Beginning April 2022, the country witnessed an energy crisis, marked by power outages and peak demand shortages, experienced across several states in the country. Industry experts chiefly attribute this to the increase in power demand on account of post-pandemic demand recovery, heatwaves witnessed in several parts of country, inadequate coal availability and logistical constraints on coal transportation.
“The present energy crisis has come about not because there is not enough generating capacity available, but because there is not enough fuel available at the power stations to feed the demand. This is mainly because of higher demand due to the prevalent heatwave. Consumers have increased their capacity to purchase heat beating loads like air conditioners, coolers, etc. The lack of fuel is also due to the high cost of imported coal and natural gas on account of Russia’s war on Ukraine. As per the CEA statistics, the peak demand in April 2022 stood at 207,111 MW, as compared to 182,379 MW in April 2021, an increase of about 14 per cent. The normal increase in demand, in recent years, has been about 5 per cent,” explains Pankaj Batra, project director, SARI/EI, IRADe, and ex-chairperson, CEA.
Notably, on April 29, 2022, the peak demand met in the country touched an all-time high of 207 GW on April 29, 2022. The peak power demand across Punjab, Delhi and Chandigarh increased by 45 per cent, 41 per cent and 35 per cent respectively in April 2022 on a year-on-year basis. Moreover, the peak power shortage hovered around 10 GW in April 2022.
In order to prevent the power crisis from escalating further, the central government, with the concerted efforts of the Ministries of Power, Coal and Railways, has announced a number of policy and regulatory measures. These include the Ministry of Power’s directives to gencos and independent power producers (IPPs) to blend up to 15 per cent imported coal, and to imported coal-based power plants to produce at full capacity. Further, it has invoked Section 11 of the Electricity Act and advised the states to allow the price of coal to be pass-through.
Domestic coal production has been ramped up. Besides, Indian Railways has increased the availability of rakes for the power sector and implemented various measures to enhance the efficiency of coal evacuation. In April 2022, the domestic coal production and total coal dispatched increased by 36.23 per cent and 9.39 per cent respectively, on a year-on-year basis. However, the shortfall in coal availability at power plants continues to be an area of concern. As of May 25, 2022, around 100 power plants had critical coal stock, that is, coal stock less than 25 per cent of the normative coal stock. Across 173 power plants aggregating 203 GW of capacity, the actual coal stock was at 33 per cent of normative requirement – 79 per cent in the case of pit head plants and 25 per cent for non-pit head plants.
Imported coal blending measures
In a significant measure to ease the situation in April 2022, the MoP issued an advisory to gencos to use imported coal for blending purposes to meet 10 per cent of the total requirement till October 31, 2022. The ministry also advised the gencos to complete the award for import of coal by May 31, 2022 to ensure that 50 per cent of the quantity is received by June 30, 2022, 40 per cent by August 31, 2022 and 10 per cent by October 31, 2022. However, as per the review undertaken by the power ministry, not much imported coal blending has taken place in the months of April and May 2022. In view of this, the ministry has directed the power plants that have not yet started blending imported coal to undertake blending up to 15 per cent till October 2022 in order to meet the shortfall of imported coal for blending in the first quarter of financial year 2022-23 (April to June 2022), and thereafter up to 10 per cent from November 2022 to March 2023.
The power ministry, in a recent letter to the state/principal secretaries and all gencos, has stated that in view of the likely slimmer materialisation of coal supply from domestic sources, to meet the power demand, domestic coal will be allocated proportionately to all gencos based on likely availability from June 1, 2022, and the balance requirement will need to be met from imported coal, which will be used for blending, and from the target set for production from captive coal mines. Besides this, if blending with domestic coal is not started by June 15, 2022, then the domestic allocation of the concerned defaulter thermal power plants will be further reduced by 5 per cent.
Operationalising imported coal-based plants to full capacity
The power ministry has issued directions to all imported coal-based power plants under Section 11 of the Electricity Act to operate and generate power at their full capacity up to October 31, 2022. The imported coal-based capacity is around 17,600 MW. As per the directions issued by the MoP, these plants will supply power in the first instance to PPA holders, and any surplus power left thereafter or any power for which there is no PPA will then be sold at the power exchanges. Considering the fact that the present PPAs do not provide for the pass-through of the present high cost of imported coal, the rates at which the power is supplied to the PPA holders will be worked out by a committee constituted by the MoP with representatives from the MoP, the CEA and the CERC. This committee will ensure that the benchmark rates of power take into account all the prudent costs of using imported coal for generating power, including the present coal price, shipping costs, O&M costs and a fair margin.
