Coal crisis for thermal power plants now could be good news for India later

The endemic supply shortage for thermal power plants offers the chance to transition to gas

The acute coal crisis for thermal power plants could be good news in the long run. Domestic coal production has more or less plateaued; instead of trying to fill the gap with imports, which are expensive, the government would do well to move ahead with transitioning to natural gas for power production.

Consultancy firm Deloitte has said it will be immensely difficult for Coal India (CIL), the state-owned monopoly producer, to reach an annual production level of one billion tonnes by 2024. The report was commissioned by former coal minister Piyush Goyal. The minister has moved on but any external observer could have advised him even without having read the report that the target will never be reached.

The rationale for choosing gas over coal is simple. Despite a 62 per cent upward price revision (September 2021), natural gas has become more competitive against coal. Experts measure this as the levelised cost of electricity between natural gas and supercritical coal plants (a supercritical coal plant has a higher efficiency compared with a traditional coal-fired plant). The table shows the improvement was sharp between 2013 and 2017. Measure for measure, factoring in competitiveness, coal is proving to be more costly to import than gas.

The coal shortage has hit power companies for the third time within 10 years (FY13, FY16). Each crisis has chewed off incremental thermal capacity and this one is going to be no different. From the total installed power generation capacity of 383.37 Gw, coal now accounts for only 53 per cent or 202.67 Gw. Renewable energy (101 Gw), gas (25), hydropower (46) and nuclear energy account for the rest. In 2012-13, the aggregate coal-based plant capacity was on course to reach 245 Gw of capacity.

CIL is committed to supply coal to only 176 Gw of thermal power capacity. Even within this smaller universe and despite domestic coal production rising by 20.6 per cent in August 2021, year-on-year shortages have sprung up (in fact, coal production in April-to-August rose just 12.5 per cent).

This is because the additional production is simply making up ground for a decade of slow growth when the compounded annual growth rate was just 3.6 per cent. To reach a billion tonnes from here — India produced 730.8 million tonnes in FY20 and 646.83 million tonnes in FY21 (the latter reflecting the Covid-19 effect) — will need a CAGR of 8.18 per cent, which is inconceivable. At the current rate, it will take till FY24 for domestic coal production to reach 800 million tonnes.

Of the economy’s total present energy consumption, 55 per cent comes from coal, of which 83 per cent comes from CIL. It speaks volumes that the company has instead plans to enter solar wafer manufacturing, Chairman Pramod Agarwal told Reuters early this year.

The current chaos in coal supply to thermal power plants has happened because both CIL and Singareni Collieries Company Ltd, a joint venture with the Telangana government, have suddenly come up short in arranging supply logistics. This is a throwback to the early nineties’ crisis, when pithead stocks would mount while the Railways struggled to arrange rakes to transport them.

CIL had not reckoned with the rise in demand from the thermal power plants this year as the economy bounced back. Electricity production rose 15.3 per cent in August, maintaining the momentum since the start of the year.

CIL had large stocks, which met the initial post-pandemic demand surge, but it failed to factor in a sustained rise. It has never been good at planning ahead. For instance, every year in the monsoon, production comes to a halt at both underground and open cast mines. CIL has 352 mines of which 158 are underground, 174 open cast and 20 mixed mines. But it makes no provision for this annual disruption.

The Deloitte report has said there should be large-scale automated first-mile connectivity points for CIL at its major mining clusters, including coal handling plants, silos and rapid loading systems. But of the 36-odd such points less than 10 are operational because of the usual delays in placing investment orders and land acquisition challenges.

Given this combination of short- and long-term constraints, if the rise in electricity demand sustains for the economy, the shortage in domestic supply will persist. Steel plants are the exception because their demand is met from overseas supplies. Their aggregate imports were about 52 million tonnes in FY20, and as India expands steel production, it will have to rise commensurately.

The promoters of 33 Gw of additional coal-based power are caught between flat domestic supply (CIL plus private sector) and high-cost imports (see table). Few of these plants are port-based and so have to depend on the railways. Private sector coal miners have already approached CIL to pick up stakes in new railway line projects. The additional cost of building their own lines is threatening to make the mines uncompetitive.

The alternative, then, is gas. India produces 28.6 billion cubic metres (bcm) but the price differential between coal and gas has been steadily narrowing. For the 105 bcm of natural gas India plans to import annually by 2030, the country has already built regasification infrastructure at the ports. It has 39.5 mtpa of capacity, good for 2026, and an additional 30 mtpa is on course to become operational by 2023.

Qatar meets more than half of India’s imports but India imports no gas from Iran, despite the country sitting next door with the world’s largest reserves. Russia, the largest global producer, sends its entire gas to Europe; Saudi Arabia and the UAE have developed major facilities to process their gas and can’t spare more.

Indonesia, which accounts for 60 per cent of India’s coal imports, has seen prices touch new highs because of heavy rains at its major producing area, South Kalimantan. So the time to push up average gas consumption has become favourable. As climate change wreaks havoc with the weather and ecology, this is not an opportunity to lose.