New coal blending order to raise discoms’ cost by Rs 11,000 cr in first half of FY24: Report

Mumbai: The government's directive mandating power producers to increase blending of imported coal to six percent of their requirement until September will add up to Rs 11,000 crore towards power purchase cost for distribution companies, said a report. At the present blending rate of 5.4 percent applicable this fiscal, the distribution companies or discoms will incur an additional Rs 42,000 crore on their power purchase bills this fiscal as this has pushed up the variable cost of power procurement for utilities by Rs 0.226 per unit.

New directive issued on Jan 9 will see discoms shelling out an additional Rs 11,000 cr in their power purchase

The new directive issued on January 9 will see discoms shelling out an additional Rs 11,000 crore in their power purchase bills during the first half of the next fiscal. Now the government wants thermal power plants or gencos to increase the imported coal blending to six percent, said Crisil Market Intelligence and Analytics in a note on Monday.

The latest directive is aimed at averting a power crisis from coal shortage this summer due to domestic supply issues. Earlier, a directive issued in April 2022 mandated domestic power plants to blend 10 percent of their coal requirement. This led to an increase in blending to 5.4 percent during April-November 2022 from a meager 1.2 percent last fiscal.

According to Crisil, the blending level to sustain for the rest of this fiscal, raising the cost for power utilities by Rs 42,000 crore and pushing up the variable cost of power procurement for the utilities by Rs 0.226 per unit.

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'During the first half of next fiscal, the variable cost per unit will be lower by Rs 0.067'

According to Hetal Gandhi, director of research at the agency, during the first half of next fiscal, the variable cost per unit will be lower by Rs 0.067 despite a marginal increase in blending to six percent, because the price of imported coal is expected to be 33 percent lower at Rs 7,100 per tonne compared to Rs 10,600 per tonne in the first half of this fiscal. All the same, utilities are staring at a cumulative increase of over Rs 0.159 per unit in their variable cost due to the two blending directives.

Power demand had risen by 10 percent on-year in April-December. In the first three weeks of January, growth was even higher, at 14 percent, due to a severe cold wave in the north with the peak demand surging 12 percent on-year to 205.6 GW, a historic high for the month. Therefore, even after adjusting for a low base in the year-ago period, growth for the full fiscal will be in healthy double-digits, said the report.

"At the other end, supply fell short and energy shortage increased 90 percent in January, lifting short-term prices by a whopping 80 percent. And the latest directive to increase imported coal blending is aimed at plugging this shortage," it said.

Agency expects power demand to remain buoyant in the summer and grow eight to nine percent on y-o-y basis

Considering the growth momentum seen in the past two years, the agency expects power demand to remain buoyant in the summer and grow eight to nine percent on y-o-y basis during April-September 2023. This will further push up power purchase bills for the top five coal-dependent states of Bihar, MP, UP, Telengana and Maharashtra, with around 13 state-owned discoms, all of which were loss-making in FY22.

According to Surbhi Kaushal, an associate director of research at the agency, the increase in cost due to higher blending will particularly impact Bihar, Madhya Pradesh, Uttar Pradesh, Telangana, and Maharashtra as these states have a higher coal share in their generation mix. These states also account for 35 per cent of power demand but also have over 75 per cent dependence on coal supply to service their demand and therefore the discoms in these states will cumulatively see incremental power purchase cost of Rs 0.15-0.20 per unit in fiscal 2023 and the first half of fiscal 2024.

Though the Electricity (Amendment) Rules of 2022 offers an automatic pass through of additional fuel cost, discoms need to compute these on a timely basis and charge them to their customers every month. On failing to do so, they may have to forfeit their right to recover the additional costs in future.

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