|Coal is the backbone of India’s electricity generation sector, so it is essential that the long-running supply issue is addressed
Credit: World Coal Association
With projected long-term annual economic growth rates of more than 7 per cent, it is vital for India to plan for concurrent growth within its energy sector, combining thermal, hydroelectric, nuclear and renewable sources.
With the predominant use of domestic and imported coal as the country’s primary fuel source, the government has embarked on ambitious plans to increase coal-fired power generation capacity.
Despite these aggressive plans, a number of factors including fuel and tariff considerations have led to capacity addition shortfalls, which will have to be addressed on a number of fronts immediately to ensure that the current energy crisis does not take a toll on India’s economic growth.
India has experienced impressive GDP growth rates exceeding 7 per cent in the past. While recent trends indicate a slow down, long-term GDP growth of 7 per cent-plus is expected to continue through to at least 2020. To support India’s expanding economy, large-scale power capacity additions in the range of 100-150 GW are projected over the next ten years. While this represents an impressive objective, in reality there has been – and will continue to be – shortfalls in capacity additions due to a variety of factors, including fuel constraints, regulatory and tariff issues, shortages of skilled manpower and construction equipment, infrastructure issues, and environmental and bureaucratic delays in obtaining clearances and permits.
Contributing to the energy capacity addition shortfall is a shortage in domestic coal production, price volatility for higher quality imported coal and natural gas. Bureaucratic and government delays associated with obtaining permits and clearances for pre-bid activities such as land acquisitions, water allocation, environmental clearances, and commercially viable power purchase agreements (PPAs) also contribute to the ongoing power generation capacity commissioning delays and shortfalls.
The lack of trained construction, commissioning, electrical and instrumentation personnel accounts for close to a 33 per cent shortage in technically skilled manpower.
Major efforts are currently underway to train local talent from villages in proximity to power projects, but this has led to non-availability and inadequate training procedures which can contribute to delays in commissioning and construction.
Also, major construction equipment such as rolling stock, cranes, tunnel boring equipment and welding machines are in short supply, and this has led to over-working of equipment, safety issues and project delays.
The Indian government, national and state-run utilities, and independent power producers (IPPs) are all taking measures to address these shortfall issues. It is expected that over the long-term many of these issues will be mitigated to a significant degree resulting in a decreasing gap in power demand and capacity.
Policy calls for more power
The energy policy of India can be characterised by five major economic and social drivers:
- A rapidly growing economy, with a growing need for a dependable and reliable supply of electricity, gas and petroleum products;
- Increasing household incomes, causing demand for affordable electricity;
- Limited reserves or bottlenecks to efficiently exploit fossil fuels, necessitating vast imports of crude oil, natural gas, petroleum products and coal;
- Adverse environmental impacts of rapid urban and regional development, necessitating the adoption of cleaner fuels and cleaner technologies.
- Increased investment in social and economic infrastructure, enhanced productivity in agriculture and a fresh impetus to the manufacturing sector.
The current electricity generation capacity in India is approximately 206,000 MW, and it ranks sixth in the world in terms of electricity generation, coming behind the US, China, Japan, Russia, and Canada.
Today, India is on the same threshold of power generation capacity as was the case for China 15 years ago. Table 1 shows a comparison between installed generation capacity expansion in China and India.
Fossil fuels account for about 65 per cent of the total installed capacity with the remaining 35 per cent being hydroelectric, renewable and nuclear. Among the fossil fuels, coal accounts for about 56 per cent of the nation’s generating capacity, with natural gas and oil accounting for 9 per cent and 1 per cent, respectively.
The central and state governments together own and operate approximately 73 per cent of the installed capacity in India. The participation of the private sector has however been increasing over time owing to power reforms. The full breakdown of generating capacity by specific fuels is shown in Figure 1.
Since India’s independence from Britain in 1947, electric generating capacity has grown from 1400 MW to the current capacity of approximately 206,000 MW.
During the same period, India has witnessed a population growth from 250 million to over 1.3 billion. The growing population, combined with India’s recent economic growth and inadequate supply and distribution infrastructure, has resulted in power supply shortages – both in terms of peak demand and overall energy supply.
An overall average peaking shortage of about 12 per cent has been typical on an all-India basis, as shown in Figure 2. The large energy deficit gaps have resulted in low per-capita consumption. Therefore, additional generating capacity will be required in order to serve the country’s population and fuel economic growth.
This has prompted the government to embark on an ambitious plan to increase power generation capacity to bridge the growing power demand – capacity gap with low-cost power.
Five-year plans established by the government’s Planning Commission lay out specific targets for new generation capacity. The 10th five-year plan (2002-2007) had a target of 41,100 MW of additional capacity.
However, only 18,000 MW of added capacity came on stream during this period, representing a slippage of 56 per cent. For the 11th five-year plan (2007-2012), the slippage decreased considerably as an estimated 67,000 MW was added against the 11th five-year plan target of 83 000 MW. For the 12th five-year plan (2012-2017), an additional 93,000 MW of new capacity has been targeted but less than 50% is expected to come on line due to current market pressures.
