Though India has witnessed 60% rise in imported coal prices between April-October 2016, still it is likely to negatively impact the power sector value chain, a report said.

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India Ratings and Research (Ind-Ra) in a report said that with the decline in coal costs, the stress on the imported coal-based plants namely Adani Power’s 1980MW plant in Mundra and Tata Power Limited’s 4000MW plant in Mundra under its subsidiary Coastal Gujarat Power Limited had reduced, despite the absence of compensatory tariff.

However, with the prices of imported coal rising again and judgment awaited on the applicability of the force majeure clause in the power purchase agreement, the stress levels would start building up again on these generators with non-escalable fuel costs, the report said.

As per the report, the rise in imported coal prices was more in October, wherein the prices surged by 25% to around $85/t as compared to $68/t in September.

Distribution companies (discoms), independent power producers (IPPs) with non-escalable fuel cost, merchant IPP’s and ports relying on imported coal for the bulk of their volumes will face volume and profitability pressures, the report said. 

Vivek Jain, Associate Director, India Ratings and Research, in a report titled, 'Spurt in Imported Coal Prices to Negatively Impact the Power Value Chain', said that for discoms, historically, the ability of them to pass on fuel costs increases to the  end consumers has been limited and delayed due to the political intervention in the tariffs. 

The only way to pass-through such costs by the regulatory commissions is through power purchase and fuel cost adjustment (PPFCA), which is an uncontrollable expense for the discoms, Jain pointed out. 

According to the research agency, with an increase in coal imported prices, the merchant IPP's 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 (2% m-o-m). Thus, it will lead to a significant compression in their gross margins, which have fallen to zero last month. 

In FY16, the overall dependence of imported coal in the country declined on the back of output from Coal India Limited increased significantly over FY15. This has further lead to a 10% decline in the overall non-coking coal imports to 156.4 mt in the last fiscal. 

However, now with the rise in imported coal prices, the end-user industries, that are looking for alternative sources, which could pressurize imported coal volumes from these players. If, there is a scenario of power surplus with adequate domestic coal availability, the use of imported coal for the power generation purpose is likely to remain benign, the report said.