International rating agency, Fitch Ratings says that India’s power generation companies could be adversely affected by coal shortages, which are likely to persist over the short-to-medium term. The comment comes after a recent government decision to prioritise coal supplies to generators which sell electricity through power purchase agreements (PPAs) over merchant generators or those that run on 30 per cent imported coal. Hence, state-run power producers including NTPC Limited (‘BBB-’/Stable) and Damodar Valley Corporation (‘AA(ind)’/Negative) are likely to benefit from this decision.
“Coal demand has increased significantly with the commissioning of new coal-fired generation capacity. Given India’s chronic power deficit, this trend is likely to continue. A lower-than-expected increase in domestic coal production, particularly due to delays in the development of captive coal blocks allocated to the power generators, has added to the demand-supply gap,” says Salil Garg, Director in Fitch’s energy and utilities team.
Fitch notes that coal will remain the dominant fuel for the Indian power sector, given the lower-than-expected gas production from existing fields and no new major gas discoveries. Additionally, the majority of the future generation capacity additions will be coal-fired. Coal accounted for 54% of total power capacity at end-April 2011 and 66 per cent of total electricity generated in FY11.
Government-owned Coal India Limited (CIL) dominates the domestic coal supply market with a 80 per cent market share, although some industrial consumers, typically in the power and steel sectors, have access to captive mines. CIL’s non-coking coal production has grown by 3.7 per cent CAGR over FY07-FY11, below the rate of coal-fired capacity additions (7.2 per cent CAGR over the same period). Its production target for FY12 is 452 million metric tonnes (mmt), only marginally up from 431mmt recorded in FY11, as the development of some new fields has been hindered by environment ministry concerns. Environmental issues have also led to most consumers’ captive mine blocks lying idle. As a result, the coal ministry projects a coal supply shortfall of up to 142mmt in FY12.
Power Finance Corporation Limited’s (PFC, ‘BBB-’/Stable) government-backed initiative to set up ultra mega power projects (UMPP) has been delayed as bidding for two 4 gigawatt plants in Orissa and Chattisgarh has been postponed as captive mines earmarked for the projects fall in areas barred from mining by the environment ministry.
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