With coal shortage at power stations, an early peak in demand, and the discoms struggling to keep electricity prices in check, India is poised to experience a dark summer in 2018. 

While power project developers are already struggling for timely payments from the distribution companies, severe coal shortage is going to make this summer worse for the consumers. Government controlled distribution utilities, which are denying power producers to pay actual fuel costs, are paying huge premium to purchase more electricity from the spot exchange market this summer in order to make up for the shortage. Amongst the states that are the biggest buyers on India Energy Exchange presently, names such as Gujarat, Uttar Pradesh, Andhra Pradesh, Telangana, and Tamil Nadu are on the top.

A domino effect

Coal supply crunch and lower PLF have already resulted in 58% higher power prices on a yearly basis in March and doubled over the previous month in spot market. The average price on India Energy Exchange is presently more than Rs.4 for every unit compared to a modest Rs.2.6 last year. As for evening peak power, the average price had risen to its monthly high on March 14 at Rs.7.9 per kWh. Latest reports suggest that this figure stood at Rs.7 on March 21.

This rise in the prices has mirrored an early rise in demand, which has already gone up by almost 10,000 MW this month with the onset of summer, according to India Energy Exchange official to Quint Bloomberg. This is partly due to rising temperatures and also the increased watering of fields. If statistics are anything to go by, the country’s peak demand has already hit 157,000 MW this month, which is 15% percent higher than a year ago, according to data on Central Electricity Regulatory Commission’s website.

And while this could have been countered if the thermal power plants were working at their full efficiency, their coal stock, according to Central Electricity Authority website, was only 15,325 metric tonnes last week, which is about 44% lower than 2017. This is a devastatingly low number, and has resulted in the use of imported coal which is driving up the price of electricity even higher.

Therefore, there is no doubt that the power sector is passing through its worse phase since the producers have to purchase the cheapest coal and sell electricity at the lowest tariff while government run discoms are delaying the payments or denying the actual cost of fuel. This has resulted in a mighty struggle for developers of over 50,000 MW of capacity with an investment of Rs 3 lakh crore.

The mad scramble for procurement of power at exchanges is also resulting in frantic bidding by utilities and buyers looking to smoothen their distribution load. And while this does help them cover up their shortfall, it is putting them under massive operational losses. Thankfully, the Ujwal DISCOM Assurance Yojana launched in 2015 has enabled states to absorb a part of these losses and issue bonds for the remainder.

Yet, utilities still remain under losses of Rs.36000 crore, according to Power Minister RK Singh’s written reply to the Lok Sabha. In a positive development, though, RK Singh also stated that the coal and the railway ministry will boost current target of 275 rakes per day to 280 by next year, and has also built up a 10-day surplus coal stock.

A bleak summer awaits

The only authorities that stand to gain from the higher prices on exchanges will be traders. For the rest, including the consumers, it is looking bleak.

For distribution companies, higher prices for traders means increase in their financial stress. Experts believe that instead of dealing with extreme seasonal changes in power prices, distribution companies should compensate power producers for their extra fuel costs and ensure power supply at a consistent and predictable rates to avoid surprises. After all, distribution companies find it difficult to pass on higher costs to consumers since power tariff is a political decision and the sector continues to suffer.

Moreover, the timing of this coal and power shortage couldn’t have been any worse. With the demand from factories expected to increase as India’s growth recovers from the setbacks of the cash ban and implementation of the nationwide Goods and Services Tax, the lack of power will prove to be a serious jeopardy. A shortfall in generation would also mean more outages due the demand-supply gap, more so in smaller towns and rural regions in India since Prime Minister Narendra Modi has already pledged to ensure electricity to about a fifth of 18 crore households still living in the dark. This will end up in further increase of demand, thereby adding to the shortage.

It is hoped, though, that consistent and predictable electricity cost will keep the power sector healthy on account of financial discipline.