Explanation: Why is India facing a coal shortage?
CHENNAI, October 1 (Reuters) – India’s utilities scramble to secure coal supplies as stocks hit extremely low levels. Read more
Here is a brief summary of the factors that led to the country’s coal shortage.
WHAT ARE THE CURRENT STOCK LEVELS?
As of September 29, 16 of India’s 135 coal-fired power plants had no coal stocks, according to the Central Electricity Authority (CEA). More than half of the factories had stocks that lasted less than three days, while more than 80% had less than a week of stock.
Coal accounts for over 70% of India’s electricity production, and utilities account for around 75% of India’s coal consumption.
WHAT CAUSED THE COAL SHORTAGE?
India’s industrial electricity demand increased after the second wave of the coronavirus pandemic. On top of that, a growing price gap between lower domestic prices and record world coal prices has led buyers to shy away from imports.
State-owned Coal India (COAL.NS), which produces more than 80% of India’s coal, said on Wednesday that an increase in global coal prices and freight costs had led to reduced power generation by plants using imported coal, adding to the pressure on utilities using domestically mined coal to increase production.
WHY ARE THE PRICES BETWEEN NATIONAL AND GLOBAL COAL SPREADING?
Domestic coal prices in India are largely decided by Coal India. An increase in coal prices usually has a ripple effect on electricity prices and inflation, making a rise a politically sensitive decision.
Indian coal has kept prices stable over the past year despite the sharp rise in global coal prices over the same period. Although the president of the company has said the miner will raise prices, it’s not immediately clear when that will happen.
Meanwhile, benchmark coal prices in Asia have reached record highs in recent times, supported by global demand for fuels for power generation as economies open up. A major energy crisis in China is the latest event driving global demand for fuel.
WHY CANNOT PUBLIC SERVICES RECOVER HIGHER COSTS?
Electricity tariffs in India, set by the respective states, are among the lowest in the world, according to the globalpetrolprices.com website, as state-run distribution companies absorbed higher input costs to keep prices stable.
This has left many of these companies deeply in debt, with cumulative liabilities running into the billions of dollars.
Stretched corporate balance sheets have systematically triggered payment delays to power producers, often affecting cash flow and discouraging further investment in the power generation sector.
Indian power producers bound by long-term agreements with distribution utilities often cannot pass on higher input costs unless clauses are included in their contracts.
WHAT DOES THE CRISIS IN INDIA MEAN FOR GLOBAL COAL MARKETS?
India is the second largest importer, consumer and producer of coal and has the fourth largest reserves in the world. It imports mainly from Indonesia, Australia and South Africa.
CRISIL, a unit of rating agency S&P, said it expects Australian and Indonesian thermal coal prices to rise over the remainder of the year, due to supply constraints and strong demand from China and elsewhere.
WHO ARE THE WINNERS AND THE LOSERS?
Shares of Indian power producers NTPC Ltd (NTPC.NS), Tata Power (TTPW.NS) and Torrent Power (TOPO.NS) and Coal India have risen sharply in recent weeks, driven by growing demand for electricity.
An official from a large utility operator said that many traders who bought coal at national spot auctions sold the fuel at very high prices.
Many non-coal consumers and import-based power plants have cut back on production due to high foreign prices.
While large-scale blackouts like those in China seem unlikely in the immediate future, parts of the country could face power outages, officials said.
Reporting by Sudarshan Varadhan; Editing by Florence Tan and Lincoln Feast
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