Decoding the link between coal policy changes and the power crunch in India

Coal supply reforms are medium term, but they have created an immediate surge in demand. The result is a power crisis

Mumbai and load shedding were hyphenated this week, like a bad dream from the nineties. It is unlikely to last long, since the generation of electricity by the power plants has reached 189.5 Gw on April 26, up a massive 9 per cent over the same day last year. 

Yet this should not have taken place, going by the list of reforms in the coal sector that have been rung in, at least for the past two years. That it has, is because of two key reasons. The medium- and long-term policy changes have made it easier to buy coal and that has put new pressures on existing producers to come with larger supply. The other is an import substitution pitch that also succeeded too well. Both have contributed to the crisis happening now. 

So, even as generation has jumped, in lockstep, load-shedding has also jumped. National grid manager Posoco data shows, in evening hours on the same day last year, April 26, 2021, the shortage was 662 Mw--small enough to be almost ascribable to system glitches. This year, it is a huge 8.2 Gw this week. 

The deadly onset of summer heat and of revival in economic activity—RBI survey shows capacity utilisation in the manufacturing sector is approaching 75 per cent,the tipping point for shortages to occur—have both done the trick of expanding demand for power. 

All accusations are therefore pointed at coal. There are two reasons why it is unfair. Thanks to the reforms, coal production has jumped 8.3 per cent, year on year to 773 million tonnes, the highest pace in the past decade. The other is that power minister R K Singh is comfortable in the arc lights; his colleague, coal minister Pralhad Joshi is decidedly not. Both have done their work well, but only one of them is telling the tale. 

Whatever the reasons, load-shedding is here to stay this summer. Since one cannot create additional generation capacity in a jiffy or stretch out new transmission lines as soon, the apparent onus on making the summer more bearable is on coal. 

The reforms in coal have expanded the demand for the fuel massively. Supply has not kept pace, since the reforms in them will take longer to fructify. Thus, coal production, despite rising fast, is not adequate to make up for several years of deficit. Domestic production should be over 850 million tonnes now to ensure total production reaches one billion tonnes by FY24. 

As a result, for many power plants, the stocks are running critically low. Ninety nine of the 181 coal-based electricity generating plants in the country are in this bracket. Load shedding has therefore, like a bad memory, again come into the news. Rajasthan has joined the list of states to institute running power cuts from this week.

Among the coal reform policies, the only one short-term one was the goal to achieve import substitution. A coal ministry note of 2020 reported that “Import substitution is one of the topmost priorities” of the government. An Inter-Ministerial Committee was set up for the purpose. Towards the goal of Aatmanirbhar Bharat, the Ministry along with all stakeholders is actively pursuing to achieve the mission of Import Substitution. The rationale seemed logical in 2020. “The country is now blessed with abundance of non-coking coal and the consumers can confidently look forward for substituting their import coal requirement with domestic coal”. 

So to promote import substitution, the ministry gave a thrust “to offer large quantities of domestic coal through various formats of e-auctions so that the consumers are not inclined towards import of coal”. The highlight of this policy was for Coal India Ltd to give discounts through waiver of performance incentive, to make thermal based coastal power plants to plump for import substitution. There are 18 of them with an aggregate generation capacity of 16.7 Gw. 

The policy came in just before coal prices across the world began to harden. Prices of Indonesian and Australian coal rapidly are now hovering around $200 per tonne. This was far steep compared to CIL prices of $20. Even after accounting for the difference in quality, the cost difference was massive provided the transport linkage was made available. 

The coastal thermal coal companies, literally lobbied, with the government too in an agreeable mood, to concede to their demands. The logic given was coal import in FY20 was 247 MT. This caused a “huge outflow of precious foreign exchange—Rs 1.71 trillion in FY19”. Again. the coal stock available with CIL was 75 MT and rising. The government also introduced an import coal monitoring mechanism, basically to discourage imports, except for coking coal. In FY21, the imports of thermal coal came down by 50 per cent. 

While this has contributed to a large extent in making the current crisis, the other reforms for the sector will help to resolve those. But they shall take time since their time frame is either medium or long term. These were:

1. Introduction of coal auction provisions, without any riders. 28 coal blocks have been auctioned with provisions for bringing in 100 per cent FDI through the automatic route, on reasonable financial terms including a revenue sharing model based on the National Coal Index. This was made possible by further liberalisation of the Coal Mines Special Provision  Act of 2015, to remove redundancy in provisions and bringing flexibility in allocation. These changes literally ran a bulldozer clearing mines of clauses that were meant to restrict investment in the sector. 
2. The Shakti plan which is a power sector linkage policy with wide ranging freedom given to CIL and SCCL to decide on the best possible coal allocation policy with their customers depending on mutual needs. 
3. First-Mile Connectivity project to progressively end transit of coal by road, replacing those with alternate transport methods like mechanised conveyor system and computerized loading into railway rakes, and finally 
4. A diversification plan to transform the government run coal companies into energy companies and bring in new technologies like coal gasification
5. Approval for coal companies to sell through a common e-auction window instead of sector specific auctions. This meant CIL and SCCL did not need to create classes of buyers but offer coal through only one e-auction window
6. Offer of more than 100 discontinued or closed coal mines of CIL to the Private Sector through a revenue sharing model. The proposal has drawn in companies like Essel Mining, Adani, TATA, JSW and JSPL 

Essentially, expect the coal crisis to ease up by FY24 but till then, the hot summer is likely to stay hot.