Coal availability not a concern, but logistics is

Girishkumar Kadam, Vice President and Sector Head, Corporate Sector Ratings, ICRA Limited What are the lessons we can draw from these events for future? One, minimising the transportation constraints, so rake availability and coal supply is ensured. The second is better co-ordination. Once you address these aspects, you can address any fluctuations in utilisation a And those plants which can resort to imports can do so. But this kind of spikes happen at a short notice. Unless you have adequate coal at the plant, it is difficult to address such situations. Structurally coal availability is not a concern. We have seen coal availability improving quite significantly and the overall coal dependence for many stations is now below 10 per cent, down from significant levels earlier. In fact, those plants that used to operate up to 30 per cent on imported coal mix, are not using imported coal at all. So coal availability is no longer the concern. This is a logistic concern which has come into picture. When hydro and wind power, which depend on weather, fell short of expectations recently, power supply chain was thrown out of gear. What are the reasons for the piquant turn of events for the generation segment, coal supplies and power prices? There are multiple factors that have lead to this situation. On the generation front, the hydro and wind segments' were relatively lower. But on the demand side, the demand was somewhat better from states like UP, MP and many other states in the north, taking the demand growth to almost 4.5-5 per cent in the first half of 2017-18. That is, demand was better off and generation was down. More importantly, the coal supply to power plants was also down due to technical constraints on the logistics side. Coal transportation, is getting corrected as we understand from various sources. On the one hand, we have been saying that the domestic coal availability has certainly improved, but the preparedness of the coal-based power plants in terms of stocking up has been on a lower side given demand growth has been subdued. And also the coal logistic related constraints in terms of rake availability and so on were also there. So a combination of all these factors did impact the spot power tariff on the energy extension. But high prices are unlikely to be sustained, because looking at the overall thermal capacity is significantly high in relation to demand. Almost 25- 28 giga watts (GW or 1,000 MW) of capacity is still not having any long term PPAs and that capacity is available in the short term market. This is also reflected in overall PLF of thermal segment. PLF is close to about 60 per cent. Low PLF is also a reflection of surplus thermal capacity. It has already sustained for nearly two months now... You saw a spurt in spot prices above Rs.9/kWh. These kinds of tariffs were unheard of in the last 2-2.5 years and unlikely to sustain. And Rs.9 was actually there in the month of October for few time blocks of 15 minutes each. These high tariffs are seen only over the last 3-4 months. Around Rs.2.8-3 a unit was the norm earlier. Certainly beyond Rs.4 is something which is not sustainable, given the overall sector scenario. The average MCP (on IEX) was around Rs.4.08 in September and October... That is what I am saying. It used to be around Rs.3. Our expectation is anywhere between 3.5 or at best Rs.4. The recent spikes are for a limited time block. That is also a point. It has also brought to light lack of coordination between various departments in supply chain of power generation. How improved coordination can help? Coordination will certainly help. Better co-ordination at the Central and state levels, and between railways and the Ministry of Coal has resulted in improvement in coal supplies over the last two years. Certainly better coordination will help and it is something which is required. It seems the whole planning was done based on PLF of 56 to 62% range, and that higher PLF was not factored into the planning process... It may not be appropriate for me to comment, because no details are available. What I am telling is importantly, logistic constraint has also played a role in terms of rake availability and the transportation constraint. Obviously the preparedness of TPPs in terms of ensuring adequate coal stocking at plants is also an issue, because demand growth has been subdued. Recently, the government had been claiming that coal supply had surpassed demand. How rise in coal shortage could have been avoided at this juncture? When the sector was facing shortfall in domestic coal supplies, import dependence was significant and that was prevailing till end of FY15 (2014-15). Since FY16, overall coal import dependence has been coming down. It alleviated the pressure on power generation and prices that was important from distribution companies¦ (discoms) perspective. And going forward also, with the kind of coal availability domestically, coal import dependence would be limited, except for coastal power plants, which are imported-coal based. How long do you think discoms might have to face higher spot prices? I think it has come down already If you look at the overall short term power market mix in overall power generation in India, it is close to 10 per cent. About 90 per cent comes from long terms PPAs. So within that 10 per cent also, the price levels have been quite subdued. If you look at bilateral PPA tariffs in the short term market it has been lower than Rs.4/kWh. Even if it has gone up, it is at Rs.4/kWh or about Rs.4.2. The reverse auction framework, which has reduced the prices had came into effect from April 2015 onwards for even short term power. So, even bilateral short term power market price levels have been pretty favourable from discoms perspective, now. Whether spot price rise will spur signing of more long term PPAs? Yes. But that is a function of demand forecast and tariff expectation on the new PPAs. If you look at the overall long term demand-supply forecast in any state, the power deficit levels have been coming down by and large in most of the states. Secondly, discoms in many states are no longer in a hurry to lock into a long term PPA. So as a result, over the last 2 years virtually there is no visibility in terms of incremental new PPAs. So that is one thing which is an area of concern for those power projects which are still waiting for long term PPAs, and that capacity is quite significant. So, what will help the sector going forward is improvement in demand. Now during the first half of the current year, there are visible signs of demand improvement. Again that is thanks to UDAY, which has raised liquidity levels of discoms in some states, thus improving their off-take capacity. More importantly, the industrial capex recovery, which is still not visible, has to happen. Industrial demand constitutes about 25-30 per cent of overall energy. That has to see real pick-up to trigger sharp growth in overall energy demand.