Costly imported coal squeeze power producers' margins

If the rise in price of imported coal continues merchant power producers may find it difficult to sell power without making a loss, says experts

The tide may be turning for coal prices globally, with certain indices rising as much as 60% in April-October. 

Industry experts and analysts point out if the rise in the price of imported coal continues merchant power producers may find it difficult to sell power without making a loss. Contracted procurers for this power, on the other hand, are expected to shy away from purchasing expensive power. 

The estimated capacity fueled through imported coal is 30,000 megawatt (Mw). 

At the Indian Energy Exchange (IEX), spot prices for power for most markets were an average Rs 2.5 per unit, except in the south where it hovers over Rs 4.4 per unit.

Vivek Jain, associate director at India Ratings and Research, said prices on power exchanges and in bilateral trades had not moved at the same rate as the rise in the variable cost of generation in October on account of increases in the imported coal price. 

“The viability of merchant power producers running on imported coal is doubtful in the current price scenario,” Jain said. 

The plant load factor (PLF) for lignite and coal-based power plants in India was 58.13% in September after declines since May except for a marginal rise in June. The PLF is an indicator of the utilisation of power assets in the country. 

“It is not unusual for the PLF to be low at this time of the year. Still, this is a historic low for a variety of reasons, including modest demand growth, robust renewable capacity addition and the rise in imported coal prices,” said Kameswara Rao, the partner at PwC India.

Sabyasachi Majumdar, senior vice-president, Icra, said the situation for contracted power might be grim. “Plants running on imported coal with power purchase agreements with distribution companies are likely to face curtailments if the buyers find the power expensive,” he said.

“With merchant prices at Rs 2.5 per unit, it is difficult to even cover coal costs. Companies may not burn the coal if they are not recovering the fuel cost,” said an analyst with a domestic brokerage firm, who did not wish to be named. 

“We could see a higher proportion of domestic coal being used, and large energy users will move to acquire and convert independent generation capacity to captive capacity. In some states, independent power producers have already applied for such conversion,” Rao said.

“JSW Energy will be hit; Adani Power and Tata Power are still fighting for a compensatory tariff. Tata Power is better off because of its coal mines in Indonesia,” said the analyst quoted earlier. 

Adani Power and Tata Power each operate 4,000 Mw imported coal-based power plants in Gujarat. Both are fighting in court for pass-through of rising coal costs through a compensatory tariff. 

Emails to JSW Energy, Tata Power and Adani Power remained unanswered.