India Ratings and Research (Ind-Ra) believes power outages are likely to increase in the near term on account of the coal shortages led by lower coal production amid a rising power demand. The coal stocks at power plants are running low. with plants having just four days of coal stock compared to 17 days of average coal stock maintained in the 12 months ended July 2021. The situation has been deteriorating as visible in the increasing number of plants being shut down on account of the fuel shortage. The capacity of thermal power plants facing outages due to the depleted levels of coal inventory increased to 20.3GW as on 8 October 2021 (30 September 2021: 13.2GW; 31 August 2021: 3.9GW).
Ind-Ra believes that the dependence on coal-based generation is likely to increase further in 2HFY22, as the generation from sources such as hydro and solar remains seasonal and is mostly dominated in the first half of a financial year. Although the other sources including nuclear capacities are already operating at around 80% plant load factor (PLF), they would not be able to provide the required relief at this time with no new capacity addition in the near term and low contribution of around 3% to the overall generation.
During 1HFY22, around 76% of the generation was met from coal-based power which may further increase in the coming months. Amid a rising power demand, Ind-Ra estimates the daily coal requirement to increase to around 2 million tonnes to meet the power demand in 2HFY22. The combined average daily coal production in September 2021 stayed at 1.5mt by Coal India Limited and The Singareni Collieries Company Limited (IND AA/Positive), as opposed to the average requirement of 1.85mt.
The situation remains critical, however Ind-Ra estimates the coal production levels to increase gradually from October 2021. Historically, coal production in October increased to around 1.8mt as the monsoons recede, however the same would remain inadequate to meet the daily demand of around 2mt. Ind-Ra also believes that the situation would normalise by end-December when coal production increases daily to around 2.5mt. Furthermore, the high coal requirement by the power sector may leave the other sectors such as cement, aluminium and steel in lurch which would have to increase their dependence on imported coal.
Plants fueled by Imported Coal Impacted: India has around 16.2GW of operational coal-based thermal capacity which runs only on imported coal. The PLF of these capacities reduced to 15% in September 2021 from 54% in FY21. The increase in international prices of non-coking coal is leading to a reduction in coal imports by such plants. Coal prices have already increased to around USD220/t by 30 September 2021 (31 August 2021: USD172.9/t, 31 March 2021: USD98.4/t). Of the total capacity of 8.6GW of ultra-mega power projects including 4.6GW of Adani Power (Mundra) Limited (IND BBB-/Stable) in Mundra (Gujarat) and 4GW of Coastal Gujarat Power Limited’s (IND A+/RWP), around 7.3GW is under shutdown owing to high coal prices, as the increase in variable cost is not entirely pass through as per their power purchase agreements. The two plants contributing around 5% to the daily generation would require around 0.12mt of domestic coal daily in case power needs to be supplied from other power plants.
The Ministry of Power is considering to allow the plants to sell power at market-driven prices on exchanges to meet the power demand or the states may allow full fuel cost pass-through based on which the generation can improve, though modalities of the same are not final. At imported coal prices of USD220/t, the exchange prices are likely to remain high, given the variable cost itself will be close to INR7/unit. Only the operating plants fueled by imported coal are linked to their captive consumption for steel industries.
Gas-Based Power Plants (GBPPs) may see Higher Utilisation: Ind-Ra believes that to maintain the power deficit at low levels, the other alternative is to increase the utilisation of GBPPs. GBPPs having a capacity of around 25GW largely are unutilised with around 19% PLF in 1HFY22. Given the quick start-stop nature of GBPPs, they are also an alternative to meet the power demand, however the international spot RLNG prices have already increased to around USD27/mmbtu in September 2021 on Indian Gas Exchange. Furthermore, most of the GBPPs do not have long-term power purchase agreements and the offtake of such high cost power even at exchange remains to be seen.
Ind-Ra believes that the current situation could be resolved only when i) coal production particularly from India and China is ramped up through the start of new mines and seasonal pickup or ii) the power demand slows down. Ind-Ra opines although coal production will increase, given the seasonality associated with production, output from new mines could take time and would be more gradual. The power demand increase from industrial consumers has been fairly robust during September and October 2021, as industrial activity picked up pace during this period due to global supply chain bottlenecks. As we approach closer to December 2021, the demand is likely to moderate from industrial side. Hence, the combined impact of both a slight moderation in demand and better coal output could aid in the situation easing by December 2021.
However, it brings to fore the fact that the energy transition to renewables is not without its own set of challenges. Before the transition to 100% renewables, the intervening phase has to be managed well and thought through as under-investments in coal and oil & gas projects cannot be undone in a year’s time. Moreover, the world could begin to view coal as ‘alternate fuel’ rather than ‘dirty fuel’. Also, if we continue to move away from coal towards more cleaner forms of energy globally, the role of nuclear energy could increase as it can meet the base load which other forms of generation (hydro, gas, solar and wind) have found difficult. Ind-Ra opines that this event may provide further boost to battery production and storage as an economically viable option for the grid-scale renewables. Battery storage is a clean alternative to provide reliable round-the-clock power.
In India, discoms could again resort to entering into medium to long-term power purchase agreements, against the earlier practice of keeping 10%-15% as open power purchase/ short-term power purchase, benefitting thermal power plants. Ultra-mega power projects could also see some bit of activity as states could realise the benefit of paying these plants an amount to compensate them towards the variable cost rather than buying power from the exchanges at INR12-20/kWh.
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