According to reports, electricity generation by plants running on imported coal is likely to drop in the coming months following a sharp depreciation in the value of the rupee, tripping one of the few drivers of India’s flagging industrial production.
The near-20% rupee depreciation in the last six months has substantially increased generation costs of many power utilities that were forced to use imported coal because of stagnant domestic production, forcing them to cut generation.
“Rupee depreciation has made purchase of imported coal unviable for most companies. We currently have an energy deficit of around 10%. It can leap to 12-15% if domestic coal is not made available to them in the short term,” said a Planning Commission official.
This, in turn, is likely to have adverse ripple effects on India’s macroeconomic indicators.
Electricity generation grew 8.6% during April and October compared to 4.8% in the year-ago period, despite a 5.5% decline in coal production during the same period.
This growth was because of addition of imported coal-based 4630 MW of capacity in 2011 and boilers increasing blending of local coal with imported coal to 20-30%, up from traditional levels of 10-15%.
As a result, according to the Central Electricity Authority, India’s overseas coal purchases rose to 20.9 million tonnes between April and September from 12.3 mt during the same period last year.
In addition to the weakening rupee, imported coal too has become dearer by 30-35%. “Prices are so high that coal is piling in the ports and companies are reluctant to buy even at spot prices,” said Debashish Mishra, a senior director with Deloitte India. “Power cuts have already become a norm in many places and it’s likely to be worse going ahead.”
In November, more than 11mt of imported coal, enough to light up five cities as big as Delhi, was lying at ports for over four months as producers refused to buy the costly coal despite acute fuel shortage.
“This has significant implications for our near-term growth. Shortage of power will considerably weaken the impact of any monetary easing,” said Jyotinder Kaur, economist, HDFC Bank.
Power generation directly impacts around 2% of India’s gross domestic product and can stall growth in sectors like services and agriculture. “It can pull GDP down to 6.5% and in the long term might make achieving a growth of 8-9% unsustainable,” Kaur added.
Global investment bank Goldman Sachs recently cut the target prices of Indian generators across the board by up to 61%, citing earnings hit for the segment from a weak rupee, high fuel costs and delays in capacity addition.
Ratings agency Fitch has raised similar concerns over the increased dependence of Indian plants on imported coal and their inability to pass on the costs that is likely to lead to default on debt obligations.