India Ratings and Research (Ind-Ra) believes that the short-term power prices in FY19 would be generally reflected by the marginal cost of power production from imported coal/e-auction coal. Given that the energy demand is likely to grow at a healthy pace, while incremental coal output could not increase to the level required, part of the incremental energy demand would have to be met by imported coal. Thus, in light of expected high imported coal prices, the short-term power prices in India would continue to be in the range of INR3.75/kWh to INR4.25/kWh over FY19.
In the last three market wires, Ind-Ra had discussed the possibility of the electricity demand growing by 6%-7% in FY19 and the continued reliance on thermal-based capacity coupled with slower-than-required growth in domestic coal output and hence the increased reliance on imported coal, which would play a key role in determining the short-term power prices
Figure 1 shows that the median incremental offtake and production has averaged about 23mt over the 12 years ended FY18(E). This median coal output is sufficient to generate 32 billion units annually. Hence, the additional power demand as per Ind-Ra’s expectations would be met through imported coal.
Additionally, over the last few months, the imported coal prices have seen a sharp increase and have reached USD100/t and Fitch Ratings Ltd expects the international coal prices to stay at higher levels.
To quote from the Fitch report Fitch: Falling Coal Investment to Support Asian Prices, “Rising regional demand and falling mining investments partly reflect the tighter environmental policies at banks. The prolonged industry downturn from 2013 to 2016 has dampened mining firms’ appetite for investments, particularly in low-margin ventures, while growing environmental concerns are affecting their funding options. Banks' increasing reluctance to fund fossil-fuel projects is likely to be a constraint on any recovery in coal investment. Regional supply could also be held back by policies in Indonesia - the world's biggest coal exporter - that will limit the amount of coal that leaves the country, as the government looks to meet growing domestic power demand. These policies have not had much impact on coal exports in recent years, as domestic demand failed to meet the government's expectation due to completion delays in power projects, but export curbs could start to bite as the state power company Perusahaan Listrik Negara and independent power producers add coal-fired capacity over the medium term.”
Though the rising imported coal prices have resulted in an increase in the variable cost of generation, the currency depreciation has also added in an increase in the cost of generation. From the lows of 3QFY16 when imported coal prices had reached USD50/t, the prices have risen 100% to USD100/t in 1QFY19 while the currency has depreciated from USD/INR 65.9 to USD/INR 66.9. The variable cost of generation from imported coal has gone up as shown in Figure 2 from INR1.86/kWh in 2QFY16 to INR3.43/kWh in 1QFY19.
Even at higher merchant tariffs of INR4/kWh, the gross margins earned by independent power producers are lower as the variable cost of generation has gone up. Though the gross margins are low, but given that most of the coast-based plants generally continue to generate energy till the time they make a positive gross contribution, these plants could see an improvement in plant load factors. However, the operations of inland-based plants based on imported coal could pose a challenge as the variable cost of generation would increase further due to inland transportation costs, thus making operations unviable. These plants might not see an increase in plant load factors even in a scenario of higher exchange prices.
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