Coal ordinance could give a fillip to merchant power plants

The merchant market witnessed significant growth before 2011 but was on a downslide ever since due to fuel related risks and corresponding policy logjams

The government’s ordinance on re-allocation of coal blocks cancelled by the Supreme Court could be a game-changer for struggling merchant power plants.

Improved clarity on coal availability from captive mines would address fuel issues, a major dampener for revival of the merchant power market. India Ratings says: “The (proposed) auction and way forward could inject a fresh lease of life into the hitherto dormant merchant power market. Coal availability through captive mines ensures  offtake will remain the only weakest link now.”

The merchant power market saw significant growth before 2011 but was then impacted by fuel-related risks and corresponding policy blocks. Many power plants envisaged as merchant projects at the time of conceptualising hurried into long-term purchase pacts, due to lack of certainty on fuel. The ordinance seeks to address this.

Power companies which have not tied up in long-term purchase agreements (PPAs) are likely to aggressively bid for coal blocks in the proposed e-auction. This is because supply to these plants would otherwise depend only upon signing long-term PPAs with state power distribution companies.

Uncertainties for merchant plants also prevail due to decreasing energy deficits and tardiness of state utilities in finalising energy requirements for a longer term. “Therefore, merchant power plants could go an additional mile in procuring coal mines that would not only ensure tariff (rate) competitiveness with base load plants that have long-term PPAs but also mitigate the existing uncertainties related to fuel,” said India Ratings.

Rate competitiveness would depend on the final auction price and cost of its funding. Companies whose mines have been cancelled are likely to be more aggressive in their bids, to protect investments already made. The proposed e-auction could also trigger action from project sponsors and project companies. Also, the exploration of these blocks by the private sector could set benchmarks for government-owned Coal India Ltd, struggling to raise output. India produced 565 million tonnes of coal in 2013-14, with CIL contributing 462 mt.