The primary fuel in India for power generation is coal becasue domestic resources are available in abundance in India. However, its coal production has remained low in comparison to reserves, a key issue that has to be resolved in order to accelerate power generation capacity additions in the future.
Natural gas is in short supply in India and supply to the existing gas-fired power stations has been inadequate. As such, the plants have been operating at 58-60 per cent load factor. Although India has identified a few domestic natural gas reserves and is in discussion with natural gas suppliers in Qatar, Iran, and Australia, gas is not expected to bridge the power generation deficits in the short-term. Furthermore the K-G basin projects in India is not producing enough gas at competitive prices to justify natural gas-fired generation.
Indian coal has a high ash content (between 35-45 per cent), silica and alumina, and highly abrasive with slagging characteristics. Given the high ash content and relatively weak coal transportation system in the country, Indian coal does not ‘travel economically’. Therefore, locating power plants close to the pit heads is common.
Availability of coal for power production is a matter of serious concern in India. In order to meet the original 12th five-year plan requirements, coal supply is estimated at around 842 million tonnes (MT) for 2016-17.
India will be facing a shortage of in the region of 280 MT. Domestic coal production has not kept pace with recent power capacity additions. Many of the leading government-owned coal producers have not been able to produce enough coal because of the following reasons:
A large portion of the indigenous coal in India is trapped under the few remaining forests in the central and eastern parts of the country, which are classified as protected areas. The Ministry of Coal is looking to increase the amount of coal-bearing land it has, and needs clearances from the ME&F to mine additional forest lands. However, the ME&F superimposed forest cover on 602 coal blocks in nine important coal fields in India, and recommended that 47 per cent of the blocks be kept off limits to mining.
The coal ministry however wants access to virtually all 602 blocks. This impasse is likely to hurt economic growth unless addressed immediately, and will require resolution at the highest level as it impacts sensitive issues and could affect the growth prospects for industry and the economy.
The coal mining sector in India has been privatised. However, delays in land acquisition norms, low-cost financing, inadequate skilled labor, misallocation of coal blocks to private companies with limited mining expertise, weak transportation and poor environmental permitting procedures are delaying the development of various private sector initiatives. The private sector is attempting to produce more than 200 MT of coal reserves annually by 2020.
All these factors have placed an increased dependence on imported coal. Some of the Indian power producers mitigated such issues by strategically locating plants in coastal areas and securing coal resources from countries such as Indonesia, South Africa, Mozambique and Australia.
However, recent initiatives by the Indonesian government to impose a 25 per cent tax on exported coal and mandatory benchmarking exports to international prices has slowed down several Indian power projects.
Many of the projects had aggressively bid in the tariff-based competitive bidding process, based on their agreements/arrangements they had made for fuel stock from Indonesia at significantly lower prices. Costlier imports are now impacting the commissioning rate of new Indian coal power plants that are dependent on Indonesian coal as many of the PPAs do not have an all-important ‘fuel pass-through clause’.
Therefore, in many power projects firing Indonesian coal the generation cost itself is more than the PPA price resulting in a number stranded assets.
Indian power plants cannot run on such expensive coal imports. This will make power unaffordable in India. Therefore, some of the options are to ramp up domestic coal production, design equipment to burn a wider range of fuels and change the fuel mix with emphasis on renewable sources.
Furthermore, various state governments which purchase the power from the IPPs will have to raise consumer tariffs for the stranded projects that were originally bid for at a fixed rate. However, raising consumer tariffs can be extremely unpopular and politically sensitive, especially with national elections scheduled in 2014. This issue will be critical and will have to be carefully timed by various state governments.
The Indian power sector has traditionally faced a range of challenges in expanding generation capacity. India has added 91 GW in the past two five-year plans against a cumulative targeted capacity increase of 124 GW. The shortfall was largely attributed to a shortage of boiler, turbine and generator equipment manufacturing facilities. Additional factors that have adversely affected capacity additions causing slippages include shortages of both construction equipment and skilled manpower, availability of fuel, project financing, rail, port and other infrastructure bottlenecks, project safety issues and delays in environmental and governmental clearances.
Previously, Bharat Heavy Electricals Limited (BHEL) was the only major supplier within India. Although BHEL retains its leadership position, in the past few years several Indian boiler and turbine manufacturers have solidified alliances with major western companies to add substantial subcritical and supercritical boiler manufacturing capacity.
With this relatively new boiler capacity addition, shortfalls in generating capacity additions should be substantially mitigated in the current and following five-year plans. The new added Indian manufacturing capacity will also reduce an historical dependence on Chinese manufacturers.
Looking ahead into the next ten years, if India wishes to realise its full economic potential and achieve its goal of adding even 100,000 MW during this time, key issues such as coal availability and linkages, rail and port infrastructure, land acquisition reforms, PPA revisions and greater levels of foreign direct investment have to be achieved.
The industry is hopeful that national elections in 2014 will bring major regulatory and policy reform. If these shortcomings are overcome, the country will undoubtedly continue to represent the highest growth opportunity for new power generation capacity expansions in the world.
Ravi Krishnan runs US-based Krishnan & Associates, which initiates business development programmes for US and European OEMs seeking market expansion in India. For more information, visit www.krishnaninc.com.
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