Coal Play: Strategies for averting another fuel crisis

Strategies for averting another fuel crisis

In early October 2021, several states across the country witnessed electricity shortages due to an unexpected increase in power demand as the economy picked up with the decline in Covid-19 cases, shortage of domestic coal and spiralling imported coal prices. Coal-fired power stations, which produce 70 per cent of India’s power, had an average of four days of coal stock left (the lowest in years). Although the central government stepped in and controlled the situation by diverting coal supply from other sectors to power plants, the crisis highlighted the need to reduce the dependence on thermal power and develop round-the-clock renewable energy solutions (with storage) as well as promote decentralised generation in order to meet demand during peak periods. Power Line invited industry experts to share their views on the issue…

What are your views on the recent coal crisis in the country? What are the key causes? 

Sachin Gupta, Executive Director and Chief Rating Officer, Care Ratings

Sachin Gupta

Over 70 per cent of the power demand in our country is met by thermal generators. Most of these coal-based thermal plants experience lower coal availability around September every year due to the issues related to production, monsoon and concomitant logistics challenges leading to a significant reduction in the coal inventory. While the reduction in coal stock levels is recurring and the reasons are stated above, this year the issue has been exacerbated with two additional factors at play flaring up the coal paucity.

First, the sudden surge in energy dema­nd. The resumption of business activities after the second wave of Covid this year has been faster and higher than envisa­ged. The base demand during the first half of the financial year 2021-22 has shown a robust growth of 13 per cent over the corresponding period last year and has already surpassed pre-Covid levels (that is, the first half of financial year 2019-20). Second, the usual shortage of domestic coal is made up by coal im­por­ts, which were restricted due to a surge in imported coal prices this year. The Harga Batubara Acuan (HBA) thermal coal price, which remained benign during calendar year 2020 at less than $60 per tonne, has more than doubled to $161 per tonne in October 2021 (as per the Mi­nistry of Energy and Mineral Reso­ur­ces of Indone­sia). This extraordinary price rise is lar­ge­ly attributable to China-related issues in­cluding surging power demand, its lo­wer domestic coal production and the un­offic­ial ban on the import of Australian coal.

Somesh Kumar, Power & Utilities Leader, EY India

Somesh Kumar

In India, coal-based thermal power plan­ts have been facing a severe coal shortage due to limited supply and a reduction in their inventory. In a country where 70 per cent of the electricity is generated using coal, this is a major cause for concern as it threatens to derail the country’s post-pandemic economic recovery.

As the economy has bounced back qui­ckly, the electricity demand has shot up, especially in the past few weeks, causing skyrocketing prices at the power exch­an­ge. When coal stocks came down to an average of four days of fuel across the country, as against an average of 15 days, it created havoc. The Central Electricity Authority data shows that on October 23, 2021, 10 plants had dry fuel for zero days; 17 plants had coal for just one day, 22 plants had stock for two days, 11 pl­ants had supply for just three days, 20 plants had it for four days (supercritical stock), 13 had it for five days, and 10 plants had six days of fuel left (critical stock).

Key causes of coal shortage

There has been a sharp uptick in power demand as the economy recovers from the Covid-19 pandemic, coupled with supply issues that have led to the current coal shortage. India consumed 114 billion units (BUs) of power in September 2021 compared to 107 BUs of power in September 2019, a period which was not impacted by the pandemic.

Coal-fed thermal power plants have also met a higher proportion of the increase in demand, leading to the share of thermal power in India’s power mix increasing to 66.4 per cent from 61.9 per cent du­ring 2019. Due to high demand for po­wer during the months of April to Au­gust 2019, there was a disproportionate distribution of power.

Other key reasons for the supply crunch are lower than normal stock accumulation by thermal power plants in the April-June period and continuous rainfall in coal-bearing areas in August and September which led to lower production and fewer despatches of coal from coal mines. A consistent move to lower imports, coupled with high international prices of coal, has also led to plants cutting imports.

Coal India Limited (CIL), the only coal supplier, has not been able to keep pace with the rally in demand. It faces financi­al distress owing to the outstanding dues from power generation and distri­bu­tion companies to the tune of Rs 216.2 billion.

In order to control the situation, the government is pressing thermal power plants with captive coal mines to im­pro-ve their coal output so that they can meet more of their own demand. This will break the monopolistic market of CIL. The government is also prioritising coal supplies for thermal power plants with low levels of stock.

Malcolm Wrigley, Chief Operating Officer, Apraava Energy

Malcolm Wrigley

The recent coal crisis in the country can be attributed to a number of factors which have come together. This is a one-off situation that the industry has had to cope with and learn from. One of the foremost factors for the shortage of coal was the intensity of monsoon which las­ted beyond the normal duration this year. The heavy rains impacted the operations of coal mines to a great extent, waterlogging the opencast pits and ham­pering production. Further, the ope­ning of businesses and picking up of ma­nu­facturing activity following the shutdowns due to Covid has increased the demand for power well above pre-pandemic levels. The third factor is the unprecedented increase in the cost of imported coal in international markets which has led to the shutdown of most of the power generation capacity that relies on this imported coal. This, in turn, re­sulted in an increased demand for electricity from domestic coal-powered plan­ts, leading to an increased demand for domestic coal.

