Power - Coal supply: Where there is will, there is way; Edelweiss PDF link

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The ongoing coal shortage issue in India seems exaggerated on both quantum and pricing fronts. Based on our analysis of available options, we believe that the situation is manageable in the medium term even if the output does not rise by more than ~20 MT/year. Though an increase in the output is the only viable long term solution, there are multiple options available based on current rules/policies and further aided by the new FSA directive that stipulates a minimum of 80% supply. These include economical coal transportation, higher allocation to efficient plants and price pooling among similar grade users. These steps would translate into savings from rail freight and economies of scale which would help reduce the impact from inevitable coal imports.

Transport economics to optimise 32MT coal

We mapped the distance between ~60GW power plants (operational post FY09) and designated coal mines as well as the nearest port.  We estimate that there would be significant savings in transport costs as ~52MT of coal would travel lesser distance due to these plants’ proximity to a port rather than LoA designated coal mines. Considering that these plants can blend 40% of imported coal, ~20MT can get diverted. Similarly, we find that ~9GW power plants (commissioned prior to March 2009) consume ~20MT, but operate at an average PLF of 34%. Of this, we believe that atleast ~10MT could be unlocked by transmitting electricity in lieu of the coal diverted. Inventory unwinding, restricting coal supplies to 90% ACQs towards existing FSAs, making efforts to reduce pilferage (automatic if coal does not travel long distances) and optimising e-auction quantity will further boost supplies and reduce imports.

Economies of scale, grade-based price pooling to trim cost impact

The demand from LoA plants is expected to be ~129MT in FY13 rising to ~230MT in FY15, necessitating imports of 88MT in FY13 and 134MT in FY15. This translates into a blending of ~70% which would be unviable both technically and commercially. The ~64GW plants (CoD prior to FY10) consume ~270MT of domestic coal, leading to ~74% PLF. Assuming coal shortage as the key reason for sub-optimal PLFs, such plants could also import to enhance efficiency. Considering that different plants will require different variety of coal, if import is price-pooled (based on pairing imported coal’s CV with the corresponding CIL grades), the impact on the user will be lower. These twin efforts combined with the efficient transport economics will not only enhance electricity generation, but also significantly reduce the impact on tariffs.

Consensus, political will must for successful implementation

Success of the above initiatives is contingent on the willingness of various entities (including ministries) involved. If a consensus is reached, all administrative issues and reworking terms of coal supplies can easily be overcome as savings that would lead to lower tariffs could easily justify the entire effort.

Power - Coal supply: Where there is will, there is way; sector update

    

Regards,