Coal crisis brews as power demand surges, record global prices bite

Utilities are scrambling to secure coal supplies as inventories hit critical lows after a surge in power demand from industries and sluggish imports due to record global prices push power plants to the brink.

Over half of India’s 135 coal-fired power plants have fuel stocks of less than three days, government data shows, far short of central guidelines recommending supplies of at least two weeks.

Supply crunch

Prices of power-generation fuels are surging globally as electricity demand rebounds with industrial growth, and tightening supplies of coal and liquefied natural gas.

India is competing against buyers such as China, the world’s largest coal consumer, which is under pressure to ramp up imports amid a severe power crunch.

Rising oil, gas, coal and power prices are feeding inflationary pressures worldwide and slowing economic recovery from the Covid-19 pandemic.

Also see: CIL steps up coal supply to power utilities

“The supply crunch is expected to persist, with the non-power sector facing the heat as imports remain the only option to meet demand but at rising costs,” Crisil said in a report this week, adding that it expects Asian coal prices to continue to increase.

“Coal inventory at thermal plants will improve only gradually by next March,” it added.

Falling coal imports

Indian power producers locked in long-term agreements with distribution utilities cannot pass on higher input costs unless a clause to pass on such expenses is written into the contract.

Traders and officials at utilities said buying of imported coal by power plants has been muted due to high prices.

India’s average weekly coal imports during August through to late September — when global coal prices rallied over 40 per cent to all-time highs — dropped by over 30 per cent from the average for the first seven months of the year, according to data compiled by Kplr.

The import total for the most recent week was under 1.5 million tonnes, the smallest in at least two years. Websites of major coal importing State utilities did not show any new tenders seeking new cargoes this month.

Global prices vs CIL prices

Coal prices from major exporters have scaled all-time highs recently, with Australia’s Newcastle prices rising roughly 50 per cent and Indonesian export prices up 30 per cent in the last three months.

The September Indonesia coal price benchmark was as much as seven times higher than similar quality fuel sold by Coal India to Indian utilities, according to Reuters calculations.

Also see: Commodities market likely to be volatile until early next year

“Traders who bought coal from Coal India in the spot auctions are making a killing. They are selling at 50–100 per cent premiums,” said a senior official in charge of sourcing coal at a large Indian utility operator.

CIL said this week higher global prices of coal and freight rates have pushed utilities dependent on imported coal to curtail power production, resulting in higher dependence on domestic coal-fired plants.

India is the world’s second largest importer of coal despite having the fourth largest reserves. Utilities make up about three-fourths of its overall consumption, with Coal India accounting for over 80 per cent of the country’s production.

Industrial power demand surge

Power plants are also grappling with surging demand from industries as economic activity rebounds from the latest wave of Covid-19.

Power consumption in industrialised States including Maharashtra, Gujarat and Tamil Nadu grew between 13.9 per cent and 21 per cent in the three months ended September (Q2FY22), a Reuters analysis of data from POSOCO showed.

The three States account for nearly a third of India’s annual electricity consumption. Industries and offices account for half the country’s annual electricity consumption. During the last two quarters of FY21, the residential and agricultural sectors were key drivers of power consumption after the first wave of Covid.

“This year, we have seen tremendous growth in industrial demand,” said Shahmeena Husain, Managing Director of Gujarat Urja Vikas Nigam.

While there have not been any large scale power outages in India, deficits have increased nearly four-fold from negligible levels recorded last year, POSOCO data showed.

Also see: Why is India facing a coal shortage?

The shortages have so far been mostly restricted to northern States such as Uttar Pradesh, Bihar and Kashmir, the data showed.

“Domestic consumption increased by about 10 per cent in the last two years because of work from home and air conditioning,” a senior Tamil Nadu government official told Reuters.

“Following opening up of industries after the second wave, industries are king,” he added.

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