Explained: How high coal prices are set to impact the power sector

How are high coal prices set to impact the power sector?

Indian power producers and discoms are facing high international coal prices, while domestic coal supply has already been struggling to meet demand in the past six months, according to experts. High demand for domestic coal amid high international prices had led to rolling power cuts in a number of states in October 2021 as several thermal power plants ran out of coal stock.

“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” said Girishkumar Kadam, Senior Vice President & Co-Group Head – Corporate ratings at ICRA.

Kadam added that higher dependence on expensive imported coal would increase costs for independent power producers and discoms that are not able to pass on the increased cost of fuel to consumers.

The average market clearing price of power on the Day Ahead Market at the India Energy Exchange (IEX) hit Rs 13.76 per unit (kilowatt-hour), up from an average clearing price of Rs 3.86 in the beginning of March. ICRA projected that spot power tariffs are likely to remain elevated at about Rs. 4.0 per unit in FY2023 due to higher coal prices, compared to average spot tariffs of Rs 2.8 per unit in FY2021.

“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 per cent,” said Vikram V, Vice President & Sector Head – Corporate ratings, ICRA.

Why are international and domestic coal prices rising?

The war has led to a disruption in the supply of coal by Russia, which is unlikely to be fully replaced by other suppliers. ICRA has estimated that imported coal prices are set to rise 45-55 per cent in the first quarter of FY23. ICRA also noted that a coal shortage was likely unless Coal India is able to ramp up domestic coal production to 700 million tonnes in the next fiscal, up from about 601 MT in FY21.

The price of Australian coal for March delivery had hit an all-time high of about $330 per tonne. Australia and Indonesia are key sources of coal import for Indian thermal power generation companies using imported coal.

The price of domestic coal has also risen sharply in spot e-auctions conducted by Coal India Limited, with premiums over baseline prices set by Coal India reaching an all-time high of 270 per cent in February 2022, which have reportedly increased further to about 300 per cent in March 2022.

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