Falling Coal Prices may drop Electricity Rates up to Rs. 1.5 per unit

The falling price of coal on the worldwide market may cause electricity rates to drop by up to Rs 1.5 per unit.

According to the most recent information available with NEPRA, the cost of producing energy from coal in September 2022 was about Rs. 18/kwh, while the average price of coal was about US$310–320 per tonne.

So, if the price of coal remains at the current level, the cost of producing power across the entire nation might drop by Rs0.5 to Rs1.5/kwh.

We, therefore, think that the future cost of power generation will be lower due to the falling price of coal, which will help reduce circular debt, Sherman Research said.

In light of the company’s ownership of a 47.5% stake in China Power Hub Generation Company, one of the nation’s largest coal power plants with a 1220MW capacity, this is a good move for “HUBC.”KE electricity bills in October 2022 to come down by Rs4.7 per unit

Assuming the plant runs at 30-35 percent efficiency, this will lower the cost of generation by Rs. 5 per kilowatt hour, saving the company about Rs. 20 billion in fuel annually.

It will also gradually relieve cash flow issues and increase HUBC’s ability to pay dividends, Sherman Research said.

There will be a Rs0.5–1.5/kwh reduction in the overall cost of home electricity generation.

Compared to the nation’s overall coal consumption need of about 28 million tonnes, the power industry utilises about 9 million tonnes of coal annually.

Furthermore, because coal is more expensive to produce than other energy sources, Pakistan’s reliance on coal for electricity generation varies between 12% to a maximum of 32% depending on the availability of affordable Hydel power (third most expensive fuel after furnace oil and LNG).

Pakistan’s cement and power sectors appear to benefit from the decline in global coal prices.

Cement and electricity are two main consumers of coal in Pakistan, which uses coal to supply 20% of its energy needs.

Yesterday, coal prices in international markets fell to their lowest level in eight months, primarily as a result of weak demand worldwide caused by rising inflation and a slowdown in construction in China, the world’s biggest user of coal.

Additionally, another factor influencing the price of alternative fuels, including coal, is Europe, which had already secured its LNG needs for the winter’s power generation needs.

At the moment, the spot price of benchmark Richard Bay coal is US$215 per tonne, which is 15% less than the monthly average price of US$252 per tonne in October 2022.

Furthermore, prices are currently 53% less than the peak level of US$460 per tonne observed in March 2022. Since 20% of Pakistan’s energy needs are met by coal, and power and cement are two of the country’s largest consumers of coal, the local economy is benefiting from the decline in coal prices.

Cement: The risk of margin erosion seems to be decreasing

Earlier, it was thought that increased coal prices could threaten the sector’s gross margin because the addition of 12 million tonnes of cement capacity during FY23 could drive cement prices lower. The rising risk does, however, appear to be abating for the time being because of falling coal prices.

In order to make cement, coal is a crucial fuel and raw material. At the moment, a bag of cement costs about Rs 300 when coal is included.

Because of the unprecedented rise in cement prices, which has also had an impact on construction activity, it is likely that cement prices will be reduced if coal prices fall significantly.

Analysts predicted that local cement players would be secure if the price of Richard Bay coal remained below the levels it is at now because their current coal inventory costs between US$230 and US$240 per tonne, minimising the risk of margin eroding.

Since coal accounts for 70% of PIOC and DGKC’s production costs, they are particularly impacted by changes in coal prices.