Coal shortage and lower merchant tariffs will hurt performance and return ratios.

The coal shortage situation in the power sector is like putting the cart before the horse. While a significant number of new power units have become operational and more are expected, there is an acute shortage of coal to keep these plants running — even at optimum capacity.

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If analysts are to be believed, there could be more pain. “The pain will definitely mount as growth in new coal mining capacity will remain muted,” says Rabindra Nath Nayak, senior analyst, SBI Cap Securities. “Led by shortage (of coal), there will be more capital work in progress (due to project delays) and possible under recovery (utilisation) in the operating plants due to the want of fuel.”

Hurting output
Thermal-based power plants across the country reported a 61.4 per cent plant load factor (PLF) in September as against 73.4 per cent in June 2011. PLF indicates the capacity at which a plant operates versus its installed capacity.
 

A company like Sterlite Energy, with a generation capacity of 1,800 Mw, saw its PLF dip from 72 per cent this May to 28 per cent in September -- partly due to coal shortage. JSW Energy’s 270-Mw Rajwest plant in Rajasthan is shut and others are operating at lower PLF. Lanco Infratech’s 1,200-Mw UPCL power plant in Karnataka reported a 50 per cent PLF in September compared to 65 per cent in August.

Threat to upcoming projects
It is not just the existing plants that have been impacted; there is a risk to upcoming ones as well. About 15,000-20,000 Mw of new coal-based power generation capacity is expected to be operational in FY12. Of this, 13,000 mw is based on domestic coal.

These plants will require coal equivalent of 60 million tonnes a year, or about 12 per cent of India’s annual consumption to operate at a reasonable utilisation level. Considering the coal shortage, there could be further delays in the new capacities becoming operational.
 

Till August 2011, only 38 per cent of the capacity generation target of about 20,000 Mw for FY12 has been achieved. “Definitely further delays are going to happen. In fact, some private players, are delaying projects given the high interest rate environment, high cost of coal and low availability of the fuel, both coal and gas,” says Sunil Jain, vice-president of equity research at Nirmal Bang Securities.

“Even if we double what we have achieved in the first half, the total capacity addition in FY12 may not be more than 13,000-14,000 Mw,” says Satyam Agarwal, who tracks the infrastructure sector at Motilal Oswal Securities.

Coal scenario
About 80 per cent of power sector’s coal requirements are met through Coal India. The company’s annual production has remained flat at 430-431 million tonnes in the last two years. The current year lends little hope of an increase given logistics issues, heavy rains and, now, the workers strike.

Coal India has already missed its targeted production by 7 per cent for first five months ending August. For the full fiscal, analysts are expecting Coal India to produce 447 million tonnes as against the earlier estimates of 475 million tonnes.

This is also a reason that in the current financial year the coal deficit (now being met from imports) for the power sector will almost double to 80-85 million tonnes, which is almost 18-20 per cent of the total estimated requirement of 467 million tonnes. This gap could only be bridged through imports, which will more than double in current financial year.

Import viability
Import of coal is less viable especially for companies that have their plants located in the central part of India. According to analysts, the landed cost of the imported coal is around $140-145 per tonne. This gives the cost of per-unit power produced at Rs 2.5-2.7 per unit (variable cost). Adding another Rs 1.2-1.5 per unit of fixed cost, the total cost of power comes to nearly Rs 4 per unit.

These levels are not viable because companies which have captive fuel or assured supplies from Coal India produce power at less than half that rate. Coal India sells its coal output at prices that are 70-80 per cent lower that international coal prices. A rise in costs along with lower merchant rates (market rate) is hurting companies.

Companies, which were earlier claiming an internal rate of return of about 45 per cent, have seen that drop to as low as 11 per cent. Companies like JSW Energy and Lanco Infratech are among the most impacted given their high exposure to merchant power and lack of sufficient coal linkage. JSW Energy reported a return on equity (RoE) of 25.5 per cent in FY10. That, analysts now believe, could drop to 13.3 per cent in FY12.

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