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Coal shortages likely to hurt Indian power sector: Fitch

Persisting coal supply issues are likely to hurt the country's power sector as well as weaken investor sentiment towards new power projects, according to rating agency Fitch.

business Updated: Jun 20, 2011 20:34 IST

Persisting coal supply issues are likely to hurt the country's power sector as well as weaken investor sentiment towards new power projects, according to rating agency Fitch.

The domestic power sector, which expects to have over 80,000 MW capacity addition in the next five years, is heavily dependent on coal-based thermal power projects.

"India's power generation companies could be adversely affected by coal shortages, which are likely to persist over the short-to-medium term," Fitch Ratings said on Monday.

Coal-based projects accounted for 54 per cent of power capacity at the end of April and 66% of total electricity generated in the last fiscal.

"Amid uncertainties over coal supply, the investor sentiment seems to be weak, especially towards new power projects," Salil Garg, who is a Director in Fitch's energy and utilities team, said.

He said that lower-than-expected increase in domestic coal production -- particularly due to delays in the development of captive coal blocks allocated to the power generators -- has added to the demand-supply gap.

Among others, Ultra Mega Power Projects (UMPPs) in Orissa and Chattisgarh have been delayed due to issues with captive mines, which fall in the Environment Ministry's 'no go' zones.

The Coal Ministry has projected a coal supply shortfall of up to 142 million metric tonnes in FY 12.

Fitch's comments come after a recent decision by the government to prioritise coal supplies to generators, that sell electricity through Power Purchase Agreements (PPAs). These players would be given priority than merchant generators or those entities that run on 30% imported coal.

"Actual drawal of coal will be subject to 85% of power being tied up through long-term PPA with discoms through tariff-based competitive bidding (except for PSU projects were PPAs were signed by January 5, 2011)," as per the latest memorandum from the Power Ministry.

The move aims to ensure that the cost of power (distributed) is low and prices are determined through competitive bidding process, a Power Ministry official said.

This criteria has been added for getting coal linkage for power projects in the 12th plan.

The government has set up a 12-member Group of Ministers (GoM) to sort out tussles between ministries on the environmental norms affecting projects, especially in the coal sector.