India's endemic coal crisis
Delayed response to the inevitable growth in coal demand has led to a deficit and prevented India’s power industry from achieving its optimum
Recently, while addressing a gathering after inaugurating the Mundra LNG Terminal, Prime Minister Narendra Modi, said, "Energy is essential for development. Paucity of energy does not let any nation come out of poverty. If one needs freedom from poverty, wants financial development and a self-sufficient country, energy is necessary."
Coal continues to be the dominant source of energy in the country. Thus, the statement of the Prime Minister is of utmost significance and relevance, particularly for determining the causes and remedies of India's endemic coal shortage.
Power generation in India has been suffering on account of coal shortage for more than a decade. An illusory 'coal surplus' situation was seen temporarily in 2016-17. Though attributed to the record 9 per cent growth in coal production by Coal India Ltd (CIL) in 2015-16, it was more due to the financial distress of discoms, restricting their ability to buy power from gencos. This led to the lowering of average Plant Load Factor (PLF) of thermal plants by 2-3 per cent. Since a change in PLF by 1 per cent impacts coal demand by 10 Million Tonne Per Annum (MTPA), a lowering of 2-3 per cent was good enough to create the optical illusion of coal shortage being converted into coal surplus almost overnight. In fact, more than 50 per cent of the record increase in coal production by Coal India Ltd – 42 MT in 2015-16 – ended up in coal stocks at pithead and powerhouses, with consumption rising modestly.
In contrast, Coal India Ltd, in the current fiscal, has been growing at its best ever rate of 10 per cent, having accepted a daunting target of 652 MT for FY19. Even then, the powerhouses are running on low stocks, quite a few of them critical. The differentiating factor this year, compared to 2016-17, is the movement in average PLF. Instead of lowering, the PLF is rising, though modestly hovering around 60 per cent. As a result, coal consumption is rising faster than in 2016-17, turning the coal surplus situation into coal shortage once again.
As the financial position of the discoms improve, on account of implementation of UDAY as well as with Direct Benefit Transfer (DBT) making deeper inroads in subsidy governance, gencos will be able to generate and sell more power. This will lead to a further rise in the average PLF. The power generated by a rise in PLF of the existing power plants is of the least cost, as it entails only the variable cost of coal. Hence, more generation of such power will enable the gencos to, a) improve margins and meet debt service payments to banks, and b) pass on a part of the cost savings to discoms through tariff moderation. This will further improve the financial position of discoms. Potentially, this can set in motion a process of rapid increase in PLF with power supply witnessing an exponential rise.
At one of the lowest per capita power consumption of around 1,100 units per person per year or three units per day, India cannot afford to wait any longer in securing the additional power that gencos can deliver through a rise in PLF. The highest PLF seen so far is close to 80 per cent in 2007-08. Since then, the new power capacities installed are of improved technology. Besides, some of the high emission, inefficient power plants have been phased out. In other words, the maximum average PLF now attainable could be higher at around 85 per cent. Also, the staggering bank borrowings of gencos can be seamlessly serviced at this level of PLF, thereby avoiding a major crisis in the banking system.
The rise in PLF from the current 60 per cent to 85 per cent will create an additional demand of 250 MTPA of coal and generate around 415 BU of power. A further demand of around 150 MTPA can arise if India decides to take effective steps towards restricting the import of coal to only metallurgical coal for steel plants and thermal coal for coastal power plants designed on imported coal. Then, there are projects under construction as well as non-operational power plants that are stressed due to insolvency and other reasons. As the root cause of the stress is addressed by a change of ownership through NCLT or other routes and projects in the pipeline get commissioned, a further demand of coal of the order of 100 MTPA may arise.
Therefore, creating additional capacity for production of 500 MTPA of coal at the earliest holds the key to economic prosperity and inclusive growth as well as mitigation of the risk of the staggering bank exposure on gencos turning bad. Incidentally, this calculation does not take into account the coal demand from the creation of fresh thermal capacities. The underlying reason for this exclusion is the drop in renewable tariff to levels below the cost of power from new thermal power plants, which is expected to halt further addition to coal-based thermal capacity. It also does not take into consideration fresh coal demand that may arise from the possible use of coal as feedstock for the production of oil, gas, ammonia and fertilisers since such demand is unlikely to be substantial in the midterm.
Relying on Coal India Ltd alone to deliver the additional coal requirement of the projected order, as has been the practice so far, will be infeasible. The experiment, with end users mining captive blocks, has also not met with any significant success either. Every other major coal-producing country such as Australia, South Africa, USA, China and Indonesia have multiple coal producers with core competence in mining. This has led to the adoption of best in class mining and environmental practices among the coal companies, particularly in Australia, US and South Africa. Environmentally benign, mechanised underground coal mining in China has flourished way beyond conceivable limits while it continues to remain nascent in India. The consistency of coal quality is yet another parameter that is usually assured in a competitive environment.
The imperative need of raising coal production by 500 MTPA at the earliest to end the endemic coal shortage must be propelled to become a game changer. While Coal India Ltd will expectedly do its best to increase production for which some scope exists, opening the sector to commercial mining and getting international companies to compete for large blocks needs urgent focus. Induction of such companies, besides helping to close the demand-supply gap, sooner than later, will help bring best-in-class mining and environmental practices, mechanised underground mining and better consistency of coal quality. The resultant competition is expected to move Coal India Ltd to a higher orbit of efficiency. The ultimate objective of creating a mature coal market in the country, with consumers having a choice in coal sourcing and producers having a choice of marketing coal in the domestic or export market, will bring India closer to energy sufficiency at competitive prices within the least possible time.
The delay in recognising the fact that a country of the size and complexity of India cannot and should not be required to depend on one commercial entity for meeting over 80 per cent of its coal demand has cost us dearly. Way back in the early 90s, it was apparent to the government that CIL as a commercial entity will not be able to meet the coal demand in case the pace of capacity addition in the power sector accelerates significantly. This led to the 1993 amendment to the Coal Mines Nationalization Act, which enabled the government to take away around 200 coal blocks with coal resources of 28 billion tonnes from CIL and allot the same to gencos and other end users. Mining of coal by end users has not been a successful model elsewhere. The experience was not different in India either. However, the expected acceleration in the pace of capacity addition in the power sector did not materialise till 2007. Since then, the pace of capacity addition accelerated exponentially to three times the rate which was prevailing earlier. Thus, the key reform of opening up the coal sector to commercial mining and inducting formidable players with core competence for supplementing the efforts of CIL became imperative in 2007. Not carrying out this reform at that stage and adopting a policy to make CIL responsible for meeting coal demand is the root cause of the endemic coal shortage we witness today. We have lived with this crisis for far too long and will have to live till the reform measure is implemented in letter and spirit, and its outcome is realised.
Needless to emphasise, the projected growth in coal production will create challenges in the logistics space. Though not a deal breaker, these will have to be holistically reviewed and addressed simultaneously.
(The author is Former Chairman, Coal India Ltd and author of When Coal Turned Gold. The views expressed are strictly personal)
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