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Power demand raises merchant prices to INR15/kWh… again

Electricity prices on exchanges (IEX) have spiked to INR 15/kWh (IEX link) in the last few days, fuelled by a 9% (2-year CAGR) surge in power demand in Mar’22 vs. 3-4% in earlier months (Exhibit 1). This has been led by a) a heat wave in North India, driving air conditioning-led power demand, and b) higher commercial activity as industries / offices / establishments operate at full capacity post lifting of Covid restrictions. However, for merchant power players (like JSW Energy), higher power prices have been offset by a surge in input costs as well (international coal prices at ~$200/T in Mar’22 – see our detailed report here. Coal stocks, however, are stable at 14 / 10 days at NTPC / all-India level, suggesting there is no immediate cause for alarm. But any disruption to coal supply in Apr-May’22 can raise power prices further.

Who benefits: We expect imported coal-based merchant players such as JSWEL to benefit only if IEX prices rise >INR 10/kWh – the implied cost at $200/T imported coal (Exhibit 10). NTPC is already benefitting from higher plant PLFs (74% in Mar’22 vs. 68% in 9MFY22) while expensive plants like Kudgi, and Sholapur are also operating at c80% PLF (Exhibit: 7). For the seasonally weak 2Q (when domestic coal production declines), NTPC aims to import ~7mnT of coal (total ~18.5mnT import target) to avoid coal supply related challenges. Coal India (CIL) benefits from the rise in international coal prices; its e-auction prices have doubled in Mar’22. With delivery of Mar’22 e-auctions by May-Jun’22, we expect CIL to report strong 1QFY23 earnings. Our calculations indicate that every INR 500/T rise in e-auction realisations raises CIL’s FY23 profit by 15-20% assuming steady volumes / costs (Exhibit 11). Tata Power gains from its 30% stake in Indonesian coal mines (detailed report), where its coal profits + UMPP loss (assuming shutdown) turns net postive (Exhibit 8) at HBA index prices >$125- 130/T (vs. $200/T currently).

MTD Mar’22 power demand up 9% (2-year CAGR): During 1 st – 22nd Mar’22, power demand grew by a robust 9% (2-year CAGR) vs. 9MFY22 average of 3%. This was led by 16%/13% demand growth in North/East (vs. 9MFY22 average of 2%/4%) and 9%/3% in West/South (vs. 9MFY22 average of 4%/1%) (Exhibits 1-2). Power demand rose primarily due to rising temperatures caused by heat waves (Exhibit 2) in North/West India in Mar’22 (media article).

Coal stocks healthy currently: As on 16th Mar’22, NTPC/All-India power plant level coal stocks remain healthy at 14 days/11 days. Further, CEA has advised NTPC to import 10% of its coal requirement (~18.5mnT for NTPC + JV) to stock up for the monsoon (seasonally weak for coal production). Our interactions with NTPC officials suggest that a) NTPC’s current coal stocks and CIL production should be sufficient to tide over the summer power demand, b) April/May typically sees higher power generation from wind, solar and hydro, which should take the pressure off thermal plants, c) NTPC targets to import ~7mnT of coal by June’22 to avert any coal shortages in 2QFY23, d) all NTPC units are running at high PLFs (74% as on 16th Mar’22) to meet the higher power demand, and d) hence, NTPC does not foresee coal stock-led power generation loss (under-recoveries) as seen in Oct-Nov’21 (report link)

Imported coal prices surge: In Mar’22, imported coal prices have spiked to ~$200/T, implying an estimated power price of c. INR 9-10/kWh, resulting in imported coal-based power plants running at sub-optimal PLFs of ~13%. Out of the 17GW imported coalbased capacity across 14 power plants, six power plants (5.8GW) are not operating while six more (10GW) are operating at only 13% PLFs.

IEX prices spike to INR 15/kWh: Led by the surge in power demand and lower PLFs of imported coal-based plants, IEX prices surged to ~INR 15/kWh on 24th Mar’22. This is a key positive for merchant players (~15GW untied capacities), which may turn viable even on expensive e-auction coal in the summer months. Players such as JSW Energy (~600MW untied) may benefit if merchant prices rise > INR 10/kWh – the implied variable cost at $200/T coal price. Other players with large open capacities who may benefit from higher IEX prices include Adani Power (2GW untied) and Jindal Power (~2.4GW untied). 

CIL benefits from higher e-auction realisations: Media articles suggest that Coal India eauction premiums have surged ~300% in Mar’22 vs. ~100% premiums in Jan’22 (link). This implies an e-auction coal price of INR 4,000/T for CIL vs. INR 10,000/T of imported coal (adjusted for GCV at $200/T). Domestic merchant power players would have an implied cost of INR 5-6/kWh at e-auction prices of INR 4,000/T, which turns their plants highly profitable at INR 10/kWh IEX prices - implying rising demand for e-auction coal. We expect CIL to continue to benefit from higher e-auction realisations in Mar-May (summer season). With delivery of these e-auction volumes expected by Apr-May’22, we believe CIL will report strong earnings in 1QFY23. Our calculations indicate that every INR 500/T rise in e-auction rates raises CIL’s FY23 profit by 15-20% (assuming steady volumes / costs).

TPWR benefits from indirect play on coal prices: With international coal prices soaring to ~$200/T in Mar’22, TPWR is expected to gain from higher realisations at its Indonesian coal mines. However, the UMPP, which consumes imported coal, turns uneconomical at these coal prices (implied fuel cost of INR 7-9 per kWh at 80% / 20% PLF) and will most likely remain shut (implied loss of INR 20bn/year). The plant has been operating at 20% of its capacity (800MW) on a temporary fuel cost pass-through mechanism with Gujarat Discom (which lapsed in Dec’21). We estimate UMPP + Coal mines to turn profitable at HBA index prices >$125-130/T (vs. ~$200/T in Mar’22) even with UMPP incurring INR 20bn shutdown losses. Every $10 change in coal realisations (currently assumed at $175 for estimates) changes our FY23 estimates by 14-15%. The management is hopeful of a permanent resolution of UMPP tariffs with fuel cost pass-through with Gujarat Discom, but that may entail offset of proportionate coal profits (details awaited).

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