The darkness surrounding power sector stocks is only going to get worse. The less-than-impressive results in the fourth quarter were masked by announcements of capacity additions this fiscal. But what’s going to fuel these plants?
About 30,000 megawatts (MW) of power generation capacity will be added this fiscal, with two-thirds fuelled by coal. But these power plants may run silent, or operate below capacity, due to a severe coal shortage. The Planning Commission expects coal deficit in India to touch 142 million tonnes (mt) this fiscal, a number which is only expected to accelerate because of policy paralysis and a crippled distribution network. The coal deficit is already casting a shadow on existing operations.
Motilal Oswal Financial Services Ltd estimates that plant load factors dipped by 3 percentage points in fiscal 2011 (FY11). One reason is the decline in shipments of Coal India Ltd (CIL), which accounts for 80% of the country’s production. Last fiscal, the company’s actual supplies fell short of linkage agreements by nearly 15%. CIL hasn’t signed new fuel supply agreements with generators in the last two fiscals. In other words, the power plants commissioned after FY09 are running on rationed coal. That’s about 14,000MW, or 60% of all capacity additions in the past two fiscals.
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Take a look at CIL’s linkages alone. By the end of this year, the total requirement will touch 403 mt, Motilal Oswal estimates. However, the company will likely be able to supply only 347 mt, some 14% short.
Yes, some power companies have captive mines; together these have a potential of producing 480 mt a year. But only 26 of the 208 allocated have started operations and it may yet take a couple of years before they are able to ramp up output significantly. What’s more, the coal ministry last month cancelled allocations to several companies.
Coal purchased though CIL’s e-auctions could cost up to double the notified prices locally. If coal was to be imported, it would wreak even greater havoc on the economics of running plants. Imported coal has its own set of constraints, including technical issues because of different calorific values and logistics. Indonesia, the main external coal supplier to local firms, is planning to index its prices to international benchmarks starting September, which will drive up prices. Thus, newer factories would either have to run at lower plant load factors, or see margins getting crimped due to higher costs.
Graphic by Naveen Kumar Saini/Mint