In contrast to an earlier advisory to discourage imports, the Ministry of Power (MoP) recently issued an advisory to the state utilities to compensate for the current domestic shortages through coal imports. After several years of decline owing to the government’s measures to reduce coal imports, India’s thermal coal imports witnessed an increase in the previous fiscal, indicating a growing reliance on imported coal. Power Line sought the views of industry experts on the outlook for thermal coal imports for the power sector in the next few years…
Do you believe that the government’s advisory to the state utilities to resort to thermal coal imports to meet shortages undermines its plans to curb imports?
Accounting for around 76 per cent of the total power generation in 2016-17, coal was the major source of fuel for the Indian power sector. Coal consumption for power generation has grown at a compound annual growth rate of 4.64 per cent since 2007-08. With thermal coal reserves of 281 billion tonnes, India has sufficient coal for more than 140 years (assuming that only 40 per cent of the reserves are extracted and 800 million tonnes per annum of coal is consumed). India is the second largest coal producer after China, with an annual production of thermal coal close to 640 million tonnes (mt). It is also the third largest importer of coal after China and Japan, with around 161 mt of thermal coal import in 2017-18. After two consecutive years of decline, coal imports have grown by 8 per cent this year. With the increase in coal prices in the international market and reduction in the value of the Indian rupee, the country’s coal import bill increased by around 38 per cent to reach $20 billion in 2017-18. This shows that the efforts of the government to reduce the import of coal to zero by March 2018 have not yielded results on the ground. The increase in the demand of electricity, unavailability of sufficient railway rakes to transport coal to thermal plants and inability of Coal India Limited (CIL) to beef up coal production as planned have led to the current situation.
However, due to the strict environmental norms and innovation in the renewable generation space, it is believed that no new thermal power plant will be installed in India after 2025. Assuming that a coal-based power plant has an average life of 25 years, no such plants would run in the country after 2050. If this happens, India needs to exhaust all or most of its coal reserves by 2050 and limit its coal import bill to the minimum possible.
However, coal production and supply in India face multiple teething challenges. These include environmental issues, regulatory bottlenecks, rehabilitation, Naxalite activities in coal producing areas, inefficient coal extraction, inferior quality of coal, unavailability of railway rakes, pilferage of coal in transit, inadequate last-mile connectivity to the demand centres, etc. Therefore, coal-based power plants, especially coastal plants, prefer to procure coal from countries like Indonesia, South Africa and Australia. Price is not the only critical factor in this decision as some of the plants are designed to burn high quality imported coal and cannot use domestic coal of low quality. Therefore, it is very unlikely to bring the coal import to zero in the medium term. However, the government can aim to curb imports by addressing the challenges mentioned above, which is a massive task.
The import of coal is obviously a function of the demand for power in the country and domestic coal production. This implies that the government’s advisory is based on the assessment that the coal ministry would not be able to domestically meet the entire demand for thermal coal. It is better that this reality is accepted and imports take place in a planned manner.
However, the issue at the moment is that there is no clarity on the matter of pass-through of the cost of coal imported by independent power producers. According to discoms, this dispensation was applicable only till the end of the Twelfth Plan – March 31, 2017. The Association of Power Producers has also taken up this issue with the MoP for issuing a clarification, if necessary. Till the time the uncertainty regarding the pass-through of cost is addressed, the advisory will only help the state-owned generators who have both cost and power purchase agreements (PPAs).
Developers import thermal coal for plants, which are based on domestic coal as the last resort, to meet the deficit in coal supply and their power supply obligations under PPAs. Accordingly, as and when the power demand increases and domestic coal production is unable to meet the requirement, the gap is bridged by imported coal/e-auction/ open market coal.
T.N. Arun Kumar
After a declining period of two years, coal imports have again picked up. As per Centre for Monitoring Indian Economy Private Limited (CMIE), the total coal imports grew by approximately 9 per cent from 195 mt in 2016-17 to 213 mt in 2017-18. Of the total imports, almost 75 per cent was contributed by thermal coal imports. As against this, the domestic coal production by CIL and Singareni Collieries Company was 629.4 mt in 2017-18, up by a meagre 2.3 per cent over the past year.
The primary reason behind the surge in coal imports was improvement in the power demand aided by logistics constraints, along with the lesser availability of railway rakes to carry the fuel from the mines to the power plants. In the first quarter of 2018-19, the trend of thermal coal imports continued with coal imports rising by over 14 per cent to 43.4 mt over the corresponding period last year.
