Dependence on overseas coal to hurt pvt power firms

Private power producers, which have embarked on ambitious capacity addition plans, are likely to see adverse financial impact due to uncertainty over fuel supplies and increasing dependence on pricier imported coal.

India, which is facing acute power shortage, is expected to see a capacity addition of over 80,000 MW in 12th plan (2012-17), with major chunk coming from private power players.

Rating agency Icra has said that rising dependence on coal imports by Independent Power Producers (IPPs) and high international coal prices are likely to keep a "significant upward pressure on the cost of power generation".

"With increased dependence on imported coal, the cost of power generation is likely to increase further; possibilities of renegotiation or dishonouring of competitively bid Power Purchase Agreements (PPAs), where fuel price risk is not covered, cannot be ruled out," the agency said in a report.

Going by estimates, around 60% of current thermal power projects being executed by private Independent Power Producers (IPPs) are based on domestic coal.

Coal India expects its incremental coal production to be about 120 million tonne (MT) by end of FY 2017 while its commitment under various Letters of Assurance (LOAs) to power projects is around 325 MT, the report said.

"The dynamics of fuel supplies, land acquisition and environmental issues for power projects have changed a lot in recent times, impacting the ability of independent power producers in meeting their obligations," Association of Power Producers (APP) Director General Ashok Khurana told PTI.

APP is a grouping of 16 entities, including Reliance Power, Tata Power, Essar Power, Lanco Infratech and Adani Power.

Many issues faced by power producers, including those related to fuel supplies, need to be sorted out soon, Icra's Senior Vice President Sabyasachi Majumdar said.

"The situation is difficult [for power producers] but there is rising demand for electricity," Majumdar, who is also Co-Head Corporate Sector Ratings, noted.

With most of the projects awarded through competitive bidding route, many power producers might see under recoveries since fuel costs would be higher than tariffs agreed on PPAs.

According to Icra, power projects based on domestic coal linkage and having competitively bid PPAs, the cost escalation due to blending of imported coal is likely to have an adverse impact on their returns.

To ensure fuel supply for their upcoming projects, many private players, including Reliance Power, Tata Power, Adani, Essar, JSW and Lanco, have acquired coal assets in Australia, Indonesia and South Africa.

"... Increasingly, IPPs have opted for acquisition of overseas mining assets, however, they remain exposed to volatility in coal prices as well as political and regulatory risks...," Icra noted.