Coal price hike may not increase power tariff for consumers, but input cost for industry may rise

Coal prices were hiked by CIL on May 30.

The increase in prices of coal by India's largest miner, Coal India Limited (CIL), is likely to have little to no impact on consumers directly as most power plants do not use the high-grade coal for which the prices have been increased, experts told Moneycontrol on May 31.

However, the revised coal prices may be a cause of worry for energy-guzzling sectors like cement, aluminum, and steel among other commodities which use high-grade coal and may face higher input costs, experts said. They may be forced to increase prices and if they are not able to do so, they may witness a squeeze on margins.

CIL hiked the prices of its high-grade coal by 8 percent owing to an increase in the wages of its non-executive staff, which constitute nearly 94 percent of the Central PSU's workforce. The prices have been increased for coal grades ranging from G2 to G10, which is considered high-quality fuel. The revised coal costs came into effect on May 31.

Contrary to common perception, the hike in coal price may not necessarily result in a steep hike in power tariffs, according to experts. "As the coal supplied to the power sector is generally of a lower calorific value, typically below 4200 kcal/kg, this price increase is unlikely to have any major impact on the electricity tariffs," said Vikram V, vice president, and sector head, Corporate Ratings, ICRA Limited.

But, a few thermal power plants could be impacted with a 6-7 paise per unit increase in their generation cost. High-grade coal production is limited to CIl subsidiaries such as Bharat Coking Coal Limited (BCCL) and Central Coalfields Limited (CCL).

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"Nonetheless, for power plants using high calorific value coal say of 4400 kcal/kg, the increase in cost of generation is estimated to be 6-7 paise per unit," he said.

To be sure, electricity is a concurrent subject in India because of which power tariffs of every state is decided by the state electricity regulatory commissions. Also, besides coal or fuel cost, there are several other reasons that go into increasing power tariffs in a state or union territory. Such reasons may include accumulated regulatory assets, increased capex, transmission and distribution losses and so on.

M. Arun Kumar, Partner, Induslaw, said the price hike by CIL is for high-grade coal which is primarily used in the cement and metal industries. "With the increase in input cost, we may see a price rise in cement, aluminum, and steel. This increase could impact a wide range of sectors such as infrastructure, construction, automotive and manufacturing sectors," he said.

"The prices of coal (i.e. low-grade coal) which are generally used in thermal power plants remain unchanged and therefore, the fear of an increase in electricity tariff, that is typically passed on to end consumers, is allayed," Kumar said.

He further said that the coal price hike will help CIL  increase its earnings to meet its costs and expenses, especially since there has been no increase since 2018, compelling CIL to absorb the cost of inflation and post-pandemic surge in demand and development of core sectors.

CIL is expecting to earn a revenue of Rs 2703 crore for the balance period of the financial year 2023-24 and all add-ons would be as per the extant practice. This is likely to offset the burden of nearly Rs 6,000 crore on CIL to some extent which has been added due to the wage revision.

According to ICICI Securities, the price hike, though inadequate to cover the entire wage hike, will mitigate almost 50 percent of the impact. "As per our
checks, CIL sells almost 80 percent of its coal in G7-G12 grades, hence the benefit to CIL is expected to be substantial. CIL's management has indicated incremental revenue of Rs27.03 billion for the balance period of FY24. As per our analysis, this equates to a hike of 2.2 percent for the entire volume of coal to be sold in FY24," the domestic brokerage said in its report dated May 31.

The brokerage raised its FY24/FY25E earnings per share (EPS) for CIL by 10.5 percent-11 percent.

"However, we do not expect most power plants to be impacted as they take lower grades of coal. That said, sponge iron and other players in non-regulated sectors are likely to be adversely impacted," it stated.

Prior to the May 30, 2023, coal price revision announcement, notified coal prices were revised by CIL in January 2018. The increase back then was effectively 11 percent. For 2025-26, the PSU has set a production target of 1 billion tonnes.