Nomura research :: India Power Utilities & Coal -Govt moves to ease coal security risk for IPPs

What’s new: Government alters rules relating to linkage coal supply
and pass-thru of imported coal cost by power producers
The Cabinet Committee on Economic Affairs (CCEA) has approved a
new coal supply mechanism to power producers wherein:
 Generation capacity (projects commissioned post FY09 up to FY15)
eligible to get coal under Fuel Supply Agreements (FSAs) with Coal
India (CIL) has been widened to 78GW (including cases of tapering
linkage) from 60GW previously
 In the FSAs for the 78GW capacity, domestic coal availability from
CIL as a proportion of the Annual Contracted Quantity (ACQ) has
been pegged at 65% for FY14 and FY15, 67% for FY16 and 75% for
FY17.
 To fulfil the balance supply obligation under the FSAs, power
producers can source imported coal from CIL on a cost-plus basis or
import coal themselves. The higher cost of such imported coal
would be considered for pass-thru as per modalities suggested by
the central electricity regulator (CERC).
 Accordingly, the Ministry of Coal (MoC) and Ministry of Power (MoP)
would issue advisory and modify requisite Acts/Policies and bidding
guidelines to enable the electricity regulators to decide upon the
pass-thru of higher cost of imported coal on case-by-case basis.
 Subject to coal availability, Government would explore options to
supply coal to 4660MW capacity and other similar cases which do
not have any coal linkage but are likely to be commissioned within
FY15, have long-term PPAs and ‘high bank exposure’.
Implications for the overall power sector value chain…
 Although modalities will take time to be finalized 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, in our
view.
 Upon implementation, the likely obvious rise in wholesale power tariffs
would put pressure on distribution companies (discoms) to raise retail
tariffs and/or seek higher subsidy from the respective State
Government. We do note that if directives are complied with, discoms
are mandated to have a mechanism to pass-thru fuel-cost adjustments
in cost of power to the consumers periodically.
 What next – The MoC and MoP would move to modify the relevant
Acts/Policies via notifications (does not require parliament approval, in
our view). Thereafter, power producers can approach the regulator
seeking alteration in tariffs. Each petition would be examined on a
case-by-case basis, with CERC’s stipulated modalities would form the
basis of extent of the pass-thru of incremental coal cost.

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Specifically, our views on each of the above measures –
Expanding the list of projects eligible to sign FSAs with CIL from
60GW to 78GW…
 We understand that the incremental 18GW capacity deemed eligible to
sign FSAs with CIL includes ~11GW capacity with tapering linkage.
Our interaction with CIL suggests that operational capacity within this
~11GW capacity is partially being supplied coal.
 Nevertheless, the ~11GW projects with tapering linkage stand to gain
as they would be assured a base minimum domestic coal supply and
ability to pass-thru the higher cost of imported coal as well.
 Within our power utilities coverage universe Adani Power (ADANI IN,
Reduce) stands to benefit in respect of securing coal via its 3.3mtpa
tapering coal linkage for Tiroda-I.
 For CIL, the onus of supplying base minimum domestic coal under
FSAs to an additional 18GW capacity (provided the projects come on
stream and sign up offtake under long-term PPAs) is a risk, given
production/offtake constraints. On a positive note, CIL’s minimum
domestic coal supply commitment under the new FSAs has been
trimmed to 67% in FY16 (hitherto pegged at 70%)
Allowing power producers to import coal themselves to make up
for domestic coal supply shortfall in FSAs…
 Arguably, a positive for CIL as this would likely reduce the onus to
import coal, as major IPPs are likely to opt to import coal themselves,
in our view.
Enabling pass-thru of higher cost of imported coal secured to meet
shortfall in FSAs coal supply….
 Benefits linkage-coal-based capacity where offtake is tied up in longterm PPAs via Case-I bids wherein fuel cost is not a pass-thru / or only
a partial pass-thru
 “To meet balance supply obligations under FSAs” suggests power
producers may secure imported for the entire shortfall i.e. up to the
FSA quantity and not 80% of ACQ (minimum guaranteed quantity to
be supplied by CIL currently under the new FSAs).
 It follows that effectively, [1] CIL would guarantee domestic coal supply
which enable utilization level of 55% in FY14/FY15, 57% in FY16 and
64% in FY17. [2] Power producers can seek price pass thru for
imported coal required to enable overall utilization at 85% (level for
which the FSA quantity is pegged).
 There is no impact on capacity wherein offtake is tied up under costplus models or Case-II bids where fuel cost is a pass thru.
 Within our power utilities coverage universe Adani Power (ADANI IN,
Reduce) stands to benefit the most in respect of [1] 1424MW PPA with
Haryana from its Mundra-III facility which has an FSA for 6.4mtpa coal
and wherein Case-I bid-based levelized PPA tariff is INR2.94/kWh),
and [2] 1320MW PPA with Maharashtra from its Tiroda-I facility which
has an FSA for 4.2mtpa coal (excluding tapering linkage) and wherein
Case-I bid-based levelized PPA tariff is INR2.64/kWh).
 This development would also support the case of Lanco Infratech
(LANCI IN, Buy) which is seeking revised tariffs for its 300MW offtake
tie-up with Haryana/Chhattisgarh and resume generation from its
Amarkantak facility (Unit-2)
Considering coal supply to 4660MW capacity which does not have
any coal linkage…
 In our view, this measure signals a potential ‘cutting through the
queue’ for securing linkage coal. However, given CIL’s domestic coal
production/offtake constraints, the phrase “supply subject to coal availability” does render the probability of this 4660MW capacity
getting coal by FY15 fairly remote.
 In our view, the 4660MW capacity would potentially include 2640MW
of Adani Power (1320MW at Tiroda-II and 1320MW at Kawai). It
follows that should coal supply under this measure is made available
by the Government, Adani Power stands to be the biggest potential
beneficiary.
In summary, measures send a positive signal for the sector…
 In our view, widening of the eligible capacity to secure linkage coal in
tandem with allowing IPPs to make up for linkage coal shortfall
themselves and pass on the incremental cost in tariffs is a positive
move to augment electricity generation.
 Although the measures impact only a few listed IPPs, it clearly signals
Government’s intent to make coal cost a pass-thru in the upcoming
revised Standard Bidding Documents (SBDs) for both Case-I and
Case-II projects.
 Within our coverage universe, and perhaps in the entire power utilities
space, Adani Power is clearly the biggest potential beneficiary of these
measures.