Regulated coal supplies to non-power sectors and allowing participation of captive miners amid an increase in production by the critical supplier—Coal India—may help corporate India avoid what appeared to be a major power crisis in the making until recently. However, the threat still looms when power demand picks up from here, says a research report.
In its report, ratings agency CRISIL says, “Coal stocks are unlikely to improve to the previous level of 15-18 days’ inventory anytime soon. Also, availability of rakes and a pick-up in power demand in March-May will be the key monitorable from here.”
In recent months, a surge in power demand amid rapidly dwindling coal inventories, higher prices of imported coal, delayed payments to power producers, prolonged dry spells impacting hydropower generation, and maintenance shutdowns at nuclear plants, have had a domino effect on the sector. Storms in some coal mining belts have affected supply further, worsening the situation.
In the five years through September, growth in India’s monthly power demand averaged 4%, though it did exceed 12% in a few months of fiscal 2020. Base demand has clocked 13% growth year-to-date. Volatility in base demand has also risen sharply over the past two years. Peak demand growth has been higher at nearly 15%, while volatility has spiked here, too.
A state-level monthly demand assessment indicates that, on average, monthly power demand growth was close to 20% for highly industrialised states such as Maharashtra, Tamil Nadu and Gujarat which, together, account for close to 30% of overall power demand.
“This can be attributed to a sharp rebound in economic activity that has led to a revival among larger power consumers such as industries and commercial complexes compared with last year,” the ratings agency says.
Growth from moderately industrialised states has been close to 15% year-to-date, while states with more residential or agricultural consumers saw less than 10% growth. Further, pent-up post-pandemic demand has caused power demand to be 3% higher than even pre-pandemic fiscal 2020.
In addition to demand, supply sources also play a role in power generation. The supply of coal, in particular, plays a decisive role.
At a pan-India level, over 70% of the power produced is via the coal route. The dependence on coal-based generation, however, varies widely between states.
“Our assessment shows that Bihar, Telangana, Tamil Nadu, Uttar Pradesh and Maharashtra and to a certain extent Gujarat are structurally at higher risk of being impacted by disruptions in coal purchases, either due to higher dependence on the fuel type or higher short-term purchases impacting overall pick-up,” CRISIL says.
According to the rating agency, Telangana, Uttar Pradesh, and Maharashtra have a higher dependence on coal than other states. “Bihar, on its part, is vulnerable because while it meets 54% of its need directly via coal-based generation, a further 18% comes via short-term power purchases from other states, which would also be coal-based primarily.”
The rating agency expects higher dependence on coal-based power seen in the first half of this fiscal to continue into the second half. However, it points out that the massive increase in power demand in April-September was not distributed equally among the different power sources.
“A ramp-up in coal generation pushed up its share in the overall power pie to about 71%, compared with a 67% last year and an average of 70% over fiscal 2019-2021. This meant an additional 7.5-8 billion units being generated via coal over this period. The consumption rate has also intensified as usage of domestic coal of lower calorific value increased, given a decline in imports with higher calorific value over the period,” CRISIL says.
Amid the surge in demand, stocks at power plants reached critical levels of less than 17MT (million tonnes) as of August, 8MT as of September, and 7.5MT by 15 October 2021.
Specifically, of 135 plants with a capacity of 165GW, nearly 70% of plants and 73% of the capacity were at a critical stage with less than 10 days of coal stocks.
As the situation started turning acute, a core management team was set up in August to ensure coal supply to plants with stocks at critical levels. Further, in early October, the coal ministry declared that coal supply to nonpower sectors would be regulated.
Overall stock, meanwhile, fell to four days as of 15th October from six days as of 15 September 2021. “Our interactions indicate that supply should ease by end-October when the supply regulations are expected to be moderated,” CRISIL says.
Industrial demand constitutes 30% of total power consumption, excluding captives, specifically from grid-based power. Industries follow a combination of captive power plants (CPPs) or grid power.
The assessment by CRISIL of 10 sectors in the manufacturing space indicates that, excluding captive consumption, these sectors may account for nearly 55% of total grid industrial power consumption.
It says, “Our interactions with sources across key clusters in these 10 sectors indicate no major impact on production just before the festive season. Nevertheless, for instance, south-based cement players and, to a certain extent, nonpower users like aluminium players are bearing a part of the brunt. While segments like cotton yarn face power cuts, these cuts are limited, dispersed and not meaningful enough to impact revenue. However, smaller ceramic units that import coal have been facing issues in terms of price and availability.”
The ratings agency says different categories of stakeholders in the power value chain will be impacted differently in the evolving milieu.
It says, “Thermal power producers will wait for the supply of coal to normalise. They will continue to rely on domestic coal unless discoms compensate them for higher imported coal prices via variable cost pass-throughs.”
Distribution companies (discoms) will behave differently, depending mainly on their financial positions, CRISIL says, adding, “Weaker discoms will go for power cuts rather than continue to buy from the short-term markets at higher prices. Better-placed ones will either enter short-term power purchase agreements (PPAs) with players compensating for higher variable costs or continue purchasing from short-term markets. Punjab and Gujarat, for instance, have done this.”
According to the report, industrial consumers' purchasing power from short-term markets will increase their costs, though such purchases are limited. Industrial consumers with captive power plants will bear the brunt of lower supplies of coal.
“While players in cement sector are going for more pet-coke usage, smaller cement players are bearing the brunt of both shortage and higher prices. Also, smaller players in sectors such as sponge iron and ceramics, who are dependent on spot allocations or imports, may bear the brunt of higher coal prices as well as low availability,” it added.
For residential consumers, most discoms have come out with their tariff orders for the current fiscal. Hence, CRISIL feels any sudden short-term increase in power prices may not result in an immediate increase in cost to the final consumers.
“With the harvesting season on, improvement in the availability of rakes and trajectory of power demand in March-May will be the key monitorables as coal stocks at thermal power plants will take time to top the 10-15 days mark,” the ratings agency concludes.