Coal shortage: Will coal crisis derail India's nascent economic recovery?

India is facing the prospect of large-scale power cuts, as the country’s power plants are running dangerously low on coal, the fuel which accounts for 70% of the country’s electricity output.

According to the Central Electricity Authority data, 67% of the 135 thermal plants tracked had just four days of coal supplies or less. At the start of August, these plants had 13 days of supplies on average. What is worse is that sixteen of these plants have completely run out of supplies, and 75 have just three days’ supplies or less.

The demand for electricity is rising with economic activity resuming in the country. The power demand in August 2021 was 17% higher than the pre-Covid-19 level of August 2019, according to the government.

Facing record global coal prices on the back of a strong demand and an increase in freight costs, Indian buyers have avoided importing the fossil fuel in recent months. Instead, they have relied mostly on domestic stock. That has reduced the domestic stock to the lowest level in more than three years, with state-owned Coal India failing to keep up with the surge in local demand. Coal India, which produces more than 80% of the country’s coal, bumped up production towards the end of August but was facing bottlenecks in transporting the coal to power plants. The company has kept

prices unchanged over the past year.

The shares of most companies in power and coal mining business have seen a positive impact of this demand surge. The scrip of Coal India and other power producers like NTPC, Tata Power and Torrent Power have risen between 5% and 30% in recent weeks.

Coal India produced 42.6 million tonnes of coal in August, an increase of almost 15% from the same month a year ago. Its production in September was roughly the same as last year, at 40.7 million

tonnes. Excessive rains in coal-mining areas of Jharkhand, Chhattisgarh and Odisha in August and September aggravated the problem, leading to lower despatches during the period.

The price of coal from Indonesia, one of India’s major suppliers, has surged more than 200% since March. India mainly imports coal from Indonesia, Australia and South Africa, besides Colombia, Russia, Kazakhstan and Mozambique.

Coal India had warned the Power Ministry of a potential crisis as early as February 2021. The company told power generators to increase their coal stocks before the monsoon. Despite its request, utilities were using existing stockpiles and limited fresh purchases amid a rising power output. A majority of the power plants also did not adhere to guidelines of maintaining a 22-day coal stock. This may have been a mistake on the part of the power-generating companies. Electricity generated from coal rose 20% in the first eight months of this year.

However, government officials have now pointed out that the drop in coal supply is not leading to any energy crisis. According to data available with grid regulator Power System Operation Corporation, or POSOCO, there is currently no energy shortage in the country.

A senior coal ministry official told Business Standard said the demand supply mismatch would in no way impact consumers like in other countries. But Power Minister R K Singh told a national daily that the coal crisis could last for as long as six months. He added that power demand usually started coming down in the second half of October, but the situation right now was uncertain.

In China, for example, several provinces have begun power rationing in order to conserve the fuel ahead of the peak winter demand season. That country’s power shortage has reached such an extent that homes in some parts are experiencing unannounced power cuts.

According to an estimate by Goldman Sachs, up to 44% of China’s industrial activity has been impacted by power shortages.

China’s order to its state energy companies to secure coal supplies to avoid any winter shortage is driving up prices for other major importers like India.

At the same time, some local authorities are also curbing power use by industry to meet energy consumption and efficiency targets set by China’s central government. China has promised to cut energy intensity by around 3% in 2021 to meet its climate goals.

Even though India is on an aggressive path to increase the proportion of renewables in its energy mix, coal still remains the backbone of the power sector. India’s dependence on coal also contributes heavily to its trade deficit. To address the current crisis and help in import substitution, the government has allowed companies with captive mines to sell 50% of their annual output in the open market. Additionally, to avoid a demand-supply mismatch, the power and coal Ministries have jointly decided to draw up a monthly coal supply programme for thermal power units.

The goal is to build a 40-million-tonne stockpile at power plants by March, which marks the beginning of the high power demand period. The current stock stands at 7.6 million tonnes.

Any power cuts to the industry will damage India’s rebound as the economy is recovering from a historic 7.3% contraction in FY21. In fact, Jindal Steel and Power has warned that steel prices are expected to increase in the coming months, as companies are buying coal at three times the rates just a month ago.

While blackouts like those in China seem unlikely in the immediate future, India’s power producers will need to increase domestic coal purchases, as well as imports, regardless of the price.