Changing dynamics: Another power crisis may be looming and it could be much graver

The dynamics of India’s power sector are being put to test again, in less than six months after last October’s widespread power outages exposed its fault lines.

With a sudden widening of demand-supply gap since the middle of March amid a quickly intensifying summer, prices of spot power traded on exchanges have skyrocketed, forcing the Central Electricity Regulatory Commission (CERC) to intervene to thwart a possible attempt by some gencos to profiteer at the expense of discoms.

In an order issued on Friday capping spot power prices at Rs 12/unit against a traded level of Rs 20, the regulator noted that as on March 25, “58,719 mega watt (MW) of installed generation capacity was on outage due to various reasons wherein, 4323 MW of thermal capacity was on outage due to coal shortage itself.” The regulator observed that the recorded peak shortage was 4,060 MW on March 25 with overall energy shortage at 68.86 million units (compared with 82 million units on October, a recent, if not all-time, peak).

This is clearly a burning issue and the power crisis looks to aggravate in the weeks ahead potentially impeding a nascent economic recovery, but it is difficult to fix the blame.

To be sure, state-run Coal India reported record coal production of 622 million tonne in FY22 as against 607 mt in FY21. But the demand for the fuel is increasing at a faster rate, given a sharp rise in power demand.

As power plants based on imported coal cut capacities drastically in view of prohibitively high landed cost of imports caused by the Russia-Ukraine crisis, it fell on other thermal stations to keep domestic electricity supplies going. However, they could barely acquit themselves well; peak power supply shortage stood at 3,451 MW on March 31, as against just 444 MW on February 88. The power deficit in the whole of March was 574 million kilowatt-hours or 0.5% of the demand for the period, as per the data put out by grid regulator POSOCO. A slightly wider deficit would be big enough to cause widespread outages.

As the country’s principal coal producer and supplier to thermal stations, CIL is finding it difficult to brace itself to meet the sudden spike in coal demand. Latest e-auction price for Coal India for fuel grades G7 and G8 saw prices rising by nearly 300% to Rs 13,500/kg, which is still much cheaper than the landed cost of imported coal (Rs 17,000-18,000/kg).

At the same time, curiously, some power plants appear to be not keen on lifting coal; analysts attribute this to a working capital crunch.

Girishkumar Kadam, senior vice president and group head-corporate ratings at Icra, said given tight domestic coal supplies over the last six months, coal import dependency of the power sector is expected to increase moderately in the near term. “It, therefore, poses a cost headwind for the independent power producers and for the distribution utilities, given the elevated international coal prices,” he said. The share of coal imports in consumption by the Indian power sector has declined to about 4% in the first 11 months of FY22 against about 8% in FY21, amid the increase in international coal price level by more than 140%, he noted.

Coal India said on March 28 that its pithead stock would rise above 60 mt by April 1, as against 99 mt a year ago. Coal stocks at power plants were 25.5 mt on March 28, down 13% on year. This is sufficient for just nine days, while a year ago the inventory was adequate for 15 days.

Coal India officials insist that as much as 90 million tonne of coal is ‘floating in the system,” which, according to them, should be enough to prevent power cuts across the country for want of coal. But it is undeniable that supplies to the non-power sectors, especially to the aluminium and the steel smelters, have declined sharply over the past few weeks.

A Tata Power spokesperson said: “We have taken all the steps to maintain optimum coal stocks — both domestic and imported — at our thermal plants and are ready to generate as per the peak load demand situation.” He added the three units at the company’s Mundra facility, which supplies power to Gujarat discoms, are being run thanks to ‘supplemental PPAs’ signed. Tata Power sources most of its fuel requirements through long-term fuel supply agreements.

An official at state-run NTPC told FE that the company has placed orders for 6.7 million tonne of imported coal, and would need around 20 million tonne of the fuel from abroad to address the growing power demand. NTPC is sourcing Indonesian coal at $150-$160 per metric tonne, which is around 30% higher than the price at which it imported coal it in March last year. NTPC has average coal stocks of around 14 days at its 30 plants against the normative requirement of 24 days. At some of its pithead plants the current stocks would last for even 17 days.

