India power regulator proposes to cut Australian impact on imported coal price index

India's power regulator Central Electricity Regulatory Commission wants to prioritize Indonesian coal prices over Australian coal rates in the composite index that is used to calculate the impact of imported coal prices on electricity tariffs, according to a discussion paper released by the statutory body, which was reviewed by S&P Global Commodity Insights.

CERC has asked stakeholders to submit their feedback on the methodology proposal by June 30.

India's composite index for imported coal was last revised in 2013, when 50% weightage was ascribed to Indonesian coal prices while South African and Australian coal prices each carried 25% weightage.

CERC has now proposed to increase the share of Indonesian coal prices in the composite index to 65% and bring down the weightage of Australian coal prices to 10%.

The power regulator suggested that price indices for 5,000 kcal/kg GAR grade coal, published by Platts and Argus/CoalIndo, should each hold an equal share in the overall weightage of Indonesian coal prices while calculating the Indian composite index.

Consequently, the share of FOB Kalimantan 5,000 kcal/kg GAR index assessed by Platts, part of S&P Global Commodity Insights, will increase to 32.5% in the composite index from 25%.

While the 2013 composite index considered the FOB Newcastle 6,000 kcal/kg NAR price assessed by GlobalCoal for Australian imports, CERC has proposed to substitute it with the price indices for FOB Newcastle 5,500 kcal/kg NAR coal assessed by Platts and Argus/McCloskey, each carrying a 5% weightage.

"These indices represent lower-CV coal, which is more representative for imports into India, and are being used as reference prices for coal contracts," CERC said.

The reduced weightage of Australian prices reflects the lower share of Australian coal in the Indian thermal coal import basket, CERC pointed out. Most of the Australian coal imports to India comprise of metallurgical coal.

"The availability of credible and reliable coal price indices, which represent steam coal imports in India, has also improved over the years," CERC noted, while emphasizing the need for reviewing the methodology for the composite index.

The FOB Newcastle 5,500 kcal/kg NAR price indices were launched by Platts and Argus/McCloskey in 2012, and historical data of both these indices is now available, the regulator stated.

CERC suggested retaining the weightage of South African coal prices in the composite index at 25%. However, the price yardstick for this coal will now be based on the 5,500 kcal/kg NAR grade assessed by Argus/McCloskey, instead of the 6,000 kcal/kg NAR benchmark assessed by the same agency, which was used since 2013.

"The calorific values shall be harmonized across indices by normalizing for 5,000 kcal/kg and assuming a linear trend across indices of different calorific values of coal," the CERC discussion paper said.

Impact of imports

The composite index is used for computing the escalation rate for imported coal and to appropriately gauge its impact on the Indian power sector.

Out of the 205.24 GW of installed coal-fired power generation capacity in India, around 17.9 GW is designed specifically to run on imported coal, while 162 GW runs on a mix of imported and domestic coal.

India's coal imports fell 12.23% year on year to 19.66 million mt in March, federal commerce ministry data showed May 15. However, imports in the financial year 2022-23 (April-March) increased 13.92% on the year to 237.67 million mt.

Indonesia was India's top coal supplier in financial year 2022-23, with imports surging more than 51% on the year to around 110 million mt. Imports from Australia in that period fell 29% year on year to 47.50 million mt while supplies from South Africa fell about 32% on the year to 17.45 million mt.

India's coal import costs surged nearly 57% on the year over the financial year to above $48 billion, commerce ministry data showed.

Global thermal coal prices were at elevated levels over March-October 2022 due to the Russia -Ukraine conflict, which disrupted trade flows as Europe cut its reliance on Russian imports. The disruption led to India importing less from its traditional sources like Australia and South Africa, as procurements increased from Mozambique, Canada and Colombia, mainly to cut import expenditure.

S&P Global Commodity Insights recently reported that India's federal power ministry has directed all imported coal-based projects to generate power at full capacity till Sept. 30.

The ministry had previously urged all power plants in the country to start planning for thermal coal imports to meet 6% of their requirements and to ensure adequate fuel stock availability at least till September.