Higher Coal Imports May Push Power Supply Cost For Discoms By 4.5-5 Per Cent, Says Icra

Power ministry issued a directive under Section 11 of the Electricity Act, saying all imported coal-based power units shall operate and generate power at their full capacity to meet the growing demand

New Delhi: The government measures to ease power supply constraints through higher coal imports are likely to increase cost of supply for discoms by 4.5-5.0 per cent in 2022-23, Icra said on Tuesday.

On May 5, Ministry of Power (MoP) issued a directive under Section 11 of the Electricity Act, stating that all imported coal-based power plants shall operate and generate power at their full capacity to meet the growing demand, Icra stated.

As per this directive, all states and power generating companies (gencos) based on domestic coal will have to import at least 10 per cent of their fuel requirement for blending with domestic coal and meet the growing demand for electricity.

This directive by the ministry is valid till October 31, 2022.

As the present power purchase agreements (PPAs) do not provide for a pass-through of the fuel cost for these projects, the tariff for supply from these plants under PPAs shall be worked out by a committee with representatives from the MoP, Central Electricity Authority and Central Electricity Authority Commission, considering the prevailing coal prices.

In December 2021, MoP had issued an advisory to state gencos and IPPs (independent power producers) to meet their coal requirements through blending of imported coal to the extent of 4 per cent.

The directive has come in view of the fact that the improvement in the average coal stock level for the thermal generation capacity on an all-India basis continues to remain slow as seen from the stock position of 8 days as on May 7, 2022 as against 9 days at November-2021, which recovered from the lowest level of 4 days on September 30 last year, as against the normative requirement level of 24 days.

Girishkumar Kadam, Senior Vice President & Co-Group Head - Corporate ratings, Icra, said all-India energy demand in April and May 2022, grew 11.5 per cent and 17.6 per cent year-on-year, respectively, also supported by heat wave and weather conditions, while tight domestic coal supply position and elevated international coal price levels continued to affect the energy generation levels.

Measures directed by MoP are thus likely to considerably increase the coal import dependency for the power sector from about 4 per cent in FY2022 to about 12-13 per cent in FY2023, he added.

"The higher share of imports for thermal generation under a pass-through arrangement as directed by MoP is further expected to lead to an increase in the cost of supply for state discoms by 4.5-5.0 per cent in FY2023 at an all-India level, considering the increase in the share of imported coal and coal price level at $110 per MT for coal gross calorific value (GCV) of 4,200 kcal/kg, Kadam said.

The share of coal imports in the power sector declined to about 4 per cent in FY22 from 8 per cent in FY21, amid an increase in international coal prices by more than 150 per cent over the last 12-month period.

With this, 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 May 2022.

Vikram V, Vice President & Sector Head Corporate ratings, Icra said, the estimated increase in the cost of supply for discoms amid the higher share of coal imports to meet the demand is likely to increase the cash gap per unit for discoms at the all-India level to 68 paise per unit in FY2023 against 50 paise per unit estimated earlier.

"This is considering a 5 per cent increase in the cost of supply and an average tariff hike of 4.5 per cent for discoms at the all-India level. As a result, timely & adequate tariff determination by the regulators along with timely implementation of fuel cost adjustment (FCA) pass-through thus remains a key monitorable for discoms, he added.

The outlook for state-owned distribution utilities continues to remain negative, due to the continued weak financial position as a result of inadequate tariffs, higher than allowed distribution loss levels and inadequate subsidy dependence.

Nonetheless, the credit profile of privately owned distribution utilities remains supported by operational strengths arising from demographic profile, operational efficiencies, tariff adequacy as well as sponsor strengths.