India’s power sector reeling under fuel resource crunch

Energy is pivotal to the growth of a country’s economy. India’s robust and sustained growth has resulted in strong demand for clean and economical energy resources.

Primary energy consumption (energy consumption from all sources) reached approximately 560 Million Tonnes of Oil Equivalent (MTOE) by end of 2011.

Between 2007 and 2011, primary energy consumption in India increased at a compound annual growth rate (CAGR) of approximately 8 percent.

Coal has been contributing a major share of India’s energy basket (primary energy consumption), following the global trend. However, with increasing environmental concerns, the share of natural gas has also been increasing.

Exhibit 1 indicates the share of major fuels in India’s energy basket in 2011. Fossil fuels (coal and oil) together contributed 82 percent, whereas share of coal was pegged at 53 percent of India’s energy basket in 2011. 

See Exhibit 1. 

With increasing focus on reducing Green House Gas (GHG) emissions and reducing dependence on fossil fuels (due to depleting reserves), the share of renewable energy is gradually expected to increase in coming years.

However, the dominant position of coal as a major fuel source in India’s energy basket is expected to continue over the next two to three decades, primarily because of its lower costs and abundant availability.

India’s Sectoral Coal Requirement and Role of the Power Sector

Before diving into India’s coal availability and demand-supply scenario, it is imperative to understand the coal consumption pattern across major sectors (as seen in Exhibit 2), which drives coal requirement within the country.

See Exhibit 2. 

As depicted in Exhibit 2, India’s power sector contributed a major chunk (75 percent) of the total coal consumption of 640 million tons (MT), in FY2011-12. This is primarily due to the huge coal-based power generation capacity.

Coal has contributed to more than half of India’s total power generation capacity for quite a few years (as indicated in Exhibit 3). As per latest statistics available from Central Electricity Authority (CEA), India’s total power generation capacity stood at 210.9 GigaWatt (GW) at the end of December 2012, of which, share of coal in power generation capacity was 57.3 percent.

Over the next 5 years (FY2011-12 to FY2016-17), India plans to add close to 80 GW of additional power generation capacity; of which approximately 60 percent is expected to be coal-based plants, primarily because of relatively lower cost (CAPEX) and abundant coal availability.

Besides, owing to the long life of coal-fired power plants and the higher cost of building advanced plants, dominance of coal as a fuel for power plants in India is expected to continue.

See Exhibit 3. 

Globally, demand prospects for coal could increasingly be dependent on climate change policies; however, such factors could have less influence in developing countries such as India.

This is due to the fact that developing countries place a higher value on economic growth and energy security than on environmental objectives.

This fact clearly underlines the strategic importance of coal in India, and implications of its availability on performance of the power sector and overall economic growth of the country.

Coal Availability in India

India ranks among the top 5 countries globally in terms of proven coal reserves. As per the Geological Survey of India (GSI), India’s proven coal reserves stand at 118 billion tons, as on April 01, 2012.

Coal India Ltd (CIL) and Singareni Collieries Co. Ltd (SCCL), two state-owned coal mining companies, dominate much of the domestic supply (more than 90 percent of India’s total domestic coal production).

Even though India has plentiful coal reserves, its domestic supply has been unable to keep pace with the demand spurt, leading to an ever-widening deficit in recent years.

As per statistics available from Ministry of Coal, India’s demand for coal has increased at a CAGR of more than 6.5 percent over the last 5 years (FY2006-07 to FY2011-12), whereas domestic coal production during the same period has increased at a CAGR of only 4.6 percent.

Coal demand in India was pegged at approximately 650 MT in FY2011-12, whereas the domestic production stood at approximately 540 MT, leading to a deficit of 110 MT (17 percent of the total coal requirement).

Coal deficit within India has more than doubled over the last 5 years.

One of the key reasons for the increasing coal shortage in the country has been the inability of Coal India Ltd (CIL), which contributes more than 80 percent of India’s domestic coal production, to ramp up production.

CIL’s coal production over the last 3-year period has remained flat at around 430 MT (CIL produced 431.3 MT of coal in FY2009-10, which marginally increased to 435.8 MT by FY2011-12, which is a mere 1 percent increase). Even for FY2012-13, CIL has revised its coal production to 452 MT, still short of the 464 MT target it had set.

India’s aggressive coal-based power generation capacity expansion plans over the next 4-5 years (60 percent of the total power generation capacity addition of 75 GW planned during the FY2012-13 to FY2016-17 period), is expected to increase the coal demand.

Besides, grand infrastructure development plans (road, bridges, etc.) and construction activity in the country, translating into increased demand for iron and steel, cement etc., is further expected to fuel the demand for coal. By FY2016-17, coal demand in India is projected to be 980 MT, based on estimates from Ministry of Coal.

With the current production plan of CIL (target to produce 615 MT of coal by FY2016-17), and other captive mines, domestic coal supply at best could reach 795 MT. With these projected coal demand and production figures, the shortfall would further widen to 185 MT (close to 20 percent of the total coal demand).

Exhibit 4 shows India’s coal demand, production and deficit, till 2014-15.

