Rising Fuel Imports for Power Generation

we o P

riff a rT

e Fu

s t r o p l Im

Regular tariff hikes critical

CRISIL Insights

About CRISIL Insights: CRISIL Infrastructure Advisory provides advisory services to large industries, investors, multilateral agencies, regulators and governments in 20 emerging economies across the world. CRISIL Infrastructure Advisory is a division of CRISIL Risk & Infrastructure Solutions Limited (CRIS), a wholly owned subsidiary of CRISIL Ltd. CRISIL is a global analytical company providing rating, research, and risk and policy advisory services. Our services enable governments to shape public policy, create sustainable and transparent regulatory frameworks, carry out reforms and create bankable infrastructure projects, thereby attracting investments in infrastructure. We help public institutions undertake economic and sector reforms and improve service delivery. We catalyse private sector participation by providing investors support in investment analysis and valuation, and in bidding activities CRISIL Insights, a knowledge-sharing endeavour of CRISIL Infrastructure Advisory, aims to: n Share research insights and updates based on our deep domain expertise n Present ideas to design, strengthen reform programmes n Share case studies on industry good practices n Highlight the issues plaguing the infrastructure sector; present possible solutions n Inform readers about workshops and events related to the infrastructure n Provide updates on policy and regulation to players in the infrastructure sector.

Authors Ajay Dwivedi Sr. Director - CRISIL Infrastructure Advisory Email: [email protected]

Saurabh Kamdar Associate Director - Corporate Advisory Email: [email protected]

Growing fuel imports make regular growth in Indian power tariffs more urgent Traditionally, electricity generation in India has been powered largely by domestic coal, India being rich in coal reserves. As a result of this, and the fact that the price of domestic coal is government controlled, Indian power utilities were able to effect regular and moderate tariff increases to offset fuel price growth. However, in the last few years, domestic coal production has slowed down, necessitating coal imports for power generation. Imported coal is about 60% costlier than domestic coal on an energy equivalent basis. Moreover, the price of imported coal is more volatile than that of domestic coal. This trend of rising coal imports which has taken the share of imported coal in coal based power generation to beyond 15% presently is expected to continue. This makes it imperative that power tariffs in India rise in line with fuel costs to ensure that Indian utilities remain financially viable. India’s dependence on imported coal for power generation grows Coal production in India has stagnated in the four years ended FY12, growing at a compounded annual growth rate (CAGR) of 4% (Refer Figure 1). Over the last 12 years, volume growth in domestic coal usage for power generation has been 6% p.a. as compared to 24% p.a. for imported coal. The increase in dependence on imported coal has been particularly sharp in the last two years - majority of the increase in total coal usage by the power sector in the last two years was met by imports. Consequently, the share of imported coal usage for power generation by volume doubled in this period to 15% (Refer Figure 2). Moreover, the share of imported coal in power generation by energy content stands at an even higher level of 18%.

Figure 1: Indian coal production and imports 500 450

397

400 350 300 250

Figure 2: Coal consumption for power generation

Stagnation in domestic production

304 312

336

419

440 442

362

90% 80% 70%

251 265 235 243

60%

50% 43%

50%

200

40%

150 80

100 50

95%

100%

8

6

8

5

11

19

21

27

28

30

46

0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

30%

19%

21%

13%

20% 10%

3% 0% 2% 3%

0% 4% 2%

6%

7% 6%

9%

0% 7% 7% 6%

15% 9%

0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Share of Imported Coal in total coal consumption

Domestic Coal (MT) : CAGR: 6% Imported Coal (MT) : CAGR: 24%

Source: Ministry of Coal

Share of imported coal in Incremental coal consumption

Source: CRIS Analysis

This reliance on imported coal for power generation in India is expected to continue. By FY2017, imported coal would account for about 20% quantum for coal based generation and 19% of all generation in India (Refer Figure 3 and 4). This is inspite of the fact that domestic coal production volumes for power generation are expected to pick up over the next five years to register a CAGR of 9% from the CAGR of 5% of the previous 5 years. In this period, imported coal usage for power generation, is expected to grow at a CAGR of 13%, down from 30% of the previous 5 years (Refer Figure 4).

1

Figure 3: Expected change in generation mix 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

Figure 4: Expected coal consumption trends 25%

22%

21%

20%

20%

19%

10%

10%

9%

8%

8%

7%

12%

14%

16%

17%

19%

19%

24%

20%

21% 17%

19%

20% 19%

18%

15%

15%

15% 11% 10%

11%

10%

10% 54%

54%

54%

55%

53%

11%

5%

53%

2013 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17

3%

2%

0%

2014

2015

2016

2017

increase in Domestic coal consumption: CAGR: 9%

Domestic Coal

Imported Coal

Increase in Imported coal consumption : CAGR 13%

Gas

Hydro & Renewables

Import as % of Total Coal consumed

Source: CRIS Analysis

Source: CRIS Analysis

Higher coal imports increase the price of the fuel basket and make it more volatile Imported coal is priced at 1.6 times the price of domestic coal on an energy equivalent basis. Moreover, the typical freight costs of coal imports are about 1.2 to 1.5 times that of domestic coal on an energy equivalent basis. Further, while domestic coal prices have grown at about 6% p.a. over the last five years, imported coal prices have grown at about 12% p.a. in this period (Refer Figure 5). Figure 5: Coal price movement - domestic & imported 7000

Figure 6: Gas price movement

900 800 700 600 500 400 300 200 100 0

6000 5000 4000 3000 2000 1000 0

Imported Coal Price (Rs/MT) - GCV adjusted - Australia CAGR 12% (L.H.S)

6.0 5.0 4.0 3.0 2.0 1.0 0.0

Average Domestic Coal - CIL Price (Rs./MT) CAGR 6%

(R.H.S) Average Production Cost for Coal Block CAGR 6% (R.H.S)

Source: Domestic Coal - Coal India, ROM Prices; Imported Coal - Coal spot.com, FOB prices

Average Gas Price ($/mmbtu) CAGR 9% Source: Average price compiled by CRIS, based on APM, non-APM and RLNG sources, at land fall point.

