On the favourable track?

Traditionally, the power sector has been seized by a plethora of problems. Low per capita power consumption at a third of China, substantial T&D losses, Discoms bleeding due to tariff subsidisation disabling purchase of power from gencos, low PLF of thermal plants affecting the capacity to service bank debts and shortage of fossil fuel affecting power generation, were the major pain points. Concerted efforts initiated at policy formulation and implementation to tackle these issues in recent times seem to be yielding an encouraging outcome.

Regarding fossil fuel, the power plants are largely coal-based except for around 14 GW gas-based capacity mainly built on the indicated potential of the KGD6 basin. These became stranded as the gas production from the basin fell off dramatically to a tenth of its peak level seen in 2010. Reportedly, the deep sea gas in High-Pressure High Temperature (HPHT) conditions were unviable to at the general price of domestic gas. Besides, technological challenges were substantial. Efforts at reviving these gas fields through an infusion of appropriate technology and allowing special price commensurate with complexities have been initiated. However, the power generated from such high-cost gas may find a challenge of distribution under the Merit Order system. Hence, even if availability improves, the possibility of the stranded gas-based capacity coming into operation may remain a question mark.

For the coal-based power plants, the problem initially was an acute shortage of coal. Over 200 coal blocks allocated earlier to end users for mining were cancelled by orders of the apex court in 2014, effective 1st April 2015. Collectively the production from this segment was around 45 Mtpa in 2014-15 - the last year before cancellation. This production dropped to NIL from April 1, 2015. A transparent auction-based process for allocation of these blocks was promptly brought in place. However, the new allottees had to face quite a few hurdles before coal production could recommence. Inexperience was also a hurdle in some cases. Finally, in 2018-19, the aggregate coal production from this segment regained the pre-cancellation level of 2014-15. This segment is expected to be on a medium growth trajectory now, particularly with companies like NTPC commencing mining operations with plans to grow fast.

The dominant coal supplier, namely Coal India Ltd (CIL), stopped growing from 2010-11, largely due to the imposition of a blanket ban by MOEF on all projects in critically polluted industrial zones. The zones were identified based on an evaluation of the Comprehensive Environment Pollution Index (CEPI) developed by IIT Delhi. This was based on measures of air, sound and water pollution. Industrial clusters with CEPI higher than 70 were classified as critically polluted. Most coal projects were located in such clusters and hence suffered the ban. Incidentally, coal mining does not release toxic waste into water. A quick measurement of CEPI in coal mines yielded scores of less than 50. In other words, coal mining per se was not found responsible for the clusters being critically polluted. Demand for sub-cluster analysis to identify industries responsible for critical pollution were made. The outcome in terms of lifting the ban was painfully slow. As a result, after a phase of 6 per cent plus CAGR during 2007-2010, when coal production increased from 361 to 431 Mtpa, the CAGR in the next 3 years, 2011-2014, plummeted to 2.33 per cent - production rising from 431 to 462 Mtpa during this period. Ironically, the capacity addition in the coal-based power generation picked up substantially onwards 2007. This coupled with muted growth in coal supply resulted in thermal coal imports rising exponentially. The higher cost of imported coal led to a higher tariff on one hand and, at times compelled the power plants to operate at reduced PLF. The situation became acute by 2014.

The reversal of the situation demanded a warlike multi-pronged approach. The Ministry of Coal and CIL acted in unison to debottleneck each constraint. Intense interactions with concerned Ministries in the government, namely MOEF, Railways and Power were carried out to build a high degree of collaborative approach and maintain coordination at the highest level. The approach was extended to the coal-producing state governments for support in securing faster environment and forest clearance of various projects as well as the acquisition of land. Previous records of the quantum of land acquired were beaten convincingly.

The outcome was indeed encouraging! The growth in coal production moved up to around 7 per cent in 2014-15, increasing from 462 to 494 Mtpa. In 2015-16, the growth reached a record level of 8.5 per cent rising to 536 Mtpa.

Ironically, contrary to expectations, the growth in coal consumption during 2015-16 was muted and a significant portion of the increased coal production landed up in coal stocks at pithead as well as power stations. Beginning from April 2016, the coal offtake became even more sluggish. Chasing the targetted growth in coal production became a nightmare for CIL as it led to unmanageable addition to coal stocks with the associated risk of coal catching fire.

