Rating agency ICRA said higher coal prices could impact returns and undermine debt service capability of the promoters of new coal based power projects.

ICRA said in a report that "High fuel prices for many new coal based power projects could adversely impact project returns and undermine the debt service capabilities of the project promoters especially those that do not have a pass through of fuel costs in their power purchase agreements." Given the current scenario many Indian companies have been scouting for captive coal assets abroad.

ICRA said that "While this would address the fuel supply risks that they may face the financial risk profiles of these companies would also be impacted by the level of investment required and the funding structure for the same."

According to the Coal Ministry's estimates the widening demand supply gap of the fossil fuel in India is likely to touch 142 million tonnes next fiscal from projected 84 million tonnes in 2010 to 2011. The gap is pushing prices upward.

ICRA said "The demand supply gap in the domestic coal industry is likely to widen significantly over the medium to long term largely because of the significant size of the coal based power projects that are expected to be commissioned over this period."
Coal production recorded around 7% growth during the period leading to demand-supply gap to widening further. India had produced just over 500 million tonnes coal in 2009 to 2010.

The shortfall is met through import which is always a costly proposition. Again, the long-term supply could be a challenge going forward considering the increasing demand for coal from many emerging economies.

Power generation through thermal power sector, which ICRA believes to continue to be the prime mover of coal demand in the country has gone up to 90 giga watt at the end of November last year from 71 GW at the end of FY07. It is likely to increase further to 113 GW by FY12 end.

(Sourced from BS)