Coal import may push power supply cost for discoms by 4.5-5% in FY23

New Delhi: The government measures to ease power supply constraints through higher coal imports are likely to increase the cost of supply for discoms by 4.5-5.0 percent in 2022-23, ICRA said on Tuesday. On May 5, the 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 percent of their coal requirement for blending with domestic coal and meet the growing demand for electricity.

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

Tariffs for power supply to be worked out by govt panel

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 (CEA) and Central Electricity Regulatory Commission (CERC), considering the prevailing coal prices.

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

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 eight days, as on May 7, as against nine days in 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.

Power demand grew 17.6% in May y-o-y

Girishkumar Kadam, Senior Vice President & Co-Group Head – Corporate ratings, Icra, said, "All-India energy demand in April and May 2022, grew 11.5 percent and 17.6 percent 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 the Power Ministry are thus likely to considerably increase the coal import dependency for the power sector from about 4 percent in FY2022 to about 12-13 percent 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 percent in FY2023 at an all-India level, considering the increase in the share of imported coal and coal price level at USD 110 per MT for coal gross calorific value (GCV) of 4,200 kcal/kg," Kadam said.

Share of coal imports declined to 4% in FY22

The share of coal imports in the power sector declined to about 4 percent in FY2022 from 8 percent in FY2021, amid an increase in international coal prices by more than 150 percent 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 percent increase in the cost of supply and an average tariff hike of 4.5 percent for discoms at the all-India level. As a result, timely and 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 the demographic profile, operational efficiencies, tariff adequacy as well as sponsor strengths, said ICRA.

(PSU Watch– India's Business News centre that places the spotlight on PSUs, Bureaucracy, Defence and Public Policy is now on Google News. Click here to follow. Also, join PSU Watch Channel in your Telegram. You may also follow us on Twitter here and stay updated.)