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Power sector issues: Problem not of coal supply, but of demand from thermal plants

Almost unnoticed, a strange transformation has come about in the power sector. For the last few years the industry has been reeling from a massive shortage in coal, which fuels that vast bulk of power plants in the country. There were days towards the end of last year when power plants had just enough fuel to last a few days Ideally, a thermal plant should have enough coal to last it about three weeks. By the first week of November last year, hit by shortages of domestic coal and a slowdown in supplies of imported coal, the thermal power industry had just enough coal to last it for about five days. More than 50 of 90 thermal plants for which data is recorded reported coal stocks as 'critical' — they had less than a week of stocks left.

 But March onwards the transformation has been dramatic, at least on paper. Coal stocks with power plants, an important measure of the adequacy of fuel, have risen sharply since March. By the last week of August, coal stocks for the thermal power industry had reached 19 days (that figure has since dropped to 16); in other words plants had enough coal by end-August to last them almost three weeks — close to the ideal.

 Last month, it was reported that Coal India has signed fuel supply agreements (FSA) to supply coal to 16 private power projects with a generation capacity of 14,000 MW, and in which a total of Rs 84,500 crore has been invested. FSAs for nine more projects worth Rs 41,200 crore are also in the pipeline. So what happened? And does that mean the power sector's coal problems have been fixed? Producers themselves hardly think so.

 And the plentiful availability of coal with plants sits uncomfortably with another statistic — the extent to which plants are actually using that coal to produce energy. Thermal plants are actually producing less power than they were before. For August for instance, the 'plant-load factor' — effectively a measure of capacity utilisation — was just 55%, compared with 61% in August last year.

 "Coal stocks should not give a false sense of fuel security," says Ashok Khurana, director general of the Association of Power Producers (APP). Put simply, thermal plants have more coal than ever but they are producing less power than before. What's wrong?

 An Old Problem

 Part of the reason for the high coal stocks is straightforward. It's that time of the year when demand for power is more benign than it is during the hot summers across the country, or the winters when demand soars in north India. Anticipating disruptions to coal supply during the monsoon, power plants typically stock up coal to tide.

 "The decline in the plant load factor is also due to the fact that economic growth has been weak," points out Dipesh Dipu, associate professor at the Administrative Staff College of India. "This slowdown is also affecting the demand for power." But there is a deeper problem as well. Vinayak Chatterjee, chairman and managing director of Feedback Infra, an infrastructure services and advisory firm, says: "The locus of the crisis has shifted from being a coal supply-driven problem, to a problem of distribution companies' buying ability."

In other words, the power sector's problem, which was earlier one of coal supply, has now turned into a problem of demand. The state electricity boards which are the sector's main customers are not able to afford power. "The intermediary [distribution company] is just not willing to buy power due to its financial constraints," says Khurana.

 This has occurred despite a major financial restructuring package implemented for the distribution companies by the government. Under the terms of the plan, half the liabilities of power utilities will be taken over by the state government, and the remaining are to be rescheduled by lenders, with a moratorium of three years on principal.

 In addition to the implementation of the plan, a number of discoms have already put in place long overdue tariff hikes. According to data compiled by rating agency ICRA, tariff hikes in 2013-14 range between 5% and 13%. Ironically, the power sector is to an extent getting hoist by its own petard. Due to the problems of coal shortages, the industry turned to more expensive imported coal. It had heavily lobbied to be allowed to 'pass through' higher coal prices to end-consumers.

 That proposal got the government's nod but the sector hadn't apparently reckoned with the customers themselves. State discoms, many of them under pressure to improve their balance sheets, have simply refused to buy more expensive power. So the industry stares at a piquant situation.
On the one hand, rates in the power exchange, where customers can buy power for as little as a day in advance and where they are under no obligation to sign a long-term contract, have slumped to well below Rs 3 per unit. But at those rates, it doesn't make sense for the thermal plants running on a mix of imported and domestic coal to supply power. Thermal plants typically are able to recover fixed costs at a plant load factor of 85%.


Source: The Ecomonic Times