Paradoxically, the average PLF of power plants witnessed a falling trend despite coal being available - a phenomenon not witnessed earlier. It turned out that the problem essentially is with the Discoms facing financial stress due to tariff subsidisation for supply to the agricultural sector. Besides, the evacuation of upcoming renewable power was assigned a higher priority. Compelling the Discoms to bear the subsidy burden disabled them financially to buy all the power that gencos could generate. Without the issue being addressed, the prospects of evacuating the power that could be generated appeared dim.

The Ujjwal Discom Assurance Yojana (UDAY) was conceived at this time to address the issue. The scheme required, on one hand, the states to progressively take over an increasing share of losses of the Discoms and, on the other hand, focus on reduction of cost as well as T&D losses. It is a time-bound program with constant monitoring and a hard stop for linking Discom losses to state budgets in a gradual manner. Some of the other measures to work in tandem were savings in interest cost, reduction of imported coal by increasing supply of domestic coal, freight rationalisation through a swap of supply sources, reduction of T&D losses and most importantly, demand-side management by emphasising the use of LED bulbs and low power consuming efficient appliances.

While the projected savings accruing from a full-scale implementation of UDAY across all states was estimated at a staggering Rs 2052 billion, the savings required for the Discoms to break even was assessed at Rs 639 billion till 2020-21 (as per CLSA Report of Jan 2019). In other words, even 32 per cent of the projected benefits were sufficient to make the Discoms turnaround. This was expected to trigger sustainable demand recovery, improve capacity utilisation and eventually drive capex recovery.

The unfolding of events subsequently goes to establish the fructification of the plan to some extent 2018 onwards. The sluggish coal demand witnessed in 2016-17, continued partially during 2017-18 leading to muted growth in coal production by CIL from 536 to 567 Mtpa over the two year period, translating into a low CAGR of 2.78 per cent. However, the position witnessed a reversal from early 2018. The rise in purchasing power of Discoms led to faster growth in demand for coal. The pithead stocks of coal depleted and the stock at powerhouse end became alarmingly low.

CIL initiated efforts to gear up and got its act together November 2018 onwards. Stock depletion at pithead was arrested and despatches to powerhouse stepped up. Once again the collaborative style of functioning prevailed across all concerned agencies. By March 2019, CIL registered an impressive growth from 567 to 607 Mtpa in coal production (7 per cent) with coal offtake reaching a level of 608 Mtpa. The coal stock at powerhouse end reached a comfortable level of 18 days. The stocks at the pithead in CIL has also risen to a comfortable level of 54 Million tonnes.

Going forward as the benefits of UDAY seep in, the Discoms are expected to further enhance purchasing power. This will lead to a rise in the PLF of existing power plants. The scope for such rise is substantial as currently, the PLF is at a low of 60 per cent. The best seen PLF in 2007-08 was 79 per cent. Since then, the new capacities built have embraced better technologies. Also, some inefficient capacities have been phased out. As such the highest PLF attainable is expected to be higher than the best seen so far. Even considering a peak PLF of 80 per cent, the additional coal demand works out to around 200 Mtpa.

Besides, there are 40 GW stranded inoperative coal-based power capacity. With IBC brought into play, most of these capacities may become operational in course of time through NCLT proceedings or otherwise. This will further add 200 Mtpa to the coal demand.

The current import of coal is over 200 Mtpa, of which over 100 Mtpa is metallurgical coal for steel-making and thermal coal for select coastal power plants. These cannot be substituted by domestic coal in the near term. However, the residual import for non-coastal power plants and other consumers are replaceable by increasing domestic coal production by another 100 Mtpa.

The resultant demand growth on the above accounts aggregating to 500 Mtpa may materialise over the next five years, if not earlier. CIL may grow consistently at the 2018-19 rate of 7 per cent, taking its production five years from now to 850 Mtpa. This leaves a gap of 257 (607+500-850) Mtpa to be met from other sources.

This does not take into account any coal demand for use as feedstock for the production of Ammonia or Urea or chemicals on which the country is currently import-dependent. Considering that China is successfully using at least 500 Mtpa of coal as feedstock to produce fertilisers and chemicals economically, India can also move in this direction. This may add to coal demand further.

The coal production from captive blocks assigned to end users is expected to grow to the extent of meeting the end-use requirement primarily. Therefore, induction of commercial miners, for which the legal enablers are in place since 2015, needs to happen at the earliest to ensure that the painstaking reforms carried out in securing sufficiency of the power supply is not derailed due to paucity of coal.

(The author is former Chairman, Coal India Ltd. The views expressed are strictly personal)