Standard Post with Image

Emkay`S Take on Power Sector Post FSA Announcement

  • Committee of secretaries constituted by PMO under chairmanship of Pulok Chatterjee has asked CIL to sign FSA, for all power plants commissioned up to Dec11, by Mar12, with 80% penalty trigger level. Also, without a timeline, it has been agreed that FSA will be signed for power plants COD up to Mar 2015.
  • Emkay Global Financial Services said, ``The only solution to the fuel issues is mid to long term in nature - which is increase in production - we believe, as per current electricity demand elasticity and logistics constraint, coal is already being imported up to optimum quantity. If the demand for power at higher cost would have been there, power producer`s themselves would have imported more coal and run plants at better PLFs. However, this is not happening and plants are running at low PLFs - that`s because of very high elasticity of electricity demand to the tariffs. Therefore, the only solution to the fuel issues is mid to long term in nature - which is to increase the production. But, we do not believe it`s possible in FY13E. As per CIL, its production target in FY13E is about 460 million MT, a growth of about 5.7%. However, out of 460mn MT, 18mn MT depends upon projects in which final clearances are pending.``Following are the key highlights of the report from Emkay Global Financial Services:

Current FSA qty and incremental required in FY13E after new FSAs:

  • CIL had signed FSAs with ACQ of 305mn MT up to Mar. 09. Thereafter, about 19,800MW with LOAs (qty-83 million MT) has commissioned till Jan12 and further 8,500 MW with LOAs (qty- 36 million MT) is scheduled to commission by Mar12. Further about 17,000MW with LOAs (qty-70 million MT) are likely to commission in FY13E. Coal supply to power in FY12 is likely to be about 306 million MT vs. 296 million MT in FY09. This means that for new projects CIL is currently supplying (1) about 10mn MT coal and (2) some qty freed up from FSAs before Mar09 (which at 90% penalty level cannot be more than 20mn MT).
  • Considering 80% penalty level for new FSAs, CIL requires about 123 million MT (80% of 36 + 83 + 70/2) in FY13 for new FSAs. Of 123 million MT, about 30mn MT (10+20) can be supplied with the production level up to FY12. Further, considering production growth of 5% in FY13, about 20 million MT additional can be supplied. The balance left is 73 million MT (123 - 30 - 20) - to be met through imports.

Different possibilities, feasibility and beneficiaries/losers:

  • All the imported coal to be supplied under new FSAs with price impact only on new FSAs; old FSAs continuing with earlier domestic quantity and pricing.
  • Quantity of coal to be imported would be about 73 million MT or 60% of new FSAs in FY13E. Given maximum possible blending of 30% in a boiler designed to use domestic coal, it would be technically not feasible to blend 60%. Considering almost all the projects which are given LOAs are based on boilers designed to use domestic coal, this possibility is ruled out. Also, private power producers have been reluctant to enter into long term supply agreements for imported coal at current prices and without which it would not be feasible for CIL to enter into long term contracts with coal suppliers and guarantee 80% of ACQ. Plus, for private producers, its as good as importing coal themselves, rather they would be more comfortable in importing coal themselves than asking coal India to import for them.

Imported coal is supplied to both old and new FSAs, with price pooling:

  • Though policy wise, this seems all right considering most of the FSAs (old + new) will be supplied about 20-25% imported coal and balance domestic coal-therefore everyone almost paying same price (quality adjusted). But this will involve two issues (1) pricing and (2) logistics. Considering, lots of plants are pit head plants and it wouldn’t make sense to supply imported coal to pit head plants and part of the domestic coal from there to some other location involving huge transportation costs in both the cases. Secondly, even though, theoretically it’s possible to import such huge quantity of coal up to ports but it would be logistically very difficult and costly to transport the coal to almost all the power plants. For example, in October 2011, CIL had agreed to divert e-auction coal to power sector but not even 1mn MT was lifted because of logistics and cost.
  • Further, in price pooling, coal cost for everyone will increase including NTPC leading to increase in power purchase cost for all SEBs. Given, SEBs situation will worsen and cost of power will increase, this will lead to more backing down instructions (already at current tariff levels, NTPC has been consistently asked to back down). Given-(a) electricity demand growth is unlikely to be higher than 9% and (b) if all the plants are supplied minimum 80% coal - PLFs of all the plants will come down to 60-70% levels leading to cascading effect on SEBs.
  • This solution will lead to lots of opposition by states and civil groups with PIL`s being filed. This will attract a lot of controversiesBeneficiaries -Private power producers mainly Adani power (Mundra IV and Tiroda I), India bulls power (Amravati I and Nashik), Lanco Infratech (Anpara, Babandh, Vidarbha and Amarkantak), KSK energy (Wardha Warrora), Losers - SEBs (higher power purchase cost), power consumers (higher cost for power), Coal India (import disparity to reduce, penalty on non-performance, part of eauction might have to be diverted to FSAs) and NTPC (backing down instruction will increase-will lead to lower heat rate gains)

Imported coal is supplied to only new FSAs but price is pooled with Old FSAs:

  • Even though, as explained in the first point that it would not be technically possible to blend more than 30% imported coal and therefore all the imported coal cannot be supplied under new FSAs. But for the time being, if we assume that this remains a possibility somehow, then pricing issues will be similar to the second possibility.Beneficiaries-Private power producers mainly Adani power (Mundra IV and Tiroda I), India bulls power (Amravati I and Nashik), Lanco Infratech (Anpara, Babandh, Vidarbha and Amarkantak), KSK energy (Wardha Warrora).Losers - SEBs (higher power purchase cost), power consumers (higher cost for power), Coal India (import disparity to reduce, penalty on non-performance, part of eauction might have to be diverted to FSAs) and NTPC (backing down instruction will increase-will lead to lower heat rate gains).

Source