Distribution companies (discoms) have to brace for an increase of as much as Rs 11,000 crore on-year in their power purchase cost in the first half of next fiscal following the government’s directive to thermal power plants (gencos) to increase blending of imported coal to 6% of their requirement until September.

The order, dated January 9, is the second blending directive this fiscal and is aimed at averting a power crisis from coal shortage this summer due to domestic supply issues.

The first directive, in April, was for domestic power plants to blend 10% of their coal requirement. This led to an increase in blending to 5.4% during April-November this fiscal from a meager 1.2% last fiscal.

Crisil expects the blending level to sustain for the rest of this fiscal, raising the cost for power utilities by Rs 42,000 crore on-year and pushing up the variable cost of power procurement for the utilities by Rs 0.226 per unit.

Says Hetal Gandhi, Director-Research, Crisil Market Intelligence & Analytics, “In the first half of next fiscal, the variable cost per unit will be lower by Rs 0.067 despite a marginal increase in blending to 6% because the price of imported coal is expected to be 33% lower at ~ Rs 7,100/MT compared with ~Rs 10,600/MT in the first half of this fiscal. All the same, utilities are staring at a cumulative increase of over Rs 0.159 per unit in their variable cost due to the two blending directives.”

Power demand had risen a strong 10% on-year in April-December this fiscal. In the first three weeks of January, the growth was even higher, at 14%, due to a severe cold wave in many parts of the country — indeed, peak demand during the period surged ~12% on-year to 205.6 GW, a historic high for the month. Thus, even after adjusting for a low base in the year-ago period, growth for the full fiscal will be in healthy double-digits.

At the other end, supply fell short and energy shortage increased 90% on-year in January, lifting short-term prices by a whopping 80%¹ on-year (see Chart 1).

The directive to increase imported coal blending are aimed at plugging this shortage.

Considering the growth momentum seen in the past two years, Crisil MI&A expects power demand to remain buoyant in the coming summer and grow 8-9% on-year during April-September next fiscal.

In the context, the increase in power purchase cost will be higher for the top five coal-dependent states², with around 13 state-owned discoms, all of which were loss-making in fiscal 2022.

Says Surbhi Kaushal, Associate Director-Research, Crisil Market Intelligence & Analytics, “The increase in cost due to higher blending will particularly impact states that have a higher coal share in their generation mix (Chart 2). Bihar, Madhya Pradesh, Uttar Pradesh, Telangana, and Maharashtra — which account for ~35% of power demand — have over 75% dependence on coal supply to service their demand. Utilities in this space will cumulatively see incremental power purchase cost of Rs 0.15-0.20 per unit in fiscal 2023 and the first half of fiscal 2024

While the Electricity (Amendment) Rules of 2022 offers an automatic pass through of additional fuel cost, discoms need to compute these on a timely basis and charge them to their customers every month. On failing to do so, they may have to forfeit their right to recover the additional costs in future.

¹ As of 26^th January 2023
² Bihar, MP, UP, Telangana and Maharashtra