Meanwhile, the power ministry has directed the Power Finance Corporation and REC Limited to take necessary action to arrange short-term loans for a period of six months with adequate safeguards, and operationalise imported coal-based plants that are under stress or under the National Company Law Tribunal. These plants are in need of working capital to buy coal and start generating power in order to restart their operations.
The way forward
The drop in temperature with rains across North India has provided some relief in the country in the last couple of weeks of May 2022. The peak power shortage declined to 1.4 GW on May 25, 2022, from a shortage of over 10 GW witnessed in the previous month. Going forward, there is a need to find a lasting solution to the recurrent coal shortage problem. Besides, in view of the country’s increasing power demand, renewable energy goals and decarbonisation targets, planning for a just transition to cleaner energy sources, which provide sustainable, affordable and reliable power supply, is imperative.
Undoubtedly, structural changes are required in the power sector value chain – especially in the power distribution segment, which continues to be under stress on the financial and operational performance fronts. Moreover, the country’s increased reliance on imported coal to handle the power crisis at hand is expected to increase the cost of power supply for discoms. As per a recent ICRA study, higher coal imports are likely to increase the cost of supply for discoms by 4.5-5 per cent in 2022-23.
Overall, industry experts see merit in strengthening the distribution segment, ramping up renewable energy sources along with energy storage solutions, and revisiting the existing fuel mix and fuel supply contracts for energy security, going forward.
What are the immediate steps required to prevent the energy crisis from escalating further? Do you think the recent policy response has been adequate?
Pankaj Batra, Project Director, SARI/EI, IRADe and Ex-chairperson, CEA
The government is doing its best to see that generation does not decrease because of increased fuel prices by invoking Section 11 of the Electricity Act. However, the biggest bane of the power sector is the financial condition of the state distribution utilities, which are lagging behind in their payments to the generators. They will now have to pay an even higher charge per unit to generators, because of the increased fuel prices. If the government thinks that electricity is a social commodity, then it can make arrangements to bear some of the increased cost through grants or soft loans (through PFC and REC).
One sure way of getting more power for the citizens of the country is the burgeoning hydro power segment, which is coming up across the border, in Nepal and Bhutan. Nepal will have to spill water without generating power, if it does not have access to the Indian market. This is free energy getting lost, which would be unpardonable from the point of view of the global climate crisis. An expeditious approval granting process for the entry of this energy into the Indian power market is likely to mitigate the crisis to the extent of 500 MW immediately, and within a year by 1,000 MW more.
Anish De, Partner, Global Sector Head, Power & Utilities, KPMG; National Head, Energy Natural Resources & Chemicals, KPMG in India
In the immediate term, the response strategy has to be around the following:
Ramping up coal production and building up coal stocks before the monsoon hits
Freeing up logistics, especially railways, and prioritising coal transport
Importing coal as needed and mandating the use of imported coal, and paying for the same on a fair and reasonable basis without allowing profiteering. Further, requiring regulators to pass on the higher costs to users. This may mean higher tariffs, but the alternative is long hours of power cuts, loss of productivity, and deep economic and social impacts.
Vibhuti Garg, Energy Economist and Lead India, Institute for Energy Economics and Financial Analysis
Immediately, the government needs to ramp up production from all sources as energy demand has gone up substantially because of the heatwave. Currently, the crisis is not on account of coal shortage but due to developers not maintaining enough stock at their end, and transportation through railways has also met a bottleneck.
The government is trying to avoid the crisis by ramping up production and asking captive generators to generate at maximum. Further, the government is importing coal. But one needs to be mindful that imported coal price is about three to four times higher and would increase the financial burden on discoms.
The above steps can avert the current crisis but we need to remove the structural bottlenecks. Discoms owe around Rs 1.2 trillion to developers, impacting their cash flow. Further, the government needs to accelerate the transition to cheaper renewable energy. India should also promote more decentralised renewable energy to meet the demand locally.
