It boils down to securing coal

M.V.S. Santhosh Kumar | Updated on November 12, 2017 Published on March 19, 2011

coal   -  Business Line


Coal availability has become a major issue for thermal power projects. Earlier, the delays in projects would neutralise the delay in coal production. However, coal production in recent times has been lagging behind capacity addition as execution delays are shrinking, especially in the case of private sector projects.

While the Ministry of Power is desperately trying to reduce the demand-supply gap in electricity, this is contingent on the availability of coal supply, given that two-thirds of the power projects to be commissioned during the current Plan are coal-based.

Hence, JSW Energy in the December 2010 quarter saw its fuel expenses double year-on-year, even as power generation and revenues only went up by 45 per cent and 39 per cent respectively. This has been the case with most other utilities which did not have the flexibility to pass on the rising fuel cost by way of regulated tariff. Sharp rise in fuel cost was a function of international spot coal prices shooting up due to the Australian floods stalling coal production.


The coal demand this fiscal is estimated to grow by 43 per cent more than the 2006-07 demand levels while the production may rise by only 32 per cent, widening the gap.

According to the Central Electricity Authority, another 20,000 MW of coal projects or (21 per cent of the current capacity) are expected to be added over the next 14 months while the coal production will only grow at historic rates of 6-7 per cent. This coupled with huge capacity-addition targets for 12th Plan aggravate the problem of fuel availability over the next five years.

In 12th Plan (FY13-FY17), around 74,000 MW of thermal power capacity is expected to be commissioned, with a majority of it being coal-based. Lack of definitive fuel supply may also hamper the financial closure of the projects in the 12th Plan, as financial institutions insist on coal availability.

In 2011-12, according to the Annual Plan Document, the import of coal is estimated to be 137 million tonnes as against 83 million tonnes in the current fiscal. The eleventh plan projections at 51 million tonne were revised higher due to slippages in production of Coal India (CIL).

The import gap takes into account non-power sector demand also. Such high levels of imports are exposing the coal-dependent sectors to volatile international prices, which have risen significantly over the past few months.

In the medium term, power players with their own captive blocks, if developed, will be better placed to tide over the widening demand-supply gap, followed by those with coal linkages. This category is followed by the companies which own mines abroad. These high quality mines are expensive compared with domestic mines, which would mean higher power tariffs to make the same returns. The last category, which sources coal in the e-auction market of CIL or global spot market, are most vulnerable to both fuel price and procurement risk. These projects typically sell in the short-term merchant market to improve their profitability.


Of the 208 captive coal blocks, around 113 have been allocated to private companies. The reserves of these projects are huge (49 billion tonnes of reserves), however, only 26 blocks are operational. These coal blocks, in 2009-10, cornered a modest 6.5 per cent of the total coal production. Of the 74,000 MW capacities to come up in 12th Plan, 44,000 MW capacity would have access to captive blocks.

However, the Ministry of Power is concerned about the delays in developing these mines, on account of environmental clearances, obtaining mining lease and land acquisition.

Most of the coal supply for the power sector is however through coal linkages. . More than 90 per cent of the non-coking coal mined by CIL is supplied to the power sector through this route. The ones with coal linkages would be subject to procurement risk while price risk is mitigated. But lack of adequate infrastructure for speedy movement of coal produced is a concern due to remote location of the mines and coal wagon shortage.


Tata Power, Adani Enterprises, Reliance Power, Lanco Infratech , Essar Power and JSW Energy have acquired full or part-equity stakes in coal mining companies abroad (Australia, Indonesia and South Africa).

Tata Power bought 30 per cent equity stake in PT Bumi Resources in Indonesia for taking care of its Mundra UMPP requirements. Reliance Power acquired two coal mining companies in Indonesia for its Krishnapatanam UMPP.

Adani Enterprises has been the most aggressive of the lot in acquiring coal mines as it invested heavily in Australia and Indonesia, which will not only take care of its coal trading requirements but also the demand from its subsidiary, Adani Power.

While these acquisitions will bring down the costs and increase the certainty of fuel availability, there have been concerns about logistics.


CIL is a good bet for investors, given that it is making up for the fall in production due to slippages by hiking prices. While the fuel price hike for power utilities is due, its concentration on e-auction prices, which are pegged to international spot prices, is margin-accretive.

It is also increasing its focus on coal beneficiation (quality enhancement) which would mean strong growth in realisations, despite missing the annual production targets. The uncertainty on environmental concerns may continue to limit the new capacity additions. However, some clarity from the statutory standpoint is a positive for the stock. Among the power bets, the companies which have operational mines, such as Jindal Steel and Power, or Tata Power, which has operational mines abroad, are good bets.

Investors should look out for companies with majority of the projects having coal linkages. For a company such as NTPC, all expenses are recovered through tariffs. Therefore, it is much safer bet compared to other private peers.

Reliance Power has one of the largest domestic private coal resource bases; however, it will be a long time before one could see some production coming out of these mines. Once there is some clarity on production from its mines, it may turn out to be a good bet.

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Published on March 19, 2011
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