CERC moots revised index for escalation rate of imported coal

The Central Electricity Regulatory Commission (CERC) has proposed a review of the composite index used in calculating the escalation rate of imported coal, a critical link in bid evaluation and payments.

“It has been more than a decade now since the revision in the composite index for imported coal was done in 2013. There have been many developments in international coal markets and the quantum of steam coal imports in India. Availability of credible and reliable coal price indices, which represent steam coal imports, has also improved over the years,” CERC said.

The regulator suggested an analysis of steam coal imports, trends in coal prices/ price indices used in the existing composite index, and exploring new coal price indices representing steam coal imports. It has floated a draft and sought comments from stakeholders by June 30, 2023.

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The rationale behind using a composite index, instead of a country-specific index, is to ensure efficiency in procurement and diversifying supplies.

Composite index

The CERC notifies the escalation rate for imported coal for bid evaluation and payments, for which it developed a methodology for creating a composite index for the first time in 2006. The index is also used to calculate various other escalation rates.

CERC said the composite index needs to be reviewed periodically, and the indices of other coal exporting countries may need to be added once they have at least a 5 per cent share in the total steam coal imports, and subject to availability of credible/reliable price indices. 

“Keeping this in view, it is proposed to review the composite index every three years or as and when the need arises, whichever is earlier,” it added.

Methodology

The regulator explained that the price indices should reflect the volume of steam coal imports in India (with countries having a consistent share of 5 per cent and above in total steam coal imports). Besides, the indices should have credibility, reliability, and availability of historical data, and should be representative of the calorific value of imports.

CERC has proposed three major changes — incorporation of two new price indices in place of the existing coal price index used for Australian coal; incorporation of a new price index in place of the existing coal price index used for South African coal; and changes in the weight assignments based on the trends in steam coal imports in India.

Thermal coal import trend

CERC pointed out that there was a sharp decline in steam coal in India in FY21 and FY22, followed by a sharp recovery in FY23, which can be attributed to several reasons, including domestic demand-supply imbalance, Covid impact and geopolitical factors.

India has been consistently importing most of its steam coal from Indonesia (more than 64 per cent, except in FY21 and FY22 when it fell to 56-57 per cent) and South Africa (16-29 per cent, except in FY23 when it fellto 11 per cent).

The share of steam coal imports from Australia has been insignificant till FY20; however, in the last three years, it has increased to 6-7 per cent (though in FY22, it increased up to 13 per cent, but again fell to 7 per cent in FY23).

It can also be observed that steam coal imports from these three countries together account for about 84 per cent of total steam coal imports in FY23.

In recent years, countries like the US, Russia, and Mozambique have also emerged as important markets for coal imports in India. The share of other countries in total steam coal imports in India has increased from 2 per cent in FY14 to 16 per cent in FY23, which indicates increasing diversification of the import basket of steam coal.