Impact of the coal crisis on the power sector – What is the way forward?

By BWA Envoy
December 27, 2021
2 Minutes Read

Current Coal Crisis

India has been on the verge of a power crisis as the stock of coal held by the country’s power plants has hit critically low levels. In October 2021, many state governments raised an alarm as most power plants were on the verge of shutting down due to the coal shortage. Almost 70% of India's electricity generation is coal-based, and this energy crisis has derailed the country's economic recovery post the pandemic.

Among the states severely affected by a severe power shortage were Gujarat, Haryana, Jharkhand, Punjab, and Rajasthan. The power shortage in Gujarat was 215 million units, the highest in ten years, and 113 million units in Haryana, the highest in nine years. These two states have a large manufacturing base. The other states with severe power shortages were Rajasthan (241.7 million units) and Uttar Pradesh (137.2 million units)i. The power shortage was primarily due to inadequate coal supply to 135 thermal plants. The central government stepped in by channeling the output of Coal India Limited to the power plants. Despite this, there was a widespread concern that the current situation could balloon into a full-fledged energy crisis.

Factors Leading to the Coal Crisis

With the economy reopening, total power demand in August 2021 rose to 125 billion units from 105 billion units in the same month in 2019. India’s daily electricity consumption crossed 4 billion units, resulting in an 18 per cent spike in coal consumption in August-September 2021, compared to the corresponding period in 2019. At the same time, international coal prices witnessed a sharp rise due to a coal shortage in China with enforcement of strict pollution laws ahead of the winter Olympics in Beijing scheduled for February 2022. Indian power plants could not accumulate adequate stock as heavy rains in September in coal-bearing areas hit production. Similarly, coal imports took a beating after heavy rains in Indonesia impeded production. As a result of all these factors, coupled with depleted coal stocks at power plants, panic began to set in.

Coal imports by power plants fell by 45% in July and August 2021 compared to the same period last year while India's non-power sectors grew more dependent on domestic coal. Non-power industries such as aluminum, steel, cement, and paper typically use large quantities of coal to produce heat. The decline in electricity generation by the coastal power plants, which rely on imported coal, added more pressure on domestic coal-based power plants to ramp up output.

Impact of the Coal Crisis.

With increased consumption, power demand is expected to rise further, and the situation could exacerbate, delaying India’s economic reopening. The coal shortage may thwart micro, small and medium enterprises (MSMEs) post-pandemic recovery. The depletion of coal stocks has been due to multiple reasons, risking huge losses for small businesses, particularly in power guzzling sectors such as steel, cement, fertilizers, chemicals, and more.

With respect to the steel sector, small businesses use induction furnaces or electric arc furnaces for making steel through Direct Reduce Iron (DRI) that requires thermal coal. Hence its shortage would impact MSMEs in DRI steel making within the broad iron and steel sector. DRI sector essentially consists of MSMEs that are being impacted. Since coal is not available to the desired extent, there will be some upward pressure on prices and hence there will be a profitability issue among MSMEs.

More importantly, India had reduced the import of non-coking coal, which is used as thermal coal for power generation, during the first five months of FY22 up to August 2021 to 70.85 MT from 84.44 MT during the corresponding months of FY20, down around 16.09 per cent. “Consequent to the sustained effort of the government, in line with mission ‘Atma Nirbhar, the imports of various grades of non-coking coal have reduced substantially during the current financial year. The latter includes high GCV thermal coal used for industrial purposes and low GCV that goes for power generation,” Coal Ministry had said in a statement on November 9, 2021 as the country is looking at ramping up domestic production.

Steps needed to meet power demand

Anil Swarup, former coal secretary, opined that CIL needs to step up its coal production as the coal production has stagnated at around 600 million tonnes for the past three years. In a media interview, Swarup has said CIL had cash reserves to the tune of Rs 35,000 crore, and that it should use these funds for expansion and increased production. He had also suggested the Centre should have effective dialogues with coal-producing states to give coal production a boost.

Meanwhile, CIL needs to bring in modern technology to improve the efficiency of its operation. The other issues that need to be addressed include easing the litigation deadlock on private participation in coal mining, fast-tracking clearances including environmental clearances and improving rail infrastructure to speed up transportation. Unless such issues are addressed, the coal shortage could continue to simmer, impacting growth when the country is struggling to recover from the pandemic.

State-run Coal India and NTPC Ltd are working to raise output from mines. The government is also trying to bring more mines on board to boost supply. According to the bundling plan proposed by NTPC, the company has factored in the cost of INR 5- 6 per unit for solar power with ‘Made in India’ solar cells, while coal-based power from these plants was factored in INR 1.5 - 2 per unit. This would mean that NTPC would sell the bundled power at an average cost of INR 3 per unit. The power purchase agreements would accordingly be modified to incorporate “NTPC’s Power” in place of thermal power.

Coal and railways ministries are monitoring the coal supplies to thermal plants and have taken steps to increase the daily shipments of coal to power generators. The power ministry has also permitted power generators using local coal to use up to a 10 per cent blend of imported coal to boost coal stocks. Despite international coal prices being near record highs, the government estimates that a 10 per cent blend of imported coal would likely lead to a 20-22 paise increase in the per unit (kilowatt-hour) cost of power generation.

To ensure that there is no shortage of coal at the critical/supercritical power plants, the Union Ministry of Power has swung into action to redistribute coal from 26 power stations, where they have a supply of more than 15 days.

Still, there are ongoing challenges. Union Minister Pralhad Joshi had asked state owned Coal India Limited and its subsidiaries to make all out to ensure stocks at power plants reach an average eighteen-day supply from a six-day supply by the end of November 2021. The Minister had also called upon CIL to attain 1-billion-ton production by end of 2024.

Imported coal, considering the overall calorific value and near-zero railway transportation cost would be quite competitive in coastal plants. This will allow Coal India to supply more coal to power plants based in non-coastal areas, improving the coal situation across the country.

Conclusion

India’s electricity demand is likely to cross the pre-Covid levels in the coming days in anticipation that there would not be any serious issues from the third wave of the pandemic if it were to be.

This would mean that India will have to be prepared to ensure sufficient power supplies for its industries to maintain the momentum in the economy. While green energy is the future of the world, the current crisis in the power sector is a pointer to note as to why India cannot ignore its coal-based power plants when it comes to safeguarding the country’s current energy needs, at least in the near future.

India needs a curated strategy that can satisfy the energy demand by keeping in mind the coal demand and Climate change scenarios.