Power sector: Coal worries hurt

Coal shortage will worsen from FY13, affect power producers across the country.

The dismal state of the power sector is affecting the performance of the capital goods index as a whole, as 50 per cent of the constituents of the index are directly impacted by developments in the sector. The capital goods index is down nine per cent year-on-year (y-o-y) due to the headwinds affecting the power sector. While long term potential of the infrastructure sector is not in doubt, headwinds affecting the power sector are unlikely to abate by next financial year.

It’s known that India’s independent power producers are facing an acute shortage of coal. According to analysts, while the shortage will be manageable in FY12, the situation will progressively worsen from FY13, and will last for two years at least. Coal will be rationed in a phased manner to new projects, but private players will get only up to 40-50 per cent of the quantity agreed under fuel supply agreements. However, NTPC’s new plants would get a preference at 60-70 per cent, claim analysts.

Private power producers will have no choice but to rely on relatively expensive imported coal. This will result in plant load factor falling across India, due to lack of affordability for high-priced power, coupled with coal shortage. The Central Electricity Regulatory Commission, according to analysts, is of the view that the higher costs of imported coal will not be allowed as passthrough in

Case-I bidding-based PPAs (unless entire fuel charges were bid as escalable charges in the original bids).

State Electricity Boards (SEBs) may renegotiate with generators, but the validity of such negotiations is a grey area, going by the Electricity Act. Also, poor finances of the SEBs may deter them from buying expensive power. According to Edelweiss Capital, barring government intervention, the higher imported fuel costs will not be a part of the escalation in Case I bids.

This will impact capacity addition between FY12 and FY14. Given that demand growth is unlikely to keep pace with an increase in supply, analysts expect slowdown in capacity during the 12th Plan, due to low demand and lack of coal. Despite the serious financial crunch facing SEBs, the central government is in no mood to bail them out.