Introduction

Energy has been universally recognized as one of the most important inputs for economic growth and human development. There is a strong two-way relationship between economic development and energy consumption. On one hand, growth of an economy, with its global competitiveness, hinges on the availability of cost-effective and environmentally benign energy sources, and on the other hand, the level of economic development has been observed to be reliant on the energy demand.

Energy is one of the major inputs for the economic development of any country. In the case of the developing countries, the energy sector assumes a critical importance in view of the ever-increasing energy needs requiring huge investments to meet them. India is currently among the top three fastest growing economies of the world. As natural corollary India’s energy needs too are fast expanding with its increased industrialization and capacity addition in Power generation. This is where ’Coal’ steps in. In India coal is the critical input for major infrastructure industries like Power, Steel and Cement.

•  Coal is the most dominant energy source in India’s energy scenario.
•  Coal meets around 52% of primary commercial energy needs in India against 29% the world over.
•  Around 66% of India’s power generation is coal based.
•  India is the 3rd largest coal producing country in the world after China and USA.

Coal Use in the Power Sector

Proved Coal Reserves & Production at the end Year 2010


Notes: Proved reserves of coal ¡V Generally taken to be those quantities that geological and engineering information indicates with reasonable certainty can be recovered in the future from known deposits under existing economic and operating conditions. *Commercial solid fuels only, i.e. bituminous coal and anthracite (hard coal), and lignite and brown (sub-bituminous) coal.

The constant increase in coal imports by Indian power utilities is ironical, given that India has the fourth-largest reserves of coal in the world. However, effective utilisation of these reserves has hit roadblocks like environmental clearances, rehabilitation issues and the Naxalite movement.

Power utilities are increasingly looking at coal imports as an easier option to ensure coal linkages for their plants. With a large of number of captive coal blocks stuck in various pre-implementation stages, companies are more comfortable with their dependence on coal imports.

Coal linkages through imports have become extremely important for power utilities to ensure timely commissioning of their planned power capacities. An excellent example of this is the Videocon group. It has been able to achieve financial closure for its Gujarat power project due to assured coal linkages through imports. However, a second power project of the same group in Chhattisgarh still awaits financial closure.

Operational power plants in the country are also under constant threat of irregular coal supply due to mining and transportation issues. According to the Central Electricity Authority data, around 22 thermal power stations (TPS) were in the critical list with less than seven days of coal supply. Of these, 13 TPS are in the super-critical list with less than four days of coal supply. The number of TPSs in the critical list has been constant for several months, with no improvement in the coal supply scenario. The main reasons cited for the coal shortage are delay in coal imports or reduced coal supplies from the captive coal blocks for these plants.

India¡¦s major coal reserves lie in the ¡¥red¡¦ belt or the Naxal-affected regions of the country. Power plants fuelled by coal blocks in these regions face issues like irregular supply. Coal India Ltd, India¡¦s largest coal supplier, is also seriously looking at the coal import option. CIL officials had earlier admitted to transportation problems from coal mines in the Naxal-affected regions of Jharkhand, Orissa, Maharashtra, Madhya Pradesh and Chhattisgarh.

Import of Coal: Current & Future Trends

In the recent years, India¡¦s energy consumption has been increasing at one of the fastest rates in the world due to population growth and economic development. India now ranks third amongst the coal producing countries in the world. Being the most abundant fossil fuel in India till date, it continues to be one of the most important sources for meeting the domestic energy needs. It accounts for 55% of the country¡¦s total energy supplies. The development of core infrastructure sectors like power, steel, and cement are dependent on coal. About 75% of the coal in the country is consumed in the power sector¹. Despite increase in production in XI Plan, the existing demand exceeds the supply. India currently faces coal shortage of 137.03 MT in the XI Plan (Assessed by Planning Commission) and this shortage is likely to be met through imports.

Factor affecting the price of imported coal

a. Domestic laws in exporting countries

As already stated, the country¡¦s dependence on imported coal is expected to increase as Coal India has not been able to ramp up production. Coal mining and power sectors are grappling with environment-related issues. Indonesia and Australia contribute about 55% of India’s coal imports. According to the Indian power producers’ body said power producers will not be able to honour long-term commitments because of new regulation in countries from with India import coal. For example, the new mining law in Indonesia provides for annual alignment of coal prices with international rates. This will increase the price of imported coal substantially.

