(Bloomberg) -- The worsening squeeze on India’s coal supply is triggering a power crisis that’s threatening to stall the world’s fastest-expanding major economy.

Coal-fired power stations had an average of four days’ worth of stock of the fuel at the end of last month, the lowest level in years, and down from 13 days at the start of August. More than half the plants are on alert for outages. 

With coal used to produce almost 70% of electricity, spot power rates have surged, while supplies of the fuel are being diverted away from key customers including aluminum smelters and steel mills.

Like China, India is contending with two key challenges: soaring electricity demand as industrial activity rebounds after pandemic curbs were lifted and a slump in local coal output. The country meets around three-quarters of its demand locally, but heavy rains have flooded mines and key transport routes.

Operators of coal-fired plants are facing a dilemma -- pay large premiums at domestic auctions to secure any available local supply or wade into a seaborne coal market where prices have soared to the highest on record. Already, the nation’s government is drawing up guidelines in case it needs to bring idle power stations back into action.

“Until supplies stabilize completely, we are likely to see power outages in some pockets, while customers elsewhere may be asked to pay more for power,” said Pranav Master, director for infrastructure advisory at credit ratings firm Crisil Ltd. “Because of imported coal prices shooting through the roof, plants running on domestic coal have had to do a lot of heavy-lifting. Things are expected to get better as the rains abate.” 

The impact on consumer prices would show up a few months later, when distribution utilities get regulatory approvals to pass on the cost, he said.

Coal inventories at Indian power plants fell to around 8.1 million tons at the end of September, about 76% less than a year earlier, according to government data. Average spot power prices at the Indian Energy Exchange Ltd. jumped more than 63% in September to 4.4 rupees ($0.06) a kilowatt hour. 

Aluminum producers are among major power users that complained after state-run miner Coal India Ltd. curbed supplies of the fuel to heavy industry to prioritize deliveries to electricity generators. 

The rising electricity bills are likely to put a dent in India’s stellar growth rate. The economy is forecast to expand 9.4% in the year through March 2022, which would be the fastest pace among major global economies, according to a Bloomberg News survey.

The energy crunch is a reminder of the vital role coal plays in India’s economy, even as Prime Minister Narendra Modi targets a huge increase in renewables and the nation’s top billionaires rush to add green investments. Consumption of the fuel is forecast to increase in the next few years and India, among the world’s top greenhouse gas emitters, is yet to set a target to get to carbon neutrality. 

Supplies to power plants are currently short by between 60,000 and 80,000 tons a day on the impact of the prolonged rains that have drenched coal pits, said Anil Kumar Jain, India’s coal secretary. Unusually heavy downpours last month in Dhanbad, a major coal mining center in the east of the country, have worsened the situation, he said. 

Coal India should be able to increase supplies enough by the second week of October to cover the deficit at power plants, although that will depend on the weather, Jain said. However, it will take much longer to replenish the badly depleted stockpiles.

(Updates to add details in second paragraph)

©2021 Bloomberg L.P.