In our view, given the Government of India’s continuous thrust on reducing imports, be it for bullion, electronics or commodities – such advisories seem short-lived. This appears to be a short-term arrangement to meet the higher coal demand driven by an increase in the power demand and logistical bottlenecks related to the movement of domestic coal. In the medium to long run, efforts are under way to improve CIL’s mining capacity and the railways’ haulage capacity, as well as reduce transportation constraints for a sustained curb on thermal coal imports. The same would also require supplementation by auctioning coal blocks for commercial mining.
The recent advisory issued by the government is to overcome the short-term unavailability of coal for power plants. This situation has arisen due to some unforeseen circumstances both on the generation side and the demand side. The sector has been hit by a double whammy – rapid increase in demand coupled with lower generation from coal and hydro. On the supply side, some of the big imported coal-based plants were shut down due to tariff-related issues. Hydro generation has been one of the lowest (32 per cent plant load factor) in recent times. On the demand side, states like Uttar Pradesh and Bihar have started consuming more with the aim to meet their projected demand. Unfortunately, CIL was ill equipped to handle these sudden changes in coal requirements. This inadvertently led to the falling of coal stocks across coal plants in the country. Overal, we feel that this is a short-term fix that was needed to ensure that the required power was available in the system. In the long term, the government’s plan is to increase the mining of domestic coal to meet all requirements.
What is your outlook for thermal coal imports for the power sector and impact on the sector?
With an installed electricity generation capacity of 345 GW, India is the world’s third largest producer and consumer of electricity. With around 161 million tonnes of coal import in 2016-17, India met around 20 to 25 per cent of its total annual electricity generation. The variable cost of generation of electricity using imported coal is typically around Re 0.8 per kWh higher than the variable cost of electricity generation using domestic coal. However, the difference might be much higher with an increase in imported coal prices. The variable cost of imported coal-based electricity generation increased from Rs 1.86 per kWh in the second quarter of 2015-16 to Rs 3.43 per kWh in the first quarter of 2018-19. This is going to affect the power producers dependent on imported coal like Adani Power, Essar Power, Tata Power and JSW.
Distribution utilities and end consumers are unlikely to feel the pinch in the short to medium term as PPAs do not allow IPPs to completely pass through the fuel cost in the tariff. However, an increase in imported coal consumption affects India’s balance of trade and impacts the strategic goal of being self-sufficient in energy. The sustained efforts of the Government of India are expected to reduce the reliance on imported coal. Also, the unprecedented focus on renewable sources should help in achieving the targets going forward.
For example, Greenko’s 1,550 MW largest integrated renewable energy project in Kurnool, Andhra Pradesh, comprises a 1,000 MW solar plant and a 550 MW wind energy plant, with 1,200 MW of stand-alone pumped storage facility. It is expected to supply electricity 24×7 at a very competitive rate. Projects of this nature would help India become energy sufficient and improve its carbon footprint.
The impact of imports on the power sector would depend on the nature of the power demand for power. If the increase in demand is from the industrial or commercial sector, a higher tariff for such consumers would take care of the additional expenditure. However, if the increased demand is from other categories of consumers who get subsidised power, it will put further pressure on the discoms.
Looking at the increasing power demand, imports are set to increase to meet the gap.
T.N. Arun Kumar
With improved power demand and continued coal transportation constraints, thermal coal import would witness a positive traction in 2018-19. Coal imports have seen an increase in the first quarter of 2018-19, with many utilities in South India initiating the procurement of imported coal. Higher coal imports have also led to the rise in global coal prices. Indonesia, the largest supplier of thermal coal to India, had set its July thermal coal reference price at a six-year high of $104.65 per tonne, an increase of more than 30 per cent over the previous year.
Higher coal prices are likely to affect the bottom line of IPPs, which have bid out fixed tariffs, and rely on imported coal to meet their requirements. The central sector generators and other producers that have both cost and PPAs would not be affected much by the pass-through of coal cost.
On an overall basis, domestic coal shortage, improved power demand and higher coal imports are likely to push up power rates including merchant power prices.
In the short term, import of thermal coal is dependent on many factors that impact supply and demand. In the long term, however, CIL’s ability to meet the plan of reaching 1 billion tonnes of production will be critical to assess if India will continue to import or be self-reliant. Domestic coal is usually preferred due to the significant difference in the prices of domestic coal and imported coal. Given the government’s initiatives towards increasing CIL’s production to 1 billion tonnes and introducing commercial mining, India is likely to become self-sufficient in coal production. However, with an ever increasing demand for coal, even 5-10 per cent import is a significant quantity. In the long term, it is important that the cost of domestic coal is linked to the market-rather than the CIL-determined prices. This will ensure optimum utilisation of domestic coal and ensure the success of the commercial mining policy.