See Exhibit 4. 

Coal Imports

Relatively lower quality of domestic coal, lower growth in domestic production vis-a-vis demand has resulted in increasing reliance on coal imports. Given the increasing deficit over the years, India’s coal imports increased at a CAGR of more than 16 percent from FY2006-07 to FY2011-12.

India imported about 103 MT of thermal and coking coal in FY2011-12 — almost 50 percent jump from a year earlier. India’s coal imports accounted for around 16 percent of domestic coal consumption in FY2012, as compared with 7.1 percent in FY2003. For FY2012-13 coal imports are estimated to be reaching approximately 120 MT, further increasing to almost 160-170 MT by FY2016-17.

India imports coal from resource-rich countries like Australia, Indonesia, South Africa, etc. Given the coal deficit situation in the country, many power developers have acquired overseas coal mines to ensure fuel supply for their power plants.

However, announcements made by the respective governments in countries like Australia and Indonesia (the Australian Government announcing ‘coal tax’ and Indonesia making it mandatory for coal exports to be benchmarked to international prices from September 23, 2012), has resulted in an almost 40-50 percent price hike of imported coal compared to domestic coal.

Higher prices of imported coal leads to increased input costs for the power, iron and steel, and other sectors that rely on coal as a fuel source.

Challenges with Domestic Coal Production Ramp-Up

Various challenges have hampered growth of India’s domestic supply of coal. The major constraints have been:

• Delays in obtaining environment clearances
•  Issues related land acquisition and regulatory clearances required for mining in forested areas
•  Law and order problems in some states
•  Coal evacuation constraints

Increasingly stringent environmental regulations have made it difficult to raise output of coal in India. Some CIL mines have ceased production on account of technical problems, while others are awaiting forest clearance for their expansion. Some of CIL’s mines have suspended operations because it has become economically unviable to produce coal.

Railways account for the bulk of transportation for CIL’s production, more than 50 percent; followed by road, around 26-27 percent. Road transportation is mainly for road bridging, that is, for carrying coal from pitheads to nearest railheads.

Low availability of railway rakes for coal transportation has impacted the coal supply position within the country.

The average rake availability at best has been 176 per day, which should be at least 200 per day. Besides, slow pace of railway infrastructure development in key locations has further affected coal transportation within the country.

CIL’s mines in North Karanpara, Mand-Raigarh, and IB Valley, jointly producing approximately 250 MT of coal every year, are unable to do so as railway lines for evacuating this coal have not been laid for years now.

Coal Shortage Impact on India’s Power Sector

Shortage of coal has had an adverse impact on the country’s power sector, with new capacity build-up being affected. About 100 GW of thermal power plants are under various stages of development currently and among these, progress of about 20 to 25 percent of the capacity has been stuck due to coal supply and availability issues.

Similarly, the existing coal-based plants are suffering as well since they are operating on low Plant Load Factor (PLF). At the end of December 2012, PLF of coal-based thermal power plants stood at less than 70 percent.

From a PLF of 78.6 percent in March 2008, it fell to 73.3 percent in March 2012, further declining to 69.6 percent at end of December 2012. Poor domestic coal supply is the driver of imports. And the higher cost of imported coal makes the economics even worse for power producers who work out the financials for their power projects based on long-term supply of coal from Indonesia in the range of about US $26-30 per ton.

However, with the benchmark prices of imported coal being almost twice this value, it has thrown power plant economics in jeopardy, since developers are not able to pass on the price increase to the customers – distribution companies (DISCOMs), having entered into long-term power purchase agreements (PPA).

What Needs To Be Done To Improve the Coal Shortage Scenario

Some of the major steps to improve coal availability in the country could be:

•  Speeding up environmental clearances for new mines
•  Ease the process for companies seeking to acquire land for coal mining
•  Adopting the “Single Window’’ mechanism for processing and clearing coal mining applications. Currently, resources such as minerals, land, water, environment, and forest fall under the purview of different independent departments and ministries at the State and Central levels. A singlewindow system would expedite the coal mining application approval process 
• Joint venture with private mining companies

India’s Railways and Union Budget announced for FY2013-14 covered two major regulations for the coal and power sector:
 

• Public Private Partnership (PPP) policy framework with Coal India - The PPP policy framework with Coal India Limited as one of the partners would augur well for ramping up coal production for power producers and other consumers 
•  Investment of INR 40 billion to enhance rail connectivity to coal mines - This announcement would have a major impact on addressing the logistics issues related to coal transportation from coal mines to power plants 

Coal is expected to remain the main source of electricity generation in India over the next 2-3 decades, playing a strategic role in the economy’s growth. This can be gauged by its contribution to India’s GDP (coal contributes almost 1.5 percent to India’s GDP).

The unavailability/shortage of coal will not only have a significant impact on the power sector, but also on new project setups in the manufacturing sector (such as iron and steel, cement, fertilizers, etc.) thereby having a cascading impact on overall economic growth.

The Indian Government has taken a few initiatives to improve the coal supply situation in the medium term; however much more needs to be done to reverse the current deficit scenario.