Power generation companies could be adversely affected by coal shortages, which are likely to persist over the short-to-medium term, following the Government decision to prioritise coal supplies to generators which sell electricity through power purchase agreements (PPAs) over merchant generators or those that run on 30 per cent imported coal, according to Fitch Ratings.
“Coal demand has increased significantly with the commissioning of new coal-fired generation capacity. Given India's chronic power deficit, this trend is likely to continue. A lower-than-expected increase in domestic coal production, particularly due to delays in the development of captive coal blocks allocated to the power generators, has added to the demand-supply gap,” said Mr Salil Garg, Director in Fitch's energy and utilities team.
Fitch said coal will remain the dominant fuel for the Indian power sector, given the lower-than-expected gas production from existing fields and no new major gas discoveries.
The majority of the future generation capacity additions will be coal-fired. Coal accounted for 54 per cent of total power capacity at end-April 2011 and 66 per cent of total electricity generated in FY11.
State-run power producers including NTPC and Damodar Valley Corporation are likely to benefit from the government stand.
Coal India Ltd (CIL) dominates the domestic coal supply market with a 80 per cent market share, though some industrial consumers, typically in the power and steel sectors, have access to captive mines. CIL's non-coking coal production has grown by 3.7 per cent CAGR over FY07-FY11, below the rate of coal-fired capacity additions (7.2 per cent CAGR over the same period).
Coal India's production target for FY12 is 452 million tonnes (mt), only marginally up from 431 mt recorded in FY11, as the development of some new fields has been hindered by Environment Ministry concerns. Environmental issues have also led to most consumers' captive mine blocks lying idle. As a result, the Coal Ministry projects a coal supply shortfall of up to 142 mt in FY12, Fitch said.
Fitch said that the increasing dependence on imported coal is a challenge for the Indian companies. First, the price of imported coal is higher than the price of domestic coal bought from CIL under fuel supply agreements, though this only affects generators which cannot pass-on fuel costs through PPAs. Secondly, the weak coal transportation infrastructure between ports and power plants can lead to supply shortages affecting generation output. In FY11, coal shortages were largely responsible for thermal power generation missing its 690 terawatt-hour (TWh) target by 35 TWh.
Further, boilers are designed for a particular coal quality range and deviations in quality adversely affect generators' performance and efficiency. For this reason, most Indian power plants cannot use more than 30 per cent imported coal.
Realising the increasing demand from India and China, Governments of coal exporting nations such as Indonesia and Australia have been looking at policy actions that might restrict exports or increase the export price.