these plants under the current cost scenario.

Considering the unfavourable demand-supply situation and the overall scenario for thermal power generators, it is unlikely that they will be able to pass on the full impact of this price rise to end consumers. Despite the negative impact of the price hike Ind-Ra believes it will not materially impact the credit profiles of large thermal power generators.

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