Coal shortage threatens India’s power expansion plans

Coal is a mainstay of India’s electricity sector, but are domestic shortages and a growing reliance on imports threatening its power generation capacity development?

India’s desire to expand its coal fired power generation base is running up against fuel supply constraints from a state-dominated coal sector lacking investment and hampered by environmental regulations and labour disputes.

Jeremy Bowden

Coal shortages experienced by generators last year are likely to be a sign of things to come as it becomes clear that domestic production cannot expand fast enough to meet the huge additional demand from the rapid power expansion underway in India at the moment.

The shortfall is leaving many projects without secure domestic supplies, which is leading to cancellations, rising imports and attempts by project developers to capture supply by moving upstream into mine development at home and abroad.

Casualties to-date include companies like Reliance and Adani Power, both of which halted planned capacity expansion last year. Experts say up to $36 billion of investment is under question, representing around 35 GW, with developers worried that plants under construction across India may sit idle on completion because of a lack of affordable, reliable domestic coal.

Financiers and project developers had been piling into the sector as power demand ballooned alongside India’s rapid economic growth of recent years. But the uncertainty over coal supply has started to rattle financial backers, with the Reserve Bank of India suggesting banks freeze lines of credit to what it described as a “distressed sector”.

The move followed months of warnings from financial analysts that systemic defaults loomed on coal plant loans, which could have a destabilising impact on the Indian banking sector due to high exposure.

Imports on the rise

The domestic shortage is drawing in imports, and in 2011 India overtook China as the world’s biggest coal importer, while it remains both the third-largest consumer and producer in the world after China and the US.

Official figures are not yet out but analysts estimate India imported about 81 million tonnes of steam coal for its power plants in 2011, up about 30 per cent on the year (see Figure 1).

Figure 1: India’s imports of steam coal rose 30 per cent in 2011 Source: IEA, EIA

Fortunately demand for imports from China fell last year, dampening upward pressure on international prices from India’s additional purchases. A further 40 million tonnes are expected to be cut from China’s import total this year as up to 200 million tonnes of extra domestic production is brought online ” twice that added in 2011.

Last year Indonesia was India’s largest supplier, providing an estimated 64 million tonnes of steam coal. However, total Indian purchases were lower than many forecasts for the second half of the year because of slowing activity in its $1.7 trillion economy. KPMG estimates a domestic shortfall of 189 million tonnes a year by 2015, while the government expects imports of 194 million tonnes alongside production of 770 million in 2017.

The Indian government is now estimating a total gap between supply and demand of 142 million tonnes for the whole 2011″12 fiscal year, against coking and steam imports expected at around 115 million tonnes ” suggesting imports are not entirely making up for the shortfall. This represents a major constraint on economic growth, as well as power output. Import prices, which are variously put at 20-40 per cent above domestic levels, add expense thereby making power projects less competitive.

To reach a targeted average economic growth rate of 9 per cent per year for the next five years, the government acknowledges it must remove obstacles to domestic coal development.

In the meantime, Sriprakash Jaiswal, the minister of coal, has asked the Ministry of Power to freeze the capacity of confirmed coal-based power projects at 63 450 MW for the next five years ” against an original target of 96 178 MW by 2017.

The uncertainty means projects not included in that 65 450 MW are now being cancelled or postponed, according to the Central Electricity Authority. To help cope with the additional demand for coal from all these new plants ” albeit reduced from earlier expectations by over 30 GW ” the Prime Minister’s office recently agreed that Coal India Limited (CIL) could peg minimum supply at 80 per cent of full deliveries for plants built after March 2009, along with 90 per cent to plants built earlier.

CIL’s chairman and managing director, Ms Zohra Chatterji said in February that the company was able to meet at least 80 per cent of these new plants’ demand without importing, and so it may not need to buy in the international market, which it appears reluctant to do.

However, Sanford C. Bernstein & Company said in a recent report that it believes CIL will have to boost imports on government orders and the threat of penalties should deliveries fall below 80 per cent. The additional costs of imports by CIL can then be spread evenly among end-users, with only a marginal impact on price. Buying the fuel from CIL also eliminates the financial risk to power producers of importing coal directly.

