Coal: Still Burning
Back in 2014, when the incumbent Narendra Modi-led NDA government decided to give impetus to renewable energy, many believed it is the "end-game" for coal sector in India's energy mix. To some extent, the belief was translated into reality with the government going gung-ho on escalating renewable energy targets to 175 GW, and achieving milestones in solar capacity addition, since then. But, India is an unpredictable economy. A sector, which was written-off by environmentalists a few years ago, is still contributing 75 per cent to India's energy security and how. Believe it or not, but thermal coal imports to India have consistently been in the range of 145-155 MTPA. The lowest imports in the 2014-18 period has been 144 MT in 2017.
The imports thereafter have recovered sharply in 2018 to over 151 MT. Consider this: India's total installed power capacity stood at 350 GW as of December 2018. 55 per cent or 191 GW of the total installed capacity was coal-fired. In terms of total power generated thermal power, which is mainly coal-based power plants, continues to contribute 78-80 per cent of the total power generated.
Coal-based power generation growth would be preceded by sustained demand for good quality coal in order to fire these plants. The need for increased supply of coal over the next decade is thus foreseeable, and this further pushes the need for development of commercial mines to aid the supply of thermal coal which currently is being done by State-run coal miners. Even in the most adverse scenario, it appears that the demand for coal in India, as a source of primary energy, shall expand until 2030 and perhaps beyond. This would albeit be at a lower CAGR of 3 per cent, compared with 6 per cent in the last five years.
The regulated intake of coal by many of the generation companies has increased periodically and thus dispatch of coal to power sector could have been higher. There are shortages reported across centrally monitored power plants in the peak season during summer months and post monsoon period. The shortage of coal in turn leads to production cuts and shut-down of plants. This may lead to disrupted power supply to both domestic as well as industrial users, which brings down productivity during peak hours.
Niti Aayog has stated that coal will remain India's main energy source for the next three decades although its share will gradually fall as the country pushes renewable power generation. Captive power plants which are dedicated power plant for industrial users heavily depend on imported coal in order to meet their fuel requirement. That said, despite its dominant position in the Indian energy market, the Indian coal industry still faces structural and financial challenges. Additionally, the Indian power system is riddled with inefficiencies and distortions, from coal mining through final power sales to consumers.
Coal India Limited (CIL), which provides about 85 percent of India's domestic production of coal, is the world's largest coal mining company. Coal is central to India's political economy. The central government owns about three-quarters of CIL, which provides revenue to the treasury through dividend payments and taxes on coal production. Coal-producing States are among the poorest in India, and CIL contributes significant tax revenue and employment in these areas. Indian Railways transports the bulk of domestic coal and they over-charge for coal transport to subsidise passenger transport. For power plants located far from mines, coal transport is often the largest component of their coal costs.
Despite CIL's position in the economy, it struggles to meet growing demand. The Indian Government wants more private sector coal mining, but obtaining land and permits to expand production are the greatest challenges, and these are not unique to CIL.
Coal-fired power generation is also facing financial stress in India, as capacity has grown faster than power demand over the last several years. Renewable energy is also displacing coal-fired generation, lowering the use of coal plants and reducing their profitability. Stress is particularly acute for new privately-owned power plants. These are often more efficient and flexible in their operation than older plants, but are disadvantaged compared to publicly-owned plants in obtaining coal supply and in signing power purchase agreements (PPAs) to sell their power. This problem is likely to get worse before it gets better, since an additional 50 GW of coal-fired generation are under construction in the country.
Inefficiencies in the power sector continue at the retail level. State-level power distribution companies buy power from generators, predominantly through PPAs, for sale to consumers at regulated prices. However, they lose money on every kilowatt-hour sold. Additionally, commercial and industrial customers pay higher rates to subsidise residential consumers.
India's energy policy currently focuses on bringing affordable electricity to all homes. India's per-capita electricity consumption is only one-third of the world average, and millions of homes still lack an electricity connection. The environment is important, but local air pollution, rather than climate change, is the primary concern. Despite growing coal consumption, India is on track to meet its nationally-determined contribution under the Paris agreement.
The move to introduce commercial mining in the coal sector should be viewed in a positive light as it fosters competition and helps plants that have been stranded over the past few years due to lack of fuel supply agreement. Commercial mining can ensure sustained coal stocks for industries, especially power.
Commercial coal mining will help in creating direct and indirect employment through higher investment and better technology. It will increase competitiveness and allow the use of best possible technology into the sector. The higher investment will create direct and indirect employment in coal bearing areas especially in mining sector and will have an impact on economic development of these regions.
This reform is expected to bring efficiency into the coal sector by moving from an era of monopoly to competition. It will also lead to energy security as 80 per cent of India's electricity is generated from thermal power plants.
Commercial mining of coal will boost both production and mining efficiency. Substitution of imported non-coking coal with domestic production can save about Rs 355 billion of foreign currency outflow. Additionally, Rs 60-70 billion can be saved by developing mines with a potential to produce 4-5 million of coking coal. One needs to also keep in mind that the coal prices fluctuate depending on the global demand supply of these fuel resources. Since India is a net-importer, currency volatility too increases as commodity prices increase. Thus the net impact of currency may outflow may be much higher than the numbers stated above.
Coal imports, especially of the non-coking variety, should reduce once the proposed regulatory changes to admit private sector companies in coal mining materialise. It will also help the country come closer to its vision of producing 1 billion tonnes of coal annually by 2022.
