Upward pressure on cost of power supply for DISCOMs: ICRA

The variable cost of generation for imported coal based power projects is estimated to have increased by more than ₹3 per unit between March 2021 and March 2022

The incremental impact on cost of power supply for the discoms on all India basis is thus estimated at about 18 paise/unit reflecting a retail tariff impact of 2.6 percent. The outlook for thermal generation & distribution segments within the power sector continues to remain negative.

The Ministry of Power (MoP) has issued an advisory on March 26, 2022 highlighting a) domestic coal supply availability to power sector to be done in proportionate basis of the coal received from Coal India Limited / Singareni Collieries Company Limited (SCCL), b) direction to maximize the captive coal production within the permitted levels & c) initiatives to promote the use of renewable energy so as to bring down coal dependency. Earlier in December 2021, the MoP also advised state power generation companies (GENCOs) and independent power producers (IPPs) to meet their coal requirements through blending of imported coal to the extent of 4 percent. The improvement in the average coal stock level for the thermal generation capacity on all India basis continues to remain slow as seen from the stock position of 9 days as in March, 2022 against 9 days as in November, 2021 which recovered from lowest level of 4 days as of September , 2021, against the normative requirement level of 24 days.

As per the recent report published by ICRA on Power Sector, Girishkumar Kadam, Senior Vice President & Co-Group Head – Corporate ratings, ICRA, said, “Given the continued tight domestic coal supply position over the last six-month period, coal import dependency for the power sector is expected to increase moderately in the near term. It therefore poses a cost headwind for the IPPs (merchant & competitively bid based projects with no or limited fuel cost pass-through) and for the distribution utilities (or ‘discoms’), in an elevated international coal price level environment. The outlook for thermal generation & distribution segments within the power sector continues to remain negative.”

Vikram V, Vice President & Sector Head – Corporate ratings, ICRA says, “The incremental impact on cost of power supply for the discoms on all India basis is thus estimated at about 18 paise/unit reflecting a retail tariff impact of 2.6 percent. This is considering a scenario of 8 percent share of imports in coal supply & imported thermal coal prices (GCV: 4200Kcal/kg) at 110 USD/MT. Timely and adequate tariff determination by the regulators along with timely implementation of fuel and power purchase cost adjustment (FPPCA) framework (either monthly or quarterly as per the applicable regulations) thus remains a key monitorable for the discoms.”.

Further, the prices in the day ahead market (DAM) of Indian Energy Exchange (IEX) increased to ₹4.4 per unit in FY2022 from ₹2.8 per unit in FY2021, owing to the recovery in electricity demand growth and supply side constraints arising from tight domestic coal supply and high international coal prices. The spot power tariffs are likely to remain elevated at ₹4.0 per unit in FY2023, given that the global coal prices are estimated to remain elevated over the next 12 months.

Overall, an upward pressure on cost of generation in coal segment along with the volatility in international coal price levels, further positively support the demand for renewable energy. On the other hand, the outlook for thermal generation segment continues to remain negative due to fuel inadequacy, upward pressure on cost of generation with the elevated fuel prices internationally & compliance requirements towards environment norms and a strong policy shift towards the renewables. Nonetheless, the credit profile of central public-sector undertakings (CPSUs) remains superior, supported by sovereign ownership, established track record of efficient operations, cost-plus nature of PPAs and benefits arising out of tri-partite agreement (TPA). Further, the outlook for state owned distribution utilities remain negative, due to continued weak financial position as a result of inadequate tariffs, higher than allowed distribution loss levels and inadequate subsidy support. Nonetheless, the credit profile of privately owned distribution utilities remains supported by operational strengths arising from demographic profile, operational efficiencies, tariff adequacy as well as strengths from a strong sponsor.