Healthy reserves

The problem is not one of reserves. India is continuing to expand its proven reserve base (see Figure 2) despite steadily increasing production, and at current production rates of around 600 million tonnes a year it has over 300 years’ worth of supply.

Figure 2: Growth in India’s proven coal reserves (million tonnes), 2006-2010 Source: CIL

CIL claims it is new environmental regulations, above all, that are hindering output growth. In 2011, Dr Manmohan Singh, India’s prime minister, passed an order from the Ministry of Environment and Forests restricting new mines in areas covering about 40 per cent of CIL’s reserves. The Ministry of Coal, however, has questioned the move’s legitimacy and is pushing for it to be reduced to cover just 10 per cent of reserves.

In addition, the new rules mean that about 218 mines started before 1994, and previously exempt from regulations, now require environmental clearance.

The Confederation of Indian Industry says it now takes an average of seven years to receive environment and forest approvals to start mining. Worried about such delays and unable to secure supplies from CIL, some Indian businesses have begun acquiring coal mines in Indonesia, Mozambique and South Africa, a trend many call India’s “coal rush”.

CIL too is attempting to acquire mines in South Africa, the United States and Australia, but with little success so far.

However, concerns are increasingly being voiced over security of imported supplies, especially with the Indonesian government proposing to restrict exports of certain coal grades ” representing about 40 per cent of total exports ” from January 2014 from mines including those owned by Indian companies.

Casualties of the new environmental regulations also include companies like Madanpur South Coal Company, which has already sunk over $600 million into expanding a power plant and steel factory in Chattisnagarh state in central India, but can no longer depend on an assured coal supply from nearby mines around which the project had been based.

In a ‘business as usual scenario’, CIL’s Chatterji said her company would meet its 464 million tonnes production target in 2012″13, rising to 556 million tonnes by 2016″17. But if all environmental clearances were obtained for upcoming projects the company could produce at least 615 million tonnes by then.

In response, the Ministry of Environment and Forests assured CIL in January that it would indeed fast-track mine approvals, particularly for capacity being added to operational mines, to ensure production can rise by at least 25 million tonnes per year.

CIL has also been attempting to move up its domestic coal prices nearer to international levels to boost investment and fund a substantial wage hike for its workers. But under pressure from power producers the government reversed direct rises last year, forcing CIL to absorb the higher wage costs anyway. Instead CIL has upgraded and standardised its coal classification system, which would have raised the price of coal by 25″40 per cent to prevailing international levels, but it has been forced to limit price increases to certain grades of coal.

Both coal and power industry groups are also opposing the proposed introduction of a 5 per cent import duty. They claim that levying such a tax will make it all but impossible for project developers to supply power profitably using imported coal ” even when it is mixed with cheaper domestic supply ” unless power prices are allowed to rise. A levy of Rs50 ($1.1) per tonne on domestic coal producers designed to fund renewable development was introduced last year.

India’s fuel shortages are further exacerbated by a lack of trucking and reliable railway networks to transport coal inland from ports. Thermal coal stocks at ports may be as much as 9 million tonnes, according to a February Citigroup report. Moreover, CIL’s biggest coal fields are located in remote regions where Maoist rebels operate. The guerrillas are known to target business activities for extortion and to disrupt roads and railway lines used to transport coal. They are also suspected of involvement in coal theft.

Coal sector reform

CIL claims to be the world’s biggest coal producer, and is responsible for more than 80 per cent of India’s total consumption. Last October, it raised Rs152 billion for the government through a 10 per cent initial public offering. And at the end of February CIL became India’s most highly valued company, overtaking Reliance Industries. However, the Indian government appears to be shying away from further bold market-oriented reforms of coal production, despite calls for the dismantling of CIL’s dominant position in order to attract private investment and stimulate output.

The government has, however, pushed forward with some demand-side reforms, including expanding the number of end-users entitled to buy coal directly from CIL, which critics claim could further increase demand while doing nothing for output. The authorities will also make public the reasons why some companies are granted or denied coal, make e-auctions of coal more systematic ” CIL currently sells about 10 per cent of annual production through spot and forward e-auctions every year ” and auction coal blocks only after all environmental clearances have been secured.

