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After the opposition to the earlier proposal of coal price-pooling, rejected by state electricity boards (SEBs) in April 2013, the latest move by the Cabinet Committee on Economic Affairs (CCEA) on coal supply and pricing has come as a big relief for the power generation sector. About 78,000 Mw of capacity will be impacted positively. While the move will lead to better coal availability, it also allows power generation companies to fully pass-on the higher costs of imported coal. Under the new plan, the entire cost of imported coal will be passed on to consumers once the amendments to the existing laws pertaining to power purchase agreements (PPAs) and fuel supply agreements (FSA) are made. Higher cost of imported coal is not permitted to be passed on under the present rate mechanism. Initial estimates suggest Lanco Infra, GMR, Adani Power and CESC, among others, will stand to gain from the new plan.
The cost of producing power from imported coal is almost Rs 2.6 per unit compared to Rs 0.8-2.5 per unit cost of power generated using domestic coal (costs depend on the location of the plant). Analyst estimates suggest the blended cost of power will increase by 15-40 paisa per unit if the new plan is implemented.
While the latest proposal will lead to higher costs for consumers, it will help increase coal availability and thus power output. Notably, it will also help improve the project viability as well as performance of companies which will now be able to operate at higher capacity (plant load factor or PLF). "The CERC tariff regulations provide for recovery of full capacity (fixed) charge at 85 per cent PLF subject to availability of plant along with availability of fuel," say an analyst. On achieving the same, companies will be able to adequately service their debt and earn healthy return ratios, all of which should also lead to better market sentiments.
The current situation is the result of lack of coal availability. But now, with domestic coal availability to be in excess of 65 per cent and the remaining 15 per cent plus to be met through imports, the overall availability will rise. Power projects commissioned post-FY09 and up to FY15 with installed capacity of 78,000 Mw will be given coal from Coal India under the FSA. Domestic coal supply by Coal India is expected to be at 65 per cent each (of requirement) in FY14 and FY15, 67 per cent in FY16 and 75 per cent for FY17. This, analysts believe, will significantly help power generation companies to scale up utilisation of their capacities and improve PLF. "We believe this is a definite positive for the power sector, especially for projects with Case 1 and Case 2 tariffs having limited room to pass on the increase in raw material cost due to CILs inability to meet the promised fuel requirements," said Shankar K of Edelweiss Securities in a note.
Among prominent companies, Adani Power's 1,424-Mw Mundra-III project and 1,320-Mw Tiroda project where FSAs are signed with CIL are expected to see some gains. Analysts also believe that Lanco Infratech could benefit because the company has, in the past, been looking for higher tariffs for its 300-Mw offtake by state utilities. Its Amarkantak facility is currently operating at 47 per cent PLF due to lack of coal. Due to the latest move, Lanco's profitability and cash flows should improve.
While analysts believe these initiatives could help companies improve their cash flows and ability to service debt, in terms of earnings they do not see immediate room for upgrades as that will depend on how these plans are finally implemented. Secondly, companies will have to individually seek increase in rates from the respective state regulators, and hence, the impact will differ on a case-to-case basis.
Their caution also stems from their fear that such initiatives could face hurdles from the consumers and distribution (SEBs) companies, especially as the country enters a general election year. Technically, SEBs may also choose not buy the excess high-cost power produced using imported coal.
