Power sector's 'shocking' trinity to create a scorching summer this year

A new crisis is emerging owing to shortages in domestic coal supplies and railway rakes, coupled with rising electricity demand

The trinity of mismatch between coal supplies, availability of rail wagons and rising power demand promises to create a scorching summer this year. This trinity has often impacted the Indian economy in the past, but mostly individually. In some years, there was a shortage of coal supplies, as in FY15; in others, it was a shortage of wagons, as in FY13 and FY14; and sometimes, it was the rising demand for power, as in FY21.  

This time, coal production has risen fast, the supply of rail wagons too has risen, but eclipsing them, the demand for power has risen even faster. The demand for power has risen due to a combination of rising heat and the revival of growth in the manufacturing sector that uses coal as a feedstock. This should be good news.

Since the rise in demand is more than the power ministry’s forecast and comes after an already sharp climb last year, the combination is proving difficult to reconcile. Economic logic would say, this is a demand and supply issue that ought to be resolved by market forces. 

The problem is that the coal-rail-power arrangements in India are still not market determined. Coal India is a government-run company that accounts for over 80 per cent of the domestic supply; the largest power supply company, NTPC, is government-run and accounts for almost 21 per cent of the total power generation. The railways, of course, are entirely government-run. 

These knots will get untangled, as public policy encourages more commercial coal mining, private sector participation in power generation and transmission as well as expansion of private freight trains. But till market forces come to dominate, expect shocks from the trinity of shortage to happen at the slightest possible disturbance. 

Data from IEX, India’s premier energy exchange, shows the impact of the current shock. 

On April 16, as evening peak time approached, the cost of electricity at the exchange climbed up to Rs 10.31 per unit by 4 pm as the surplus power to trade dwindled from over 2 GW to just 580 MW. A day before, on Good Friday, during peak evening demand, there was a deficit of over 2 GW. For states that are farthest from the coal mines, Punjab, Haryana and Jammu & Kashmir, it is Hobson’s choice. Either pay the steep market clearing price or face a power outage. The northern region, according to Posoco, the national power transmission company, has faced a daily shortage of over 973 MW in April so far.

Yet, coal is not in short supply. Total domestic coal production touched 773 million tonnes (MT) in FY22, an 8.5 per cent annual rise in production. The total opening coal stock with Coal India and sister concern Singareni Collieries Company Ltd was 65.5 MT, as of April 1, 2022. Mahanadi Coalfields, for instance, the largest of Coal India’s subsidiaries, is choking on stocks piling up at the mine pit-heads. The country’s 181 coal-based power plants have a coal stock of 24.04 MT. 

Look closer and it’s clear why. In less than two weeks since then, a crisis has enveloped the sector again. The coal stock with the plants is just an average of about nine days’ need, assuming they are run at 85 per cent of their capacity. Wiser after the last crisis of September 2021, the power ministry has instructed these plants to have a storage capacity of almost thrice the current level, at 26 days. 
 

The plant stocks are designated critical if the coal stocks fall below 25 per cent of the normative levels. 

Since the rakes (wagon trains) Indian Railways allocates to Coal India and the private sector coal companies have not risen, coal stocks with the power plants have begun to run out fast. In February, the Railways supplied 410 rakes for the sector, which dropped to about 370 in March and will further dwindle in April. As demand to move other goods shoots up in the economy, the Railways has run out of spare capacity. The Railways has discovered its next year’s target for freight movement has to be revised upwards and has placed orders to buy 90,000 wagons over the next three financial years. The first lot will arrive only by September. 

Which is why the only option now is rationing. Even though coal happens to be the chief money spinner for the Railways, not all routes are profitable. For instance, if a coal rake runs from the Mahanadi Coalfields to the 1,980 MW Talwandi Sabo in Punjab, after the 1,500 km-plus journey, it will mostly return empty. No wonder, then, stocks at this plant are in the critical list, at 9 per cent of the norm. Overall, power ministry data shows, of the 79 power stations on its critical list as of April 13, mostly are in the north. This is, however, India’s second-largest electricity market.

Together with the west, the two regions account for 61 per cent of electricity demand in the country and this is likely to remain so till FY37.  But down south, too, plants in Tamil Nadu and Andhra Pradesh, which get coal by sea from Mahanadi Coalfields, are also on the critical list, because the rail links from the ports to the plants are often missing.

To this crisis, add the element of coal imports. Early last year, faced with rising coal prices abroad, the private sector-run power stations approached the government to bail them out. To keep costs low, these companies were given the option of switching to domestic coal. That helped, with thermal coal imports falling to just 25 MT in FY22, a 50 per cent drop from FY21. The companies made savings, electricity tariffs fell and inland states, again mostly in the north, revived their long-term power purchase agreements with them. Coal Secretary Anil Kumar Jain had told Business Standard, “We expect to phase out thermal coal imports completely in FY23.”

But now, of the 18 thermal power plants designed to run on imported coal, 11 are on the critical list. So the power ministry has advised all, not just these 18, power plants, to “endeavour to import coal for blending up to 10 per cent”. Current Power Minister R K Singh said these plants “have to offer fair and reasonable tariffs”. States have to set targets for each generating company, because the monsoon is just months away. And, as we know, domestic coal supplies tend to be dislocated during the rainy season. In other words, more power shocks can be expected.