With the Centre focusing on increasing renewable energy (RE) capacity to nearly 175 GW by 2022, the demand for domestic coal is likely to witness a slowdown, ratings agency ICRA said in a recent study.

“Domestic coal demand growth is likely to witness a structural slowdown on the back of the government’s large renewable energy capacity addition plans to increase to 175 GW by FY2022 from the current capacity of around 58.3 GW,” the agency said.

Over the years, the capital cost of setting up RE capacity has steadily declined, and the narrowing differential between conventional energy and renewable energy tariffs has emerged as an underlying theme.

Solar tariffs have come down to as low as Rs 2.44 per unit at the Bhadla solar park in Rajasthan.

“A greater parity between conventional and RE tariffs, coupled with the current thermal overcapacity, will lead to a perceptible slowdown in fresh investments in setting up coal-based generation capacities in the next five years,” ICRA said.

The agency further said this trend is likely to usher in a prolonged period of subdued demand of thermal coal for domestic miners.

Considering that India’s RE capacity reaches 125 GW 2022, ICRA expects domestic coal demand to register a modest compounded annual growth rate of around 3.5 per cent between FY2018 and FY2022, as against 5.6 per cent registered between FY2013 and FY2017.

“Reflecting the above trend, Coal India’s ambitious coal production target of 1 billion tonne in FY2020 is likely to be missed by a wide margin,” ICRA senior vice—president, and group head (corporate sector ratings) Jayanta Roy said.

ICRA, however, maintained that notwithstanding the anticipated slowdown in average annual coal demand in the next five years, domestic coal production is likely to grow by a higher compounded annual growth rate (CAGR) of around 5.5 per cent between FY2018 and FY2022, leading to a significant reduction in India’s coal imports.

“As per our estimate, thermal coal imports are expected to contract to below 100 metric tonne in FY2022, declining from 149 metric tonne in FY2017.

“A gradual replacement of imported coal by domestic coal is expected to help domestic miners to an extent,” Roy added.

Global thermal coal prices have rallied by 36 per cent since May 2017, largely driven by a jump in imports by China.

However, ICRA believes that the drivers of this recent price rally are not long-lasting in nature, and have resulted from unexpected seasonal and temporary aberrations.

“A weak outlook on seaborne thermal coal prices is likely to adversely impact the domestic e-auction coal prices as well, benefiting end-users in the power, cement and sponge iron sectors, as well as companies with captive power plants,” it noted.

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