The scenario of increased economic activity, heavy monsoons and high international coal prices together led to the current shortage in domestic coal supplies. Having said that, we are hoping that the worst is behind us, and coal supply will begin to normalise in the near future.

What steps need to be taken to avoid such recurrences in the future?

Sachin Gupta

Coal shortage/surplus is essentially an interplay of demand and supply of coal. While this shortage is a recurrent issue, we need to first identify short-term and long-term factors on both the demand and supply sides of coal and see what is controllable and what is not. Issues such as extended monsoon and the flooding of mines cannot be controlled and hen­ce efforts should be made towards optimal planning by all parties involved na­mely, producers, transporters and power plan­ts. Initiatives that can be taken in­clu­de better forecasting of power de­ma­nd and re­lated stocking of coal prior to monsoons. In terms of short-term quick fixes, in the past, imported coal came to the rescue. Unfortunately, it did not work for us this time given the sky-high imported coal prices. While we cannot control the international prices of coal, we believe the time has now come when strategic im­por­ted coal reserves could be discussed as an option and implemented if found feasible. This would be akin to strategic petroleum reserves, which are utilised by many countries to arrest short-term de­ma­nd supply mismatches. On a long-term basis, efforts need to be made to address the logistical issues ar­ou­nd availability of railway rakes, unloading constraints, etc. Furth­er, the government could take  initiatives arou­nd commercial coal mining, which still has not picked up in a significant way despite auctions having been conducted last year.

Somesh Kumar

With the offset of monsoon and the onset of winter, the demand for power usually falls. Also, CIL is dispatching 1.5-1.6 million tonnes (mt) of coal per day to thermal power plants against 1.4 mt earlier. However, to avoid such situation from arising again in the near future, the above points must be kept in mind and the necessary reformation be made.

  • Installation of renewable power plan­ts: The installation of renewable power plant can address the issue of peak sh­or­tages as the load profile is also chan­ging in India. The government’s target of 175 GW by 2022 and 450 GW by 2030 requires an annual installation of 25-30 GW but the pace of installation is lagging with only around 7 GW of renewable energy capacity added in the financial year 2020-21.
  • Coal supply: According to the Coal Vi­si­on 2030 document, released by CIL in 2017, the total coal demand in India in 2020 is expected to be 900-1,000 mi­llion tonnes per annum (mtpa) and 1,300-1,900 mtpa by 2030. To meet the requirement, coal production should be increased to 1 billion tonnes per an­num. In order to ensure product quality at the loading end, minimum hum­an interference is desired. Coal needs to be stored in silos/bun­kers, and sh­ou­ld be loaded on to wagons directly through belt conveyors/ rapid loading systems. The plan sh­ou­ld be to impro­ve first-mile conne­c­tivity so that more coal can be moved in a shorter time from large mines.
  • Railway infrastructure: A fully functioning dedicated freight corridor (DFC), especially the eastern DFC, would help in better supply of coal. It was planned with coal as the dominant form of freight. It has the potential to relieve other lines of almost the entire thermal coal transportation re­quirements for Punjab, Delhi, Har­ya­na, Rajasthan and Uttar Prade­sh, which amounted to 119 mt during 2018-19. Also, upgrading the locos and wagon of railway should be done. New wagon designs such as electric freight locomotive WAG 12 can help in managing more material as well as reducing the transit losses and unloading time for better optimisation of infrastructure. These designs are already in use in other countries.

Malcolm Wrigley

While the pandemic-induced pent-up demand may be a one-off situation, the erratic monsoons are likely to be more frequent. The changing weather patterns have become increasingly difficult to predict. Considering this, we need to take steps to overcome the challenges posed by the elements which are beyond our control. While we may not be able to control or predict the intensity of the mon­soons, we can work towards setting up anti-flooding measures at mines. These include the provision of sumps, drainage or pumping equipment to re­mo­ve inevitable floodwater, etc.

While the Association of Power Produce­rs (APP) has welcomed the changes be­ing proposed by the Ministry of Power (MoP) to strengthen coal stocking nor­ms, some additional measures, which wo­u­ld make the proposed changes more effective and viable, are:

  • Providing a remedy for the current imbalanced contractual provisions for coal procurement, wherein generators have a stringent and unavoidable ob­ligation of always making full payment in advance. Currently, there are no clear obligations to ensure that the desired quantity and quality of coal reaches the generators.
  • To resolve the above challenge, the APP recommended that the MoP could push for a tripartite fuel supply agreement to be signed between the generators, coal companies and railways to clearly delineate responsibilities and ob­ligations of each party and put in place an equitable penalty mechanism for all stakeholders to ensure a balanced distribution of risks.

We are confident that all stakeholders will work together to avoid this situation in the future by making appropriate investments and setting up effective measures to avoid such shortages in supply.