Being the largest consumers of non-coking coal power, cement and steel sectors will benefit the most. In 2018, India imported 151 million tonne of coal worth Rs 700 billion and as for coking coal, the benefits are moderate because India has limited reserves of this fuel and imported about 48 million ton worth over Rs 420 billion during 2018. The benefits from increased private participation in coal mining, though, will depend on faster environmental clearances, availability of adequate evacuation infrastructure.
In terms of investments, an additional Rs 1.7 trillion is required over the next 8 years in order to reach 1.5 billion production capacity by 2025. This is expected to generate an additional 5,00,000 direct and indirect jobs in the coal mining sector alone. Coal being a labour intensive sector, the job potential in the sector is high, even with moderate automation and technological upgradation.
Need for competitive markets
India has a long way to go in creating truly competitive electricity markets, but they are essential to enable RE generation to grow alongside coal. Tweaking existing policies, especially those that continue downstream pricing distortions, will not be enough. Structural reform of the power sector is needed, but the government has limited appetite for taking on this reform. Additionally, the central government can only do so much, as many problems are at the State level. The participants in the coal ecosystem-miners, railways, power plants, discoms, and consumers-are in a delicate, but distorted equilibrium. Rationalising these distortions requires finding a new equilibrium among the market players, a difficult political task.
Examples of market distortion abound:
Some consumers specifically want green power, but a large portion of those installing rooftop solar do so because of enormous distortions in retail electricity prices. For example, commercial and industrial consumers overpay for electricity to subsidise agriculture and most households. If those distortions were removed, consumers focused on price might not be as motivated to turn to rooftop solar.
Coal power plants that do not have PPAs would love to sell power directly to consumers. Although competition (known as open access) is allowed for large consumers, discoms resist retail competition for fear of losing their best customers. They resist through overt means, like transmission and wheeling surcharges and cross-subsidy surcharges, and covert means, such as delays in permitting and other technical difficulties.
Procurement of power from generators makes up more than 75 per cent of discom costs. In the coal power value chain, CIL and generators with PPAs are virtually assured profitability, but the discoms must sell power at regulated prices. These prices are intended to allow discom cost recovery, but are often set using assumptions that the discoms cannot meet. This structure also removes incentives for generators to find cheaper fuel supplies. True competitive markets would require competitive pricing for both coal and power, a substantial market change.
Stakeholders agree that coal plants in India need to be cleaner and more flexible in their operations, to lessen environmental impacts and ease RE integration. How to operationalise these goals is the billion-dollar question. Some older and dirtier plants may need to shut down, but they currently provide the cheapest power for some states.
Private-sector coal plants are generally newer, and thus cleaner and more flexible. However, fewer private-sector plants have the fuel supply agreements and PPAs needed to be competitive in India's market environment. A more flexible market structure would allow operators to monetise the benefits of these plants, rather than suffer the negative impacts that today's structure imposes.
Pricing and the value chain
Domestic coal delivered to power plants has three significant cost components: the coal itself, government levies, and transportation. Transportation costs are substantial, depending on location, and the government charges a range of levies, split between the federal government and the state where the coal is mined. Levies and transportation costs are high and have been growing far faster than CIL's prices.
For comparison, coal costs for Indian power plants are about 50 per cent higher than the United States on a per kilowatt-hour electricity basis. Part of this gap is the higher energy content of US coal, but levies and transport costs in the Indian coal supply chain are also an important component.
Transportation is the key variable in the cost of coal delivered to power plants. Coal-fired power plants are located around the country, with an increasing number of pithead (or mine-mouth) power plants built more recently.
Power plants further than about 200 km from the mine generally use rail transportation. Pithead power plants often use dedicated infrastructure to move coal, such as conveyor belts or merry-go-rounds. Locations close to mines use trucks. Rail linkages also rely on trucks to connect mines to the railhead.
Railways account for roughly 87 percent of the cost of coal transportation. The average transport distance by rail in 2017 was 496 km, a decrease of over 200 km in just five years thanks to changes in plant utilisations as well as a transportation rationalisation exercise. States far away from mines transport coal as far as 2,000 km. For a state like Punjab, coal transport cost can be as much as Rs 2/kWh, compared to about 0.10 rupees/kWh for local pithead plants using a conveyor belt.
Status of ongoing projects
There are 117 ongoing mining projects costing Rs 20 crore and above under implementation in CIL. Out of these 117 projects, 63 projects (54 per cent) are on schedule and 54 projects (46 per cent) are delayed. In SCCL, there are 20 mining projects (14 opencast and 6 underground) costing Rs 20 crore and above under various stages of implementation in SCCL with sanctioned capital cost of Rs 68.65 billion, of which, 14 projects are on schedule (as per FR/RCE), six projects are delayed. The main reasons for delay are forestry clearances, land acquisition and related R&R problems, adverse geo-mining conditions, etc. Coal companies are regularly monitoring implementation of the project at various levels and interacting with concerned authorities at State and Central levels to resolve the issues coming in the way of projects implementation. During the period 2017-18, CIL has approved five opencast projects having an annual total capacity of 24.85 MTY and sanctioned capital of Rs 42.64 billion.
The coal industry is knit into the fabric of the Indian economy. Coal faces headwinds globally and there are two main types of opposition to coal. First is the concern over coal's externalities, both local pollution and greenhouse gas emissions with global consequences. Second is the belief that India doesn't need as much coal, as renewables now provide a cheaper alternative, and coal represents a risky and expensive investment.
- RAHUL KAMAT