According to Ind-Ra report, the government has constituted a study group to consider the revision in the royalty rates based on the request from the State Government of Chattisgarh for a royalty hike to 30 per cent from the existing 14 per cent ad-valorem.
Ind-Ra believes the royalty hike looks quite steep at 30 Ind-Ra, and if accepted, it will lead to coal attracting the highest ad-valorem duty compared to all other minerals.
Since January 2015, coal consumers have been hit by rising prices due to the imposition of DMF and NMET (effective January 2015) taking the effective royalty rate up to 18.48 Ind-Ra from 14 Ind-Ra.
If the revised royalty rates were to be accepted as proposed by Chhattisgarh, the variable cost of generation can increase by another 7 Ind-Ra. On the positive side, coal linkage rationalisation for companies has led to a decline in the transportation costs thus easing some impact.
Industrial power rates are a critical pre-investment consideration for manufacturers and given that bulk of the coal based capacity in India is on a cost pass-through basis, the ultimate impact of such hikes is passed on to the consumers. Such regular hikes in one form or the other is not a healthy sign for the thermal power generators. Ind-Ra believes that as alternate sources of power namely solar see further reduction in tariffs, the competition between thermal and solar will intensify, with a high probability of solar winning.