Award of fresh coal linkages positive for the power sector: ICRA

V Rishi Kumar Hyderabad | Updated on February 20, 2020 Published on February 20, 2020

But, high base tariff discount negative for IPPs, says ICRA

The Central Government’s efforts to award coal linkages under its Shakti policy to independent power projects having long-term PPAs on an auction basis will have a positive impact on coal-based power plants, rating agency ICRA has said.

Said Sabyasachi Majumdar, Group Head & Senior Vice President, ICRA: “On the positive side, the availability of coal linkage would enable the plants to declare normative availability, allowing recovery of fixed charges and improve merit order position. The winning bidders can offset the discount offered in tariff to some extent through efficiency gains in station heat rate and auxiliary consumption. Further, the higher discount in tariff would be positive for the distribution utilities.”

“On the flip side, the increase in base discount is a negative for coal-based power projects, given that most of the coal-based assets without fuel linkages are financially stressed. They are also likely to be facing under-recoveries in fixed charges under their PPAs because of significant increase in project capital cost and fine tariffs quoted under the competitive bidding for securing long-term PPAs.”

For instance, the reduction in tariff by 7 paise per unit at a 60% PLF (plant load factor) level for a coal-based power project with capital cost of ₹7.5 crore per MW and having a long-term PPA for the entire capacity, would reduce the debt service coverage by 0.05 times over the debt repayment tenure and the IRR (internal rate of return) by 50 bps.

Domestic coal production by Coal India Ltd (CIL) witnessed a decline of 3.9% in the first 10 months of FY2020 on a y-o-y basis. This is being attributed to the extended monsoon season and the labour issues at CIL. As a result, CIL’s supply to the power sector declined on a y-o-y basis. However, the impact of this decline on thermal power generation remains limited so far, given the slowdown in electricity demand growth as well as higher supply from other sources like hydro, nuclear and renewables.

Thermal power generation declined by 2.8 per cent in the 10 months of FY2020 on a y-o-y basis, with the demand growth slowing down to 1.3 per cent compared with the reported growth of 5.7% in the corresponding period of the previous year.

Domestic coal production would have to be ramped up to meet the incremental demand driven by the expected improvement in electricity demand growth, award of fresh coal linkages, and given the government’s objective to reduce dependence on costlier importer coal.

Along with higher production, this would require augmentation of the rail transmission infrastructure to ease the logistic issues for coal supply, ICRA said.

Published on February 20, 2020
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