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Higher Coal Imports Likely to Increase Power Supply Cost for Discoms by 4.5-5.0% in FY2023: ICRA

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In a notification dated May 5, 2022, the Ministry of Power (MoP) issued a directive pursuant to Section 11 of Electricity Act. It stated that all imported coal-based power plant must operate at full capacity in order to meet growing demand. The MoP now directs all states and GENCOs based upon domestic coal to import at minimum 10% of their fuel requirements for blending with domestic coke and meeting the growing electricity demand.

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The MoP has issued a directive that is effective until October 31, 2022. The current power purchase agreements (PPAs), which do not allow for fuel cost pass-through, will determine the tariff for supply to these plants under the PPAs. This committee will be composed of representatives from the CEA, the MoP and the CERC, taking into account the current coal prices.

In December 2021, the MoP issued an advisory to state GENCOs & IPs to blend imported coal up to 4% to meet their coal needs. This directive was issued in light of the slow improvement in the coal stock for thermal generation capacity on an India basis. It can be seen in the stock position of 8 Days as on May 7, 2022, as opposed to 9 Days as on November 30, 20,21. The stock position recovered from the lowest level, 4 days, as of September 30, 2021 as compared to the normative requirement level, of 24 days.

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M. Girishkumarkadam, Senior Vice President and Co-Group Head – Corporate ratings, ICRA commented on the impact of directive on discoms. He stated that “All India’s energy demand in April and May (till date), 2022 grew by 11.5% Y-o-Y, supported also by heat wave / weather conditions. However, tight domestic coal supply positions and high international coal prices continued to have an adverse effect on energy generation levels. The MoP’s measures to reduce power supply shortages through coal imports are likely to significantly increase coal import dependency for power sector, from 4% to 12-13% in FY2022, to 4% to 4% in FY2022. A higher proportion of thermal generation imports under a pass through arrangement, as directed by MoP, is expected to cause an increase in cost of supply to state discoms of 4.5% to 5.0% in FY2023 all India. This is due to the rise in imported coal and the coal price level of US$ 110/MT for 4200 kcal/kg.

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The power sector’s dependence on coal imports fell to 4% in FY2022, compared to 8% in FY2021. This was due to an increase of more than 150% in the international coal price (Indonesian coke price index) and the challenges that the IPPs faced in passing on the increased fuel prices to the distribution utilities (discoms). The variable cost of producing imported coal-based power plants has increased by more than Rs. 14 months after a sharp rise in global coal prices. Between March 2021 & May 2022, 3.0 units

Further commenting on this, Mr. ICRA Vice President & Sector Head, Vikram V said that the increase in supply costs for discoms due to higher coal imports is expected to raise the cash gap per discom unit to 68 paise in FY2023, as opposed to the 50 paise perunit estimated earlier. This assumes a 5.0% rise in the cost supply and a 4.5% average tariff increase for the discoms at this level.

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The regulators must determine the tariffs promptly and accurately. They also need to implement fuel cost adjustment (FCA) pass through (either monthly, or quarterly, as per applicable regulations). This is a critical monitorable area for the discoms.

State-owned distribution utilities’ outlook remains negative due to their continued poor financial position, which is a result of insufficient tariffs, higher than permitted distribution loss levels, and inadequate subsidy dependency. The credit profile of privately-owned distribution utilities is supported by operational strengths that result from demographics, operational efficiency, tariff adequacy, and sponsor strengths.

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