Tariff for merchant power sold on exchanges may average more than Rs6 per unit this quarter—the highest for any quarter in the past five fiscals—driven by high prices of imported coal due to the geopolitical uncertainties stemming from the Russia-Ukraine conflict, and healthy growth in power demand (8%-9% year-on-year --y-o-y), says a research report.
In the report, CRISIL Ratings says, "The high merchant tariffs, together with increasing volumes at exchanges, will benefit 34 giga-watt (GW) out of a total 73 GW private coal-based capacity in India. The remaining private capacity is either fully tied up with discoms or is likely to face coal shortage."
In India, nearly 100% of the power sold on exchanges by the coal-based gencos is produced using either imported coal or domestic coal procured through e-auctions, whose premiums are linked with imported coal prices. Consequently, merchant power tariffs have a high correlation with imported coal prices and have, along with coal prices, been on the rise since August last fiscal.
Indeed, the rating agency points out that in March, merchant power prices went through the roof to Rs8.2 per unit as against an average of Rs4 per unit in the previous 11 months. "The spurt was due to the Russia-Ukraine conflict, which heightened fears of coal shortage as Russia is the third-largest exporter of non-coking coal, with nearly 15% share in global exports. Imported coal prices were, in fact, up 50% in March vis-à-vis the previous 11 months."
According to Ankit Hakhu, director of CRISIL Ratings international, coal prices have eased from the March peak but may remain over US$90 per tonne this quarter if the conflict prolongs, while demand at power exchanges is on the rise. In March, the volume of transactions in Indian Energy Exchange (IEX) was up 16% y-o-y across market segments and overall volumes were up 38% y-o-y in fiscal 2022.
"In the current quarter, early onset of summer and a recovering economy will keep power demand high. With growing power demand and coal prices high, we expect merchant tariffs to remain over Rs6 per unit on average this quarter,” he says.
According to the rating agency, high merchant rates are a positive for power generators at large, though only some will be able to benefit this quarter, based on their location and ability to sell power on exchange. At the other end, it says, coal shortage will shut out about 15 GW of private coal-based capacities as these are either in stress and lack adequate working capital to pick up domestic coal at market rates, or rely extensively on imported coal, which will be in short supply.
"In fact, imports declined by over 40% in fiscal 2022. Inventory at these plants is also at less than critical levels. A further 24 GW is fully tied up with discoms and hence may not be available for sale on the exchanges, unless approved by the discoms," it says.
Snehil Shukla, team leader at CRISIL Ratings, feels net-net, about 34 GW of private thermal capacities will be able to sell power on exchange, though offtake will depend on the ability of state discoms to purchase this high-cost power or opt for power outage. He says, "Plant load factor (PLF) at these plants jumped about 900 basis points (bps) on-year in March and is expected to increase by 200-300 bps more. Higher PLFs will mean improved fixed cost recovery. However, operating margin per unit will remain at similar levels due to higher cost of generation offsetting high merchant prices.”
That said, CRISIL says its estimates remain sensitive to resolution of the geopolitical crisis in Europe, which could lead to a significant drop in imported coal prices, or any further COVID-19 wave—and ensuing lock-downs—that could dampen power demand.