Tariff for merchant power sold on exchanges may average more than Rs 6 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% on-year).

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, a CRISIL analysis indicates.

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, in March, merchant power prices went through the roof to Rs 8.2 per unit as against an average of Rs 4 per unit in the previous 11 months last fiscal. 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 prices¹ were, in fact, up 50% in March vis-à-vis the previous 11 months.

Says Ankit Hakhu, Director, CRISIL Ratings, “International coal prices have eased from the March peak but may remain over $90/tonne this quarter if the conflict prolongs. Meanwhile, demand at power exchanges is on the rise. In March, the volume of transactions in Indian Energy Exchange (IEX)² was up 16% on-year across market segments (overall volumes were up 38% on-year 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 Rs 6 per unit on average this quarter.”

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, coal shortage will shut out ~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 levels³.

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).

Says Snehil Shukla, Team Leader, CRISIL Ratings, “Net-net, ~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. Plant load factor (PLF) at these plants jumped ~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, our 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 lockdowns — that could dampen power demand.

¹ Indonesian non-coking coal FOB prices at 4,200 kcal/kg
² Power sales through IEX are over 90% of the total power sales through exchanges in India
³ As per Central Electricity Authority (CEA), inventory of less than 7 days (25% of 26 days) is considered critical for thermal coal-based power plants