The Nationwide Electrical Energy Regulatory Authority (NEPRA) determined to carry a re-hearing within the matter of revision in gas value adjustment mechanism dated September 23, 2016 for coal energy vegetation. The three main factors of the listening to relate to the weightages connected to the pricing of the imported coal, the basket of the coal used, and acquiring coal via tendering. 

“Coal, with its intricate nature, presents a extra convoluted problem in terms of the analysis and preservation of normal specs,” begins Faisal Zia Siddiqui, the Group Head at Sapphire Vitality. “That is significantly evident when juxtaposed with liquid and gaseous counterparts, whose commonplace export specs could be decided via rudimentary mechanisms resembling mixing,” Siddiqui continues. 

“Nearly all of Unbiased Energy Producers (IPPs) are procuring straight from a myriad of worldwide sources. Every supply has its personal distinctive specs that fluctuate based mostly on market dynamics. Consequently, devising a common method for shopper pass-on has perpetually been a frightening activity for regulators. This listening to seems to be a concerted effort to refine their amassed expertise,” Siddiqui provides. 

Now that we’ve coated how the story’s been informed within the headlines, let’s see what’s up.

The 2016 coal pricing mechanism  

The Gasoline Value Adjustment Mechanism is a method that calculates the month-to-month Gasoline Value Part (FCC) of the electrical energy tariff. This calculation is predicated on the precise costs, portions, and qualities of coal imported from varied areas, together with South Africa, Australia, and Indonesia.

This mechanism is a revision to the Upfront Coal Tariff choice made on June 26, 2014. The Upfront Coal Tariff is a hard and fast charge provided to coal-based energy initiatives to stimulate funding and reduce dependence on imported oil and fuel.

The FCC method varies for every area, contingent on the index used to find out the Freight on Board (FoB) value of coal. This value represents the price of coal on the port of origin previous to transportation. Indices are chosen based mostly on their transparency, liquidity, and relevance to the coal high quality and market. As an example, South African coal utilises the Argus/McCloskey’s Coal Value Index (API 4), while Indonesian coal employs the Indonesian Coal Index (ICI 3).

The FCC method additionally incorporates different elements resembling marine freight, insurance coverage, and extra prices. These are adjusted based mostly on precise prices supported by genuine documentary proof. It offers Unbiased Energy Producers (IPPs) with the pliability to acquire coal from any mixture of the aforementioned loading areas. The gas price part might be adjusted based mostly on precise weightage. 

tendering, NEPRA allowed IPPs to acquire native coal and Afghan coal from third events when world coal costs spiked in 2022. Nevertheless, as costs receded, varied corporations continued to depend on the spot market tenders to satisfy their demand wants. 

Why does NEPRA wish to change this? 

It expedites gas price adjustment filings for the assorted era corporations for every month of electrical energy they produce. 

“Coal is being procured from varied sources now so the benchmark must be versatile to include that,” explains Fahad Rauf, Head of Analysis at Ismail Iqbal Securities. 

Moreover, the present  pricing mechanism additionally assumes that each one coal procured from suppliers is purchased at commonplace charges. The NEPRA assembly has highlighted the way it will handle premiums, and reductions given to IPPs from suppliers. The present system fails to take into cognisance whether or not corporations can have relationships with spot market sellers in various capacities after tendering took off. 

The NEPRA listening to is to judge whether or not the tendering course of is an environment friendly one, or not given the present circumstances. 

What’s going to the brand new system seem like after the listening to? 

The system will stay tethered to a weighted method, because the sourcing oscillates in specs and portions for every energy plant. A shift in direction of a non-weighted method might be envisioned if a neighborhood coal market is established, one which sells a typical mix to all Unbiased Energy Producers (IPPs). Nevertheless, this seems to be a distant actuality. The Nationwide Electrical Energy Regulatory Authority (NEPRA) is unlikely to sanction any return to such an aggregator or intermediary, no matter the potential value effectivity it may introduce into the system.

One may query why we stick with such a labyrinthine system, slightly than adopting a mannequin the place all IPPs can independently import coal and generate electrical energy, akin to the strategy in India. NEPRA’s rationale is rooted in stability; they purpose to minimise surprises by way of month-to-month prices and be sure that the value of electrical energy doesn’t deviate drastically from the imply. 

Now, whether or not this method works is one other query solely.