Dr Rahul Tongia, Senior Fellow, Center for Social and Economic Progress
We are in crisis mode, and the short-term solutions are easier said than done. Even if plants ask for more coal, can the system deliver? Importing coal takes many weeks, but also will such pricey power be offtaken? What we have to do is ensure coal supply is prioritised for system requirement, instead of focusing on contracts, prioritisation based on historical payments, etc. The fact that the stockpiles at pithead plants are relatively much higher than at distant plants means we will have to quickly start sending coal further away – as those plants are at a greater risk – even if this increases the transportation time. This short-term pain is necessary to avoid further, deeper pain. There are reports of far greater load-shedding, but this is an unfortunate blunt instrument we have to rely on to prevent grid failures. Consumers need a lot of education on saving power (not that they are to blame!), but it is more than “saving energy” per se. More guidance on when and where to save more power can help the system immensely.
What are the long-term structural strategies required for avoiding a repeat of this crisis in future years?
The most sustainable way of mitigating this crisis in the future would be increasing the efficiency of the generation, transmission and distribution sectors, introducing a time-of-use tariff to give signals to the consumer to use electricity, and incorporating system efficiencies through optimisation of power resources on a regional and ultimately a global basis, as intended in the One Sun One World One Grid initiative undertaken by the prime minister of India, and the Green Grid Initiative, jointly undertaken by the prime ministers of India and the UK. Efficiency in the distribution sector can be brought about by the use of smart grids, meaning smart devices and smart methods and procedures.
Although the country will continue to depend on coal as a source of energy for many years to come, it has, wisely, already taken steps to shift to renewables so as to reduce its dependence on coal, which could be kept as energy reserves for the country. The country should, of course, try to reduce its dependence on imported solar cells and modules by manufacturing locally, initiatives for which have also already been taken.
- Ask discoms to mandatorily demonstrate capacity adequacy for the next three years at the minimum by estimating likely demand (under various growth scenarios) across the various months. In case the discom does not have adequate supplies, it should be required to sign contracts to meet the requirements.
- Brownfield power plants, including extensions and replacement of inefficient units, should be prioritised. This must be done principally in pithead locations.
- Domestic coal supply augmentation must be supplemented with other alternatives including torrefied municipal solid waste and biomass. This would address both fuel and environmental problems.
- Renewables including wind should be ramped up rapidly. Wind is important since it has some capacity value and can balance the diurnal patterns of solar.
- Storage must be prioritised for peaking and ancillary (ramping) requirements. The lithium-ion battery storage market will remain volatile and alternative static storage projects need rapid ramping including alternate battery chemistries, off-river pumped storage and gravity storage.
- The National Electricity Plan should be refreshed every two years instead of the five-year cycle and should indicate transmission capacity addition priorities based on anticipated generation and load.
India should accelerate the deployment of renewable energy. However, renewable energy is intermittent, so India needs to build an entire ecosystem, which comprises:
- Investing in flexible sources such as battery storage and pumped hydro
- Expansion of the transmission and distribution network
- Modernisation and digitalisation of the grid
- Domestic manufacturing of inputs such as modules, cells, wafers and electrolysers.
- Promoting electric vehicles for transportation
- Promoting more decentralised renewable energy such as solar rooftops
All this would require government support in the form of providing more incentives and capital support to these new technologies, as well as investing in R&D. India should invest in better forecasting of demand and ensure capacity adequacy at all times.
Dr Rahul Tongia
The current power crisis is not the first time this has happened, and while many factors (post-Covid recovery, globally high prices, etc.) may have come together in a perfect storm, the underlying fundamental issues can only be addressed by tackling the systemic issues at hand. This does not just mean ensuring compliance with stockpile mandates at power plants, but revisiting the entire structure of fuel adequacy, contracts, etc. We have a system designed for managing access (to cheap fuels under fuel supply agreements, mostly with Coal India Limited), and managing scarcity. Many plants were told to fend for themselves for part of their requirements, whether through e-auctions or imports, etc. This is because the FSAs only covered a fraction of the coal needs as specified in the annual contracted quantity (ACQ). The ACQs and normative coal requirements did not match up. This system sort of worked as long as some plants were not demanding their full requirement. That changed. In fact, as Covid struck, stockpiles of coal were at a record high. In the medium run, we also need to increase renewable energy deployment as it displaces coal.