In fact, as a coal crisis loomed, the government had directed power producers owned by it — NTPC and Damodar Valley Corporation — to get 10% of their coal requirements through imports.

According to Icra, variable cost of generation for units relying on imported coal rose by more than Rs 3 per unit between March 2021 and March 2022. The resultant incremental impact on cost of power supply for the discoms on an all-India basis, the agency said, would be 18 paise/unit reflecting a retail tariff impact of 2.6%.

Of course, not all power plants are facing a capacity squeeze. According to industry sources, JSW Energy is importing low calorific value coal from Indonesia at around $120-$130 per metric tonne and is producing power to sell on exchanges. The company relies 100% on imported coal for its power plants in India. It has produced over its name plate capacity in Q4 FY22 as 80% of it capacity is tied to long-term contracts.

Rahul Raizada, executive director at PWC, said, “Coal stocks of 9-10 days in a non-pithead power station should not be a matter of much concern. However, if the stocks come down to below-seven-days, there would be a problem.” He predicts an upward movement in the prices of coal in the spot market in the short-term because of the current geopolitical situation.”

Gencos Tata Power, JSW Energy could have made huge profits in the spot power market had the regulator not intervened to arrest price volatility.

Anuj Upadhyay, analyst at HDFC Securities said it would make sense for these firms to import costly coal and sell on exchanges. JSW Energy has around 15% of its capacity available for sale on merchant basis. “Both the companies are likely to make windfall gains in Q1FY23. Q4FY22 is likely to be mixed as the high merchant sale option was available only for second half of March,” Upadhyay had said before Friday’s CERC order.

Sabyasachi Majumdar, senior vice president at ICRA, said, “Working capital constraints for some of the generation companies due to delayed payment by discoms are one of the reasons why gencos are not lifting much coal even as their stock position is of less than 10 days. Neither Coal India nor the Railways give much credit to the gencos.”

Average coal stocks at the state-run power plants are of around 12 days or 25 MT at present against the Central Electricity Authority-mandated normative requirement of 26 days for pithead plants and 17 days for other units, according to CIL sources. This is despite the fact that supplies from CIL to the power sector have been an all-time high 540 MTs in FY22, which was 98.5% of the pro-rated demand the CEA projected, they added.

Power generation in FY22 was to tune of 1,375 billion units (BUs) against the CEA projected 1,356 BUs, and 1,237 BUs generated in FY21. “CIL has been supporting the additional 11% generation with incremental supplies even as imports were down by about 25 MT on year,” a CIL official said.

Ten coastal power stations, with aggregate generation capacity of 16,730 MW based on imported coal, have stopped producing power, the CIL official said, adding that this resulted in other thermal stations to step up production and necessitating an additional coal supply (over and above the levels required under fuel supply pacts) of 20 MT to them by CIL.

Despite the efforts made by the government to increase production from captive coal blocks – these units can now sell 50% of production in the open market –, it might take a while for these blocks’ output to see a big jump (captive coal production in FY22 is seen at 55-60 MT). Of course, with Including Singareni Collieries’ output of 70 MT, the country’s total coal production in FY22 was around 755-760 MT, up 50 MT compared to last fiscal. That was a rate of growth much below the rate which coal demand grew in the year. So, supplies to the non power sectors in FY22 was lower by around 30% year.

The Union power ministry issued an advisory on March 26 stating that CIL and Singareni Collieries Company should ensure that domestic coal supplies to the power sector is done on a proportionate basis and called for boosting captive coal production and use of renewable energy so as to bring down coal dependency. In December 2021, the ministry had advised state power generation companies and independent power producers (IPPs) meet their coal requirements through blending of imported coal to the extent of 4%.

(With inputs from Surya Sarathi Ray in New Delhi)