But these measures are not expected to solve the problem without further supply-side reforms to stimulate production, including the creation of a sales platform for CIL, the sale of surplus production from captive mines and allowing all approved end-users to import. The government has also put on hold a proposal to allow private mining firms to bid for auctions of coal blocks, because it claims state ownership of coal resources is enshrined under the Coal Mines Nationalisation Act of 1973.

India’s Association of Power Producers says that the moves, as they stand, will make the situation worse, and hopes to persuade the government to at least give power projects first priority in coal allocation and allow captive block owners to sell coal, although it backs the move to keep independent miners out of coal block auctions. It has also pushed the government to lobby Indonesia to reduce coal prices, but with little effect.

Last year’s coal shortages

CIL was reported to have reduced supply to some new plants by up to 50 per cent in 2011, and at one point several domestic newspapers reported that 11 power projects with a combined capacity of 16 000 MW had only a day’s stock left, citing the Central Electricity Authority. But Prasenjit Pal, deputy general manager at India’s biggest generator, state-run NTPC Limited, puts last year’s problems down to labour disputes and practices, along with heavy rains.

“The main problem is CIL delivers in fits and starts,” he said, explaining that in the run-up to 31 March each year CIL ramps up output to meet annual targets, which overloads the transportation system. In March, power plants stock up on coal in expectation of a slowing of deliveries in the following months, he added. “Everyone [at CIL] relaxes after the March annual target deadline; it’s a seasonal variation,” he said. “NTPC is not seeing any major shortages nowࢀ¦ there have been bottlenecks but it is not a long-term problemࢀ¦ it’s more of a logistical problem,” he said.

For fuel supply agreements signed prior to 2009, 90 per cent supply was assured and in some cases 95 per cent has been delivered. This surplus could be made available to new plants. Pal added that this will not constrain power output at these established plants because utilisation rates rarely exceed 90 per cent over the long term because of maintenance and other variations in output.

He said NTPC had not delayed or suspended any capacity expansion that had achieved financial clearance because of coal shortages, and was not concerned over the coal minister’s reported call to halt further projects. NTPC is the biggest power generator in the country with capacity of about 34 000 MW, most of which is coal-based. It has a very high capacity utilisation record, but had to cut power production in autumn 2011 by 4000 MW because of coal shortages. Pal said a record dip in production below peak demand of 13 per cent in December happened for reasons unrelated to coal supply.

Pal acknowledged independent power producers (IPPs) were still facing supply issues, and that imports were on the rise. “Larger IPPs are looking to secure fuel supply by acquiring mines for captive use… some of the smaller ones are hard pressed,” he said, especially as their financial backers were seeking secured coal supplies. He said international prices averaged about 20 per cent above domestic levels, leaving proposed projects without domestic supply commitment at a major disadvantage.

the massive challenge of India’s development

This financial year, CIL’s first quarter and third quarter profits were up 54 per cent and 64 per cent on year respectively, with output recovering to 110 million tonnes in Q3 from 93 million tonnes in Q2, which was hit by heavy monsoon rains. The additional profits should help increase investment in new mines and equipment, provided environmental obstacles can be overcome.

Overall CIL reported a 2.7 per cent drop in production to approximately 291 million tonnes in the nine months to 31 December 2011, although surging financial year-end production now means CIL’s government-set production target of 440 million tonnes is expected to be achieved. The production target for financial year 2012″13 is to rise by 5.5 per cent to 464 million tonnes.

The minister of coal said at a press conference in January that it was not possible to increase coal output overnight, but that CIL was doing its best. He added that he had asked CIL to deliver all remaining pithead stocks to help meet customer needs, and is pushing for a rapid modernisation and restructuring of the company.

Coal dominates the power sectors of both the world’s developing giants ” India and China. Even with a strong central government, and single-minded drive for production growth, China has found that producing and delivering sufficient coal to keep pace with unprecedented jumps in demand for energy has been difficult. India’s cumbersome democracy, with all its checks and balances attempting to accommodate a range of interests ” not least environmental concerns, is finding it all but impossible, despite healthy reserves.

The face-off between environmentalists and developers is and will be a key battleground for Indian policymakers for some time to come, and the government faces a massive challenge as it attempts to guide this emerging economy through its current rapid development phase.

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