The change in coal pricing method is likely to make coal costlier by Rs 1,500 a tonne for Indian power utilities. Until now, there was no regulation by Indonesian government on coal pricing. Australia - that contributes about 5% of imports by Indian power sector ¡V plans to introduce carbon tax and levy on super profits on mining companies. After implementation of these laws, Australian coal prices are expected to go up by $20-25 per tonne2. Coal prices might increase as miners in Australia would like to pass on the increase in levies to consumers.

b. China entry into the global coal market

If we look at China and analyze its export-import pattern then we can see a very dramatic change as China being net exporter suddenly turning into importer. Until 2008, China imports were negative. But in 2009, China imported around 126 Million Tons (As per world coal statistics). Analysing causes of the dramatic 2009 shift of China to net coal importer from net coal exporter reveals that it was mainly driven by a price arbitrage opportunity, rather than a shortage, as domestic production exceeded consumption. In the wake of global recession, Australian coal prices dropped while strength in Chinese coal prices continued, inverting their traditional relationship, and giving rise to a substantial arbitrage opportunity. This shift, combined with a relative freight advantage due to proximity to the Australian coal market, put Chinese coal imports at a significant advantage to domestic coal. As a result, Chinese coal imports started increasing, and they skyrocketed in 2009. In general, as Chinese internal demand overextends the capabilities of domestic production, Chinese imports inevitably begin to increase, and global prices tend to rise as a consequence. China¡¦s entry into the global market increases global coal prices which affect Indian coal import prices. While on the other hand India, is plagued by a growing gap between coal supply and power demand that it is unable to fill domestically.

Implications for the Indian Power Sector

a. Ultra Mega Projects

Power projects worth 43,000 MW, awarded under competitive bidding, are under construction. About 30% of this capacity or 13,000 MW is based on imported coal. Power companies had offered bids based on their agreements with fuel suppliers predominantly in Indonesia. If the companies are not able to honour their commitments, it would be a concern for bankers and consumers.

Indian power developers have sought government intervention as a new law in Indonesia, the largest coal supplier, makes imports economically unviable. Indonesia has said it would not allow exporting companies to sell coal at prices below notified rates after September 23. Australia issued a draft mining law few days ago to impose levy on coal and iron ore projects from next year. A group of 13 private companies has asked power ministry to set up an expert committee to find appropriate solution to tackle rise in imported rates³.

b. Price of power

The new Indonesian policy that stipulates benchmarking of coal prices to international market rates is likely to increase the cost of coal imports from that country for Indian firms. The impact on the tariff of such projects may vary, depending upon the quality of imported coal and fuel mix. So with the sudden change of rule in Indonesia, which accounts for 50% of India¡¥s coal import, is likely to affect the Indian power developers. Since Coal India will not be able to provide coal to power utilities, power companies have to go for costlier imports and that will have direct impact on price of power generation. It will be most likely possibility that power producers will demand for hike in power prices. The Government of India is thinking of pooling of prices of domestic and international imported coal for lessening the impact of high price on

Indian consumers. Whereas the power generation companies have concern over pooling international and domestic coal prices, the idea of which is to sell the raw materials at a uniform price to the customers.

Conclusion

Industry players acknowledge government efforts to recognize power as the key driver of the economic growth. But, it feels the government needs to work on a comprehensive fuel plan to ensure that the utilities are able to meet their capacity addition targets. ¡§A positive step taken in this direction is the opening up of the allotment of coal mines to the private sector. However, auction of coal blocks should be a priority in order to reduce the dependence on coal imports.

Although, it is very difficult to fill the coal demand supply gap as far as today¡¦s scenario is concerned but there are certain ways by which we can reduce the supply. One of the possible solutions is to channelize the Coal India production sold under e-auction to the power plants. Apart from that Coal India should also honor their commitment to supply quantities as agreed to the new commissioned units before resorting to the e-auction. We also need to find alternative sources for coal supply domestically or internationally which can at least help the Power utilities & Independent Power Producers¡¦ in their smooth functioning.

Also, Industry is facing with lots of challenges regarding land acquisition, environment clearances, fuel availability, equipment shortage, projects funding and shortage of skilled manpower. These key issues needs to addressed before India could meet the target of adding 1, 00, 000 MW in the 12^th Plan.

As all this turmoil continues the Indian consumers have to suffer and face the heat on their pockets. It is to be believed that coal imports will increase the electricity generation cost by 30 ¡V 35 % Kilowatt Hour. Many states have already informed Power Ministry that they have to increase the power tariffs against the price fixed by State Electricity Regulatory commission. And most probably the increase in prices will be pass on to the consumers. Indian consumers are already burdened with increased prices on diesel and petrol and increase in electricity bill will be another setback for them. The government should consider this situation very seriously before it will go out hand

Notes:

¹ MoC 2005,
² Association of Power Producers (APP)
³ Association of Power Producers (APP)

Concluded

Author can be contacted at ashishgupta@orfonline.org