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May 16, 2012

India’s Coalaveri

Where is the coal that India needs for its base-load power plants?

It has taken 65 years for India’s power sector to move from a small base of 1500 MW at the time of independence to a capacity of 200,000 MW. This milestone was crossed last month with the commissioning of a 660-MW unit of a power plant in Jhajjar, Haryana.

If the celebrations were muted, it was due to the realisation that formidable challenges lie ahead. Almost all the states in the country face huge shortage of power and the problem is seen as menacing enough to trip India’s growth story.

Inadequate fuel is one of the main causes for this desperate situation. For the last few decades, India has relied heavily on coal as fuel for its thermal plants. This has always appeared sensible. Coal reserves in the country were sizable, and statistics could be quoted to claim that India had enough recoverable coal to take care of our needs for 250 years. It was felt that India’s railway network could be relied upon to transport coal to distant parts of the country. To develop indigenous capability, public-sector companies such as BHEL were set up to manufacture the boilers, turbines and the electrical equipment for such plants, while NTPC could take care of project development and the operations and maintenance. Over a period, boilers were adapted to suit the quality of Indian coal with its high content of ash. A good ecosystem evolved for the setting up of thermal plants.

The result of this approach is that coal-power plants account for 112000 MW out of the 200000 MW capacity installed till March 2012.  Because of its higher plant load factor, generation from coal-powered plants (in terms of kWh) accounted for over 70 percent of the total generation. In the 12th Five Year Plan period coming up, this dependence on coal will remain, and even as we add another 75000 MW to our capacity, the proportion of total generation from coal plants will go up further.

Photo: Kozumel

Being a completely indigenous resource, the price of coal could be controlled by the government so as to maintain the price of electricity at a politically acceptable level. This added to the allure of coal.

While the fortune of the power sector is thus inextricably linked with the reliability of coal supplies and the stability of its price, dark clouds have been hovering for some time and the foreboding is grim.

Against a demand of 650 million tons (MT) last year, indigenous coal production was less than 550 tons. Coal India which produces over 80 percent of India’s coal has admitted that it will not be able to step up and cope with the increasing demand, and that the gap is likely to widen to 400 MT by 2016-17. The government’s move to allot coal blocks to private companies (power, cement) for captive mining has also not been successful, and production in these mines has failed to reach even 10 percent of the potential. Many of these mines have not crossed the roadblocks of forestry clearance, environmental approval and land acquisition issues. Recently, the CAG has also raised a red flag over the manner in which the blocks have been allotted and why they had not been auctioned. With the 2G scam fresh in public memory, this will push the government more on the defensive. Given this assortment of grave issues, it would be delusional to place any hope on domestic coal being our savior.

Faced with shortage of domestic coal, we started importing coal- mainly from Indonesia and Australia- some years back. Long-term power purchase agreements were signed with private players like Tata, Reliance, Adani, etc. for supplies from proposed, large Ultra Mega Power Plants (UMPP) of 4000 MW each, with the premise that imported coal would be used in these plants. The promoters were encouraged to tie up fuel supplies from Indonesia/Australia and to buy out mines if required. Benchmark price of power generated from imported coal was estimated as Rs.3.50/kWh which fitted well with the tariff regime prevailing in most states in the country.

With China too facing a similar fuel crunch and entering the market at the same time, the international price of coal shot up, almost mimicking the trend in the price of crude oil. Adding to our woes, the decision of Australia to impose a carbon tax and that of Indonesia to levy an export duty rendered coal sourced from captive mines in these countries uneconomical for power plant application in India.

So, the present situation can be summarised and circumscribed by the following statements: one, we depend on coal to meet 75 percent of our electricity needs; two, domestic coal is not adequate to meet current demand and burgeoning future demand; three, we have to make up for the shortfall by increasing our import of coal; four, imported coal is much costlier now; five, our electricity tariff is not high enough to support a higher fuel cost; six, our state governments are very reluctant to increase electricity tariff fearing a political fall-out; seven, it is estimated that India needs to increase its electricity generation by 15 percent every year, to meet its GDP growth targets and to meet the growing aspiration and enhanced life-style of its people, both in urban and rural areas; eight, alternatives such as nuclear power will take years to develop to a meaningful scale, even pre-supposing that there is public acceptance of the concept; nine, with supply of domestic natural gas declining, we have to import LNG, but building the necessary re-gasification and logistical infrastructure will take at least three years; and finally,  renewable energy cannot fill the gap fast enough, given its infirm nature and poor scale. The need of the hour for India is addition of base-load plants that can deliver schedulable, predictable power round-the-clock and right through the year.

It is a serious challenge that needs an appropriate response, as Toynbee would have put it. But what are our options?

To begin with, we must reconcile ourselves to the fact that electricity prices have to go up in step with fuel costs. State governments and regulators must work together to ensure this happens. Within the framework of competitive bidding, investors must be allowed their reasonable returns and a two-part price mechanism must allow them to index with the fuel cost. The more the government drags its feet on this matter, the more pronounced the problem becomes. This approach has to be followed even for projects already awarded. If government insists on enforcing its contractual rights, a promoter will find it more prudent to wriggle out paying a one-time penalty than to take the risk of incurring losses for 20-25 years.

Coal India has been issued a presidential order to ensure that they honour all the existing supply agreements with various coal plants. If Coal India has to import coal to fulfill its obligations, the issue of higher price needs to be addressed. It cannot be wished away.

Transmission and distribution losses continue to be high in many states and this cannot be tolerated any more. This is the equivalent of food being allowed to rot and perish in godowns, when there is famine. Investments in T&D and stricter management should release some more electricity into the system, reducing the strain on fuel supplies. This is a low-hanging fruit that can be plucked in a fairly short time.

Huge investments are required in infrastructure related to ports, roads, railways, etc. to facilitate import and land movement of coal. Execution is the key.

Nuclear plants cannot be expected to provide relief in the short term, but gas-based plants can. If we act with a sense of urgency and build LNG terminals of adequate capacity, it is theoretically possible to add 25000 MW within 3 years. Combined heat and power plants based on gas, promise a thermal efficiency of over 70 percent and can be a good, decentralized solution for commercial buildings, data centres, industrial parks and townships.

This is a long list of motherhood statements, no doubt, but sadly, there are no magical wands or short cuts available. Several ministries- power, coal, oil and gas, railways, port and shipping, road, finance, environment – have to put their collective heads together and work with a sense of mission. The situation cannot be left to any committee or core group. It requires the Prime Minister himself to take on the task of coordination among the different ministries and monitor the progress. If need be, he has to lead a high-level delegation to Australia and Indonesia and secure fuel supplies. The term ‘coalition’ must take on a new meaning- ‘the act of tying up coal supplies’.

In short, he must declare a selective ‘state of emergency’ on the power front and activate all response-systems accordingly.  We haven’t seen such display of decisiveness from the PM in the recent past, but now is the time for him to demonstrate the same sense of determination that he, as Finance Minister, is reputed to have brought into play when India went through a balance-of-payment crisis in 1991.


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