March 10, 2012

The bottomless coal pit

The quest for cheap energy from coal is an exercise in futility for India

India’s population is still growing. Unless economic growth can keep apace with this population, Indian society will become unstable. India is transitioning from a rural agrarian economy to an urban industrial one. This shift is necessary to for economic growth as the urban industry provides many more opportunities for wealth generation than its rural agrarian cousin. Cheap electrical power generation is the key to keeping India’s industrial growth rate high. Without electrical power, the economic growth will slow to a crawl and social unrest will escalate to the point where controls may be ineffective.

Presently the cheapest form of electrical generation lies in coal fired thermal plants. International attitudes towards the environmental cost of burning coal are very blase, and very well moderated by media sources loyal to the coal mining interests. The government of India has very perceptively recognised this fact and wisely pushed for investment in extremely large thermal power projects, the so called Ultra Mega Power Projects. These new super power plants are strategically positioned around the country to minimise transmission losses to key industrial areas. The plants form the cornerstone of the government’s strategy to keep the growth rate high in the near future. Put mildly, the Indian government’s heart is in the right place.

The Ultra Mega Power Projects are currently financed by loans from various Indian lenders. Given the sheer size of these projects, the sums of money involved are truly mind boggling and consequently the exposure from the slightest risk is quite great. The money lenders are understandably jittery. If for any reason the power plants do not produce electricity at an acceptable price to customers, the lenders will be faced with the prospect of a very large investment becoming a non-performing asset. It is therefore vital to ensure that every risk to the potential return on investment from these plants is contained and the price of power from these plants is kept low.

In order to keep the price of thermal power low, one has to keep the price of coal at the plant low. Achieving this poses a major challenge in India. India’s domestic coal is of a very poor quality and is composed of approximately 40 percent ash. Although India can import coal from South Africa, Australia, or Indonesia, the international price of coal is currently very high and transporting coal from these places to India is costly. Major industrialists who have invested in the Ultra Mega Power Projects have also invested in mining and shipping coal from foreign countries. But sourcing vital coal from foreign lands via lanes of communication that stretch across thousands of miles of ocean is fraught with incredible risks.

Transporting coal from pithead or port to the power plant in India is another herculean task, which falls mostly on to the Indian Railways. Each day 150 rakes transport coal over the Indian Railway’s “High Density Network” routes to various power plants in the country. The coal transport accounts for a significant amount of the Indian Railway’s diesel bill. Once the Ultra Mega Power Projects come on line, the Indian Railways will have to run about 150 more rakes per day to keep up with the coal demand at power plants. Most Indian Railways routes are working at full capacity. To run more trains on the network now would pose significant risks of accidents and disruption. Although railway infrastructure can in theory be expanded, this raises the cost of coal transport and developing railway infrastructure takes time.

Faced with such unappetising prospects, the power producer lobby marched straight into the Prime Minister’s office on one sunny morning in January, and made its views plain. They told the Prime Minister that unless something was done to keep the costs of coal down, they were going to walk away from their investments in coal fired power plants. This was one of the few occasions in modern India where industrialists had ganged up against the PMO and the effect was salutary. The Prime Minister navigated clear of the environment of hostility kicked up in the meeting and set up a special committee under Pulok Chatterji to come up with a resolution of the issues facing the industrialists.

Photo: Sree V Remella

The committee was very diligent in examining the options, and they avoided getting to the most expedient route to handle this situation—create junk bonds to defray the risk to the lenders. Such shady financial instruments are very popular on Wall Street when it comes to spreading out potential liabilities, but thankfully Indian government did not fall into that trap. The committee ultimately recommended that Coal India Limited produce more coal and sign agreements with power producers to supply 80 percent of the coal to the Ultra Mega Power Projects. In the short term, this represents a very difficult goal to achieve. Increasing productivity at Coal India Limited without reducing profitability margins and significantly increasing environmental costs is an impossible task. The costs imposed on marginalised populations affected by expanded coal mining efforts are very significant. The mining of coal is a very dirty business – there is simply no way to pretend we are not destroying lives here. Matters are also made worse by the fact there is a vast black market for coal in India. This black market draws out the worst tendencies in human kind, and make life hell for those who live proximate to these mines. Quite predictably the Coal Ministry’s response to the proposal was less than enthusiastic and the Environment Ministry was not too happy with this either.

As if all this wasn’t enough, the committee’s recommendations appear to have fallen short of what the power producer lobby wanted. A delegation from the lobby has now met Pulok Chatterji and put forward a proposal containing an extensive wish list which includes shifts in existing allocation agreements on Liquefied Natural Gas and coal that favour the power sector, new agreements for supply of gas long, and privatisation of electricity boards et al, and all that is in addition to requests for tariff changes to cover the potential exposure to high coal prices on the international market.

At the risk of sounding too dramatic—one definitely has the sensation of falling into a bottomless pit here.

The efforts of the Prime Minister and Pulok Chatterji are commendably valiant, but this is a lost cause. There is little point in setting up more Ultra Mega Power Projects beyond what have already been committed to. The search for alternatives to coal fired power production must begin in earnest. It is quite simply time to move on.

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