Just one day after independent power producers (IPPs) in India cheered a presidential directive ordering Coal India to sign a 20-year fuel supply agreements with them, an overseas development ensured that the smile was wiped right off their faces.
In the latest blow, Indonesia, from where India imports coal that cannot be supplied by Coal India, decided to slap a 25 percent export duty on coal some other base metals. That’s on top of a hike in prices of its low-quality coal (imported by India) announced last year.
Now, it wants to impose an export duty of up to 50 percent on coal by 2013.
That’s bad news for Tata power and Reliance Power, which have planned large power projects based on the assumption that they would source coal from Indonesia.
Indonesia accounts for just 0.6 percent of the world's coal, but supplies 6 percent of total output, according to an Economic Times report.
That means they are depleting their reserves quite quickly, which is possibly the main reason behind the country’s decision to hike rates.
The dependence on imports arises because Coal India’s output has been flat for almost three years now and it is still struggling to ramp up coal production.
Even if it manages to push up production, the infrastructure, especially rail, to carry the coal to wherever it is required in the country is lacking.
That’s why Indian power producers need to seek out overseas mines for coal supplies.
Given the new developments in Indonesia, Indian companies owning coal mines in that country may no longer find it viable to import coal.
One option is that companies could sell coal in Indonesia itself and use that money to buy coal at spot sales (sales for immediate deliveries) or import the commodity from other places.
In that case, companies can hedge the extra cost of importing coal or buying coal at apot price (which is more expensive than buying coal through long term contracts) by selling coal from their mines overseas.
Overall, the conclusion is this: the viability for mega power projects might be under major threat due to Indonesia’s attempt to hike export duties.
The power plants had been expected to supply power to buyers for 25 years at a fixed rate of 2-2.50 per kilowatt per hour (kwh). That, however, is now below the cost of producing power.
A recent Fitch ratings report noted that if a project sources even 30 percent of its coal requirements from Indonesia, the cost of producing power will be Rs 2.93 per kwh.
Costs just seem to be soaring higher and higher for power producers. Unless power tariffs are brought in line, the country’s power supply ambitions could suffer a major blackout.