In January 2017, India’s coal imports declined by 22 percent to 14 million tonnes (refer) because of lukewarm demand from power generating stations. Coal India Limited, which accounts for 80% of domestic coal production, has posted its worst ever financial results for H1-FY17 as revenues declined even as expenses rose (refer). At the same time, PLF of thermal power stations continues to be near all-time lows of under 60% (refer).
- The Indian government’s aggressive electrification policy – with electrification of over 12,000 villages of the 18,452 unelectrified villages since 2015 – and UDAY reform package for DISCOMs are failing to bolster power demand;
- India’s coal-fired power sector continues to suffer rising challenges posed by lack of demand, improving price competitiveness of renewable power and growing regulatory risk;
- Private investors planning long-term investments in coal mining or thermal power generation are likely to be put off by the combination of demand, offtake, regulatory and environmental risks;
This is all a big change from just three years ago, when coal availability was the main constraint for India’s growing power generation capacity. The reason for this reversal: while both power generation capacity and coal production have grown significantly, demand growth for power has failed to keep up.
But power demand from more than 300 million people unconnected to or unserved by the grid is failing to materialize despite the Indian government’s aggressive electrification policy – aim to achieve 100% electrification by 2018 – and UDAY reform package for DISCOMs. Politics continues to dictate power pricing. Just last week, the Government of Rajasthan decided to roll back a marginal but much-needed hike in electricity prices for agricultural consumers which pay a measly tariff of INR 0.90 (US¢ 1.3)/ kWh, significantly below the cost of supply. Elsewhere, UDAY stipulated tariff hikes are not happening and, in fact, difference between the average cost of supply and average revenue realized has widened in Haryana, Madhya Pradesh, Punjab, Karnataka, Jharkhand, Bihar and Uttarakhand (refer). Understandably, DISCOMs prefer to not supply power to loss-making consumers providing none-too-optimistic scenario for power demand.
Despite weak demand growth, the National Electricity Plan, December 2016 shows that around 50 GW of additional thermal capacity is under various stages of construction. Private investors in coal mines and thermal power generation projects will face the brunt if demand doesn’t pick up. In absence of demand growth, record low tariffs and ‘must run’ status of solar plants are likely to hurt sentiment for thermal power sector very badly.
We noted in our recent blog on Rewa solar project (refer) that falling cost provides a huge demand pull for solar power, which has suddenly become very desirable. But it is not all good news. Excess thermal capacity, poor financial condition of DISCOMs and low demand are also expected to hurt growth prospects for solar power in the long run.