The Coal Ministry has forecast coal shortfall to be 104-121 mt by end-2012 and 200 MT by 2016-17. This comes on the back of Planning Commission deciding to reduce the 11th Plan (2007-12) annual production estimates from 680 mt to 630 mt (486 mt from CIL, 81 from captive mines, and rest imports). However, this revised coal production target too appears difficult to achieve, with more realistic estimate being 592 mt.
The capacity addition expected based on coal linkage provided by Coal India Limited (CIL) itself is about 40 GW in the 2011-14 period. Assuming an 85% plant load factor (PLF), this would require about 200 mtpa of additional coal, whereas the incremental coal availability, assuming an 8% production growth, would be just around 73 mpta, leaving a whopping deficit or an average PLF of 40% for these new plants.
This leaves generators of all kinds with no option but to blend large quantities of imported coal. The inevitable cost escalation will adversely affect their profitability. Since NTPC has the largest exposure to CIL, it is naturally among those most likely to be affected by the coming deficits.
Since the contract agreement of standard PPAs, especially the tariff-based bids, excludes fuel supply from force majeure provisions, the entire cost escalation may have to be borne by the generator. Much the same would be the fate of private IPPs who won bids under Case I bids, whose tariffs are already determined. The profitability of merchant power plants, seen no long ago as an extremely profitable business opportunity, too will come under severe strain.
A significant number of generators who won Case I bids in recent years do not have firm coal tie-up for a major share of their coal and rely on spot purchases. This exposes them to severe risks on coal availability and coal pricing. Merchant power plants without coal tie-ups are even more vulnerable, being exposed to both fuel and price volatility.
Further, though the CIL issued Letter of Assurances to generators, many of them have not been converted into firm contractual Fuel Supply Agreements (FSAs). This means that while supplies of coal to these plants are on for now, in the absence of a firm FSA, CIL is not bound to maintain a minimum supply round the year. This has shaken up investors who face the risk of developers defaulting on their debt repayment commitments.
In light of all these developments, it is not surprising that, as the Businessline reports, investor interest in private generation is petering out. In any case, this reduction in investor interest was inevitable since the surge in power sector lending of recent years had left many banks with portfolios excessively exposed to the power sector. In order to re-align themselves to their regulatory commitments, they were already paring down lending to power sector.
All these problems comes even as CIL grapples with its failure to increase production capacity (it produces 80% of the country's coal production). Ading to the woes, the Ministry of Environment and Forests' (MoEF) refusal to accord clearances has left an estimated 203 blocks with combined reserves of 600 mtpa and potential generation capacity of 130 GW in limbo. The MoEF in 2009 had categorised these 203 coal blocks as "no go" mining zone. The Coal Ministry has been demanding permission to mine at least 90% of these 203 blocks to meet the ever widening demand-supply gap of the dry fuel.
None of these include the big risk posed by the worsening finances of State Electricity Boards, whose accumulated losses have crossed Rs 55000 Cr. These losses are certain to rise further when distribution losses are 25-30% and more than 20% of electricity is given free to farmers. Saddled with such huge debts, discoms are not likely to venture into spot market purchases, except when faced with an electoral season. This will add to the woes of an already volatile and deficient spot market.
In recent weeks, the government has also started cracking down on developers who though allocated coal blocks had not started developing them. A panel set up by the Coal Ministry has recommended issuing warnings to 29 coal and three lignite blocks allocatees, apart from the cancellation of 14 coal blocks and one lignite block to six PSUs, including NTPC and three private firms for failing to develop the mines.
Update 1 (26/1/2012)
The Economist writes,
"By the year to March 2017 domestic coal production will meet only 73% of demand, leaving a gap of some 230m tonnes, almost five times the level of 2012. Include other industries that use coal, such as steel, and some analysts calculate that India’s total imports by 2017 could reach some 300m tonnes. That is on a par with the current exports of Australia, or those of Indonesia, South Africa and Canada combined."