In the dark: Stress test for the coal economy in India to meet demand

The mechanics of production and supply logistics suggest that power producers will struggle in the coming year too

Days before the COP26 negotiations get underway in Glasgow, it is ironic that India is rushing to raise coal production, which has become vital for maintaining the momentum of economic recovery. India needs more coal than it did in FY21 and international prices are steep. To meet the gap, domestic coal is sought to be used more intensively.

This, however, does not mean India is rapidly cutting down forests to open up more mines. Instead, the coal economy — including the coal and power ministries and the government-run coal companies — is being forced into a sort of stress test to meet the demand of the 138-odd power stations without the outages that marked the past few months.

The problem is this. Coal production has risen but the productivity of mining coal and its utilisation by downstream users have not improved. Coal India Ltd (CIL), the monopoly government producer, has produced 249.82 million tonnes till end-September, which is 37.29 per cent of the annual production target of 670 MT. This represents a 3.74 per cent growth rate over FY20. It is the same compounded annual growth rate at which the company has been pushing production for the past 11 years. At the current pace, it is unlikely to meet the annual target. It also means CIL productivity has not improved.

So how is the stress being met? By running down stocks, principally. Due to the peculiarities of the coal economy in India, production takes in lumpy batches throughout the year. Coal produced from a batch of mines is sent to a common railway siding from where it is wheeled off to companies in the power, steel, cement and paper sectors. These operations tend to slow during the monsoon months. Post-monsoon, CIL mines raise production, and inventories at the sidings begin to ease up as power companies pile stocks to meet the higher demand for electricity in the second half of the year. An alternative used by companies such as state-owned NTPC is to locate their power plants next to the coal sidings. As the current crisis shows, this strategy has paid off. Coal ministry data shows of the 13 plants all over India surviving on less than three days of coal stock through most of October, eight were those farthest from the mines.

Since the demand for electricity has jumped by about 20 per cent (April to September) over the same period in FY21 in the monsoon months, coal stocks have been run down to keep the power plants running despite the waterlogged conditions in the sidings. To add to the pressure, the power ministry issued orders in September mandating that power plants running on imported coal should revert to domestic demand because international prices were rising steeply. This impacted coastal power plants such as the Tata and the Adani power plants at Mundra and created a technical problem as well since the boilers of imported coal-dependent power plants are configured to run on high-quality imported coal and not Indian coal, which has a high ash content.

That is why the order has put more pressure on CIL and its sister company Singareni Collieries Company Ltd (SCCL) but brought no improvement in the addition to capacity of the power sector. Data from the first 20 days of October shows the net addition to the grid from these plants was a negative 1,320 Mw. The capacity initially went up as these plants were fired with domestic coal but they soon began to trip. The National Load Despatch Centre records on 18th and 19th of this month, capacities at Sembcorp Energy Limited located near Krishnapatnam port in Andhra Pradesh tripped. At both Adani and Tata’s Mundra power plants in the same period, not more than two units each could remain in operation. All this only added to the uncertainty of the grid and coal supply lines.

Will India, therefore, manage to ride out this year with lower coal imports than in FY20? The answers are not clear. One of the reasons is that there is no single agency in this sector that has a clear view of the demand and supply equations. The Central Electricity Authority had estimated India’s gross domestic product to grow a conservative eight per cent real rate in FY22. The derived growth in electricity demand was expected to be about 7.2 per cent for the year. This was supposed to translate into an expected CIL production of 620 MT. The projections were made in November last year. These projections were revised as late as September for this year requiring CIL and SCCL to produce 670 MT.

Since the productivity of either has not risen as data shows, there is no particular reason to believe the gap between the demand and supply of coal will disappear soon.

The problems have been compounded by the Indian Railways. To ensure optimum coal utilisation, the organisation had begun a rationalisation of its freight routes jointly with the coal ministry (since 2013). The aim was that coal from the sidings should not move more than 500 km to reach a plant, a move that also helped the power companies as the freight rates for coal hauled beyond 700 km are steep. But railway ministry figures of the average lead distance travelled by each variety of freight in this financial year (April to September) has again risen to 571 km. Coal is running for a longer distance to reach the plants. It helps the Railways since it has substantially raised the freight charges for this distance slab.

That is the same reason companies that won the auctions for commercial mining of coal are not too keen to get into production soon. Their mines are further from end-users than an average CIL mine. The higher costs for coal lugged from these mines is a deterrent to their production plans. They have asked for a joint venture with CIL to underwrite some of those transportation costs.

In sum, while India may somehow manage to keep the power plants going this winter, the stress test for the coal economy will not create any long-term lessons for a viable expansion of the sector. Which, in the context of the climate change negotiations, may well force India’s transition to renewable energy sooner rather than later.