Tight supply of coal to power plants and expected rise in import of the dry fuel amid high international prices will put upward pressure on electricity tariff, according to an ICRA report.
“Given the continued tight domestic coal supply position over the last six-month period, coal import dependency for the power sector is expected to increase moderately in the near-term.”
“It therefore poses a cost headwind for IPPs (merchant & competitively bid based projects with no or limited fuel cost pass-through) and for the distribution utilities (‘discoms’), in an elevated international coal price level environment,” Girishkumar Kadam, Senior Vice President & Co-Group Head – Corporate ratings, ICRA, said.
The outlook for thermal generation and distribution segments within the power sector continues to remain negative, he stated.
According to the report, Ministry of Power issued an advisory on March 26, 2022 highlighting domestic coal supply availability to power sector to be done in proportionate basis of coal received from Coal India Ltd / Singareni Collieries Company Ltd (SCCL).
In the advisory, the ministry also directed to maximize captive coal production within the permitted levels and to take initiatives to promote the use of renewable energy so as to bring down coal dependency.
In December 2021, the ministry also advised state power generation companies (GENCOs) and independent power producers (IPPs) to meet their coal requirements through blending of imported coal to the extent of 4 per cent.
The improvement in the average coal stock level for the thermal generation capacity on all-India basis continues to remain slow as seen from the stock position of 9 days as on March 28, 2022 against 9 days as on November 30, 2021 which recovered from lowest level of 4 days as of September 30, 2021, against the normative requirement level of 24 days.
ICRA stated that the share of coal imports in overall coal requirements for the power sector has declined to about 4 per cent in April-February 2021-22 against that of 8 per cent in FY2021, amid the increase in international coal price level by more than 140 per cent over the last 12-month period (Indonesian coal price index) and challenges faced by IPPs to pass on the fuel price cost increase to discoms under PPAs.
With a sharp increase in coal price levels internationally over the past 12 months, the variable cost of generation for imported coal based power projects is estimated to have increased by more than Rs 3 per unit between March 2021 and March 2022, it stated.
“The incremental impact on cost of power supply for the discoms on all India basis is thus estimated at about 18 paise/unit reflecting a retail tariff impact of 2.6 per cent. This is considering a scenario of 8 per cent share of imports in coal supply & imported thermal coal prices at 110 USD/MT.”
“Timely and adequate tariff determination by the regulators along with timely implementation of fuel and power purchase cost adjustment (FPPCA) framework (either monthly or quarterly as per the applicable regulations) thus remains a key monitorable for discoms,” Vikram V, Vice President & Sector Head – Corporate ratings, ICRA said.
Further, ICRA said prices in the day ahead market (DAM) of Indian Energy Exchange (IEX) increased to Rs 4.4 per unit in FY2022 from Rs 2.8 per unit in FY2021, owing to the recovery in electricity demand growth and supply side constraints arising from tight domestic coal supply and high international coal prices.
The spot power tariffs are likely to remain elevated at Rs 4 per unit in FY2023, given that the global coal prices remain elevated over the next 12 months, it added.
Overall, an upward pressure on cost of generation in coal segment along with the volatility in international coal price levels, further positively support the demand for renewable energy.
On the other hand, the outlook for thermal generation segment continues to remain negative due to fuel inadequacy, upward pressure on cost of generation with the elevated fuel prices internationally and compliance requirements towards environment norms and a strong policy shift towards the renewables, it stated.
Nonetheless, the credit profile of central public-sector undertakings (CPSUs) remains superior, supported by sovereign ownership, established track record of efficient operations, cost-plus nature of PPAs and benefits arising out of tri-partite agreement (TPA).
Further, it stated, the outlook for state owned distribution utilities remain negative, due to continued weak financial position as a result of inadequate tariffs, higher than allowed distribution loss levels and inadequate subsidy support.
Nonetheless, it stated that the credit profile of privately owned distribution utilities remains supported by operational strengths arising from demographic profile, operational efficiencies, tariff adequacy as well as strengths from a strong sponsor.
