Indonesia's coal pricing plan may hit power firms such as Tata Power, Adani Power and Reliance Power

Private power companies such as Tata Power, Adani Power and Reliance Power sourcing Indonesian coal under long-term contracts are going to take a big hit on their bottomlines, with the Southeast Asian country switching over to a new coal pricing methodology based on international index. As a result of the new pricing formula, price of Indonesian coal will go up by $30 a tonne and lead to a R0.70 per unit increase in cost of electricity generation, according to industry experts. Until recently, Indonesian coal producers had the freedom to sell their coal at their own price.

As per the new formula notified by Indonesia’s directorate general of minerals, coal and geothermal (DGMCG), Indonesian coal producers will have to sell at prices notified by their government. The benchmark price is to be based on a formula that refers to the average coal index price in accordance with international market mechanism. All existing coal supply agreements with Indonesian coal mining companies will have to be modified to comply with new coal pricing regulations before September 23, 2011. Indian power companies import about 40 million tonne of coal a year from Indonesia under long-term contracts.

Even merchant power plants set up by companies such as JSW Energy and Lanco Power based on coal supplies from Indonesia could see sharp erosion in their profits. The pricing formula has been unveiled by the DGMCG pursuant to the new guidelines issued by Indonesia’s ministry of energy and mineral resources last September for the determination of price of various mineral resources including coal.

Producers who fail to comply with the new regulations will be barred from selling coal and also lose mining leases.

Companies such as Tata Power, Adani and Reliance Power have taken up equity in Indonesian coal mines to hedge the risk of a sharp rise in international coal price to their power projects in India. However, this strategy has now lost its relevance.

Private power project developers such as Reliance Power and Tata Power have put up aggressive bids to bag power projects auctioned through bidding regime. However, a big component of fuel cost for such projects is non-escalable and developers cannot pass on the increased coal cost to electricity buyers. That is a key risk factor for projects allocated through tariff bidding regime compared to those developed under cost-plus regime.