HOME > BUSINESS > Coal block de-allocation could hit some power projects, metal cos – Crisil

Coal block de-allocation could hit some power projects, metal cos – Crisil

The deallocation of coal blocks by the Supreme Court will hit metal players harder than most power players, Crisil Research said in a report. Power costs in West Bengal and Punjab could rise, it added.

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It said power generation companies will be able to pass through increased costs, but not metal companies. Coal is used in producing power and in smelting metals from their ore, for example in iron and steel.

“(Metal) players who have operational coal blocks will witness a sharp decline in profitability post 2014-15, as they would have to substitute captive coal with imported coal which is about four times more expensive (as Coal India may not supply domestic coal to these players given its FSA commitments to the power sector). In 2015-16, impacted players in the sponge iron and aluminum sectors are expected to witness a 900-1,000 bps and 300-400 bps decline, respectively, in operating profitability,” it said.

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There are around 7-8 gigawatts of power generation capacity linked to the deallocated operational coal blocks, said Crisil.

The impact “will be limited as these operate under a fixed return model. Moreover, we expect alternate domestic coal supply (albeit at a higher price as compared to captive coal) to be provided to these projects as most of these are operated by state owned utilities.

“We expect the power purchase cost for utilities to rise, particularly in West Bengal and Punjab, where it would increase by Rs. 0.5-0.8 per unit given that a these plants account for a large share of power purchase. However, at a pan-India level, we expect the impact to be negligible as these plants account for less than 5 per cent share of total generation,” it added.

However, for non-pass through projects that were won after competitive bidding based on lowest tariffs, this move by the Supreme Court could have a large impact.

“Projects of GVK Power and Essar Power, whose coal blocks are under development, will take a hit. These projects have been competitively bid and have a limited scope for passing on fuel costs in their power purchase agreements (PPAs). This will restrict their ability to use expensive imported coal.

“Moreover, the above power projects have either commissioned or are expected to be commissioned over the next few months. In the absence of an alternative coal linkage, we believe that these projects will operate at low plant load factors (PLFs),” it said.

coal-block-deallocation

From April 1, 2015 onwards, all operational coal blocks will be taken over by the government, which will re-auction them through a competitive bidding process. Till the fresh auctions are completed, these blocks are likely to be operated by Coal India Ltd.

“We expect players whose blocks are de-allocated to bid aggressively to retain their blocks, given the operational advantages such as proximity to end-use plants, quality of coal and consequent equipment configuration. Moreover, competition from other players operating in the vicinity of these blocks will also be very high as these are operational mines and the cost of imported coal is also higher. Consequently, the extent of impact on profitability of end-users, post auctions will be dependent on their ability to retain blocks and the price paid for them.”

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