An added factor is that increasing imports add to the price volatility of the fuel basket for power generation as prices of imported coal are more volatile than that of domestic coal. All this clearly indicates that, as the dependence of power generation in India on imported fuels grows, power tariffs need to become more responsive to costs, in general and fuel prices, in particular.

2 2

Imported coal-based plant is emerging as marginal station The fuel cost component in power tariff for new power plants stands at about 34% for captive coal, 44% for CIL coal, 55% for imported coal, 62% for domestic gas and 79% for imported LNG (Refer Figure 7). As the reliance on imported fuel grows, the fuel cost component in power tariffs will be both higher and more volatile. Figure 7: First Year Cost of Generation for a new super critical plant in FY12 8.0 7.0 5.5

6.0 5.0 3.20

2.74

3.0 2.0

4.3

4.00

4.0 1.8 0.9

1.0

1.4

34%

2.9

3.10 2.2

1.8

1.8

1.9 4.8

44%

55%

1.2 62% 3.8

Linkage

Imported Coal

Domestic Gas

3.6

1.2 7.4 79%

0.0 Coal Blocks Fuel (Rs./kWhr)

Fixed (Rs./ kWhr)

Total (Rs./ kWhr)

Share of Fuel Cost

R-LNG

Levelised COG (Rs./KWhr)

Source: CRIS Analysis

Tariff implications of high reliance on imported coal Over the last six years, the average generation cost increase for all power generators due to higher fuel costs was about 49 paise per unit. Of this, an increase of 10 paise was attributable to the change in fuel mix. Fuel cost growth accounted for ~48% of the increase in power procurement cost of distribution utilities. Over the next five years, the average generation cost increase for all power generators due to higher fuel costs is expected to be about 77 paise per unit. Of this, an increase of 16 paise is attributable to the expected change in fuel mix. Fuel cost growth is expected to account for over 50% increase in the power procurement cost of distribution utilities.This rise in fuel cost will, if all other things remain equal, necessitate 4.5% p.a. growth in tariffs over the next five years. Figure 8: Average cost of power procurement (Rs./kWhr) 6.00 5.00 4.00 3.00

3.06

3.29

3.35

3.46

2007-08

2008-09

2009-10

2010-11

2.75

3.77

4.05

4.38

4.67

5.01

5.30

2.00 1.00 0.00 2006-07

2011-12

2012-13

2013-14

2014-15

2015-16

2016-17

CRIS Projections Source: CRIS Analysis

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Can the tariff impact of India’s changing fuel mix be moderated? CRISIL Infrastructure Advisory believes that the impact of the above changes in India’s fuel basket on tariff can be ameliorated by the following: 

Optimising the allocation of coal linkages –Coal-based resources in India are concentrated in central and eastern India, particularly, in the states of Jharkhand, Orissa, and Chhattisgarh. Allocation of coal from mines situated here to particular users has evolved incrementally over the years. This has led to some unnecessary movement of coal as users are not being supplied coal from the most geographically proximate mine. Optimisation of these linkages can reduce the estimated tariff impact of 77 paise by about 5 paise. This can lead to a potential annual saving of about Rs.8000 crore



Exploration of non-traditional ways of transportation to reduce freight cost –Ways to ease transportation bottlenecks need to be explored to reduce the freight cost; and these include options like coastal shipping, and creating dedicated corridors from coal-rich regions for transportation to the nearest port or to the key consuming areas.



Undertaking Case 2 Projects with pit head location of power plants



Instituting better control mechanisms to curb losses in transit

However, the real key to changing the situation lies in kick-starting domestic coal production by exploiting India’s rich coal reserves. Proven reserves in just six states of India have the potential to satisfy our energy needs for about 100 years (Refer Figure 9).

Figure 10: Coal blocks – Allocations/De-allocations

22 12

9

9

5

45 40 35 30 25 20 15 10 5 0

60

53 52

50 40 30

24

24

20 20

Years it can support country's power requirement Source: Ministry of Coal, CRIS Analysis

Allocated

6 7 2008

3 2006

2004

2003

2002

2001

1 2000

1

2007

5

1 2 1

2005

4 3 1999

1997

0 1 1996

1995

Proven Reserves (Million T)

1993

0

1 1 2

1998

7 3

1994

10

15

3

1 2 2011

40

2010

4

45000 40000 35000 30000 25000 20000 15000 10000 5000 0

2009

Figure 9: Coal reserves

Deallocated

Source: Ministry of Coal

To effectively harness this potential, mining policies must incentivize timely production from captive coal blocks with a penalty of de-allocation, where necessary. While 87% of the allocated captive coal blocks have not started production, only 10% have been de-allocated (Refer Figure 10). Moreover, coal-block linked award of power projects, coupled with rigorous performance penalties, can be a useful addition to the suite of options to better harness domestic coal reserves.

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