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The Central Electricity Regulatory Commission (CERC) has proposed a review of the composite index used to calculate the escalation rate of imported coal. This index plays a crucial role in bid evaluation and payments. CERC stated that it has been over a decade since the last revision of the composite index in 2013, and there have been significant developments in international coal markets and the quantum of steam coal imports in India. The availability of credible and reliable coal price indices representing steam coal imports has also improved over the years.

The regulator suggested conducting an analysis of steam coal imports, examining trends in coal prices and price indices used in the existing composite index, and exploring the inclusion of new coal price indices that accurately represent steam coal imports. CERC has released a draft proposal and is seeking comments from stakeholders until June 30, 2023.

The use of a composite index, rather than a country-specific index, aims to ensure procurement efficiency and diversify coal supplies. The CERC determines the escalation rate for imported coal for bid evaluation and payments and introduced a methodology for creating a composite index in 2006. This index is also utilized to calculate various other escalation rates.

CERC emphasized the need for periodic reviews of the composite index and suggested adding indices from other coal-exporting countries once they hold at least a 5% share in total steam coal imports and credible/reliable price indices are available. The proposed frequency for reviewing the composite index is every three years or as required.

The regulator outlined that the price indices should reflect the volume of steam coal imports in India, have credibility, reliability, and availability of historical data, and be representative of the calorific value of imports. CERC has proposed three major changes, including the incorporation of new price indices for Australian and South African coal, as well as adjustments in weight assignments based on steam coal import trends in India.

CERC highlighted the recent trend in thermal coal imports, noting a significant decline in FY21 and FY22 followed by a sharp recovery in FY23. Factors contributing to these fluctuations include domestic demand-supply imbalances, the impact of COVID-19, and geopolitical factors. Indonesia has been the primary source of steam coal imports for India, accounting for over 64% (except in FY21 and FY22 when it fell to 56-57%). South Africa accounted for 16-29% (except in FY23 when it fell to 11%). Australia's share remained insignificant until FY20 but increased to 6-7% in the last three years. Together, these three countries represented around 84% of total steam coal imports in FY23.

In recent years, the US, Russia, and Mozambique have also become significant markets for coal imports in India. The share of other countries in total steam coal imports increased from 2% in FY14 to 16% in FY23, indicating a growing diversification of India's steam coal import basket.