Recent coal crisis opens doors for govts to micro-manage the market

Union power ministry in August decided to limit the stock holding to 15 days, which implied it wanted power plants to stock the bare minimum of what CEA advises

India’s power problems, accentuated by a coal shortage, are a testimony to not just the sector’s dependence on this fossil fuel but also to how fuel availability and its high price could impact the post-Covid-19 economic recovery. Coal supplies to non-power generators have not resumed yet, and companies that still have a substantial number of employees working from home across the country have started to rethink their business continuity plans and look for backup arrangements because of the frequency of power cuts.
 
Though there are captive coal blocks that have been allocated to power companies, generators largely depend on coal linkages or supply arrangements with Coal India Ltd (CIL) and its subsidiaries to meet their requirement.
 
Every year, the coal behemoth advises power producers to stock up before the monsoon since the mines tend to get flooded, impacting production. Transporting coal in the rainy season is equally tricky. But this time round the situation went out of hand.
 
Even at the peak of the festival season when power consumption usually goes up, around 48 thermal power plants on October 16 reported coal shortage as the reason for lower or no generation. None of the power plants that have coal linkages had more than eight days of stock, while 22 plants with 29,640 MW capacity had only a day’s stock on October 19.
 
In fact, coal stocks at generation sites had started to come down to less than five days in August. The government is now looking to revise the stocking norms and make it mandatory for power companies to have a minimum 20-day of coal if they are away from the mines. The number of days could be higher for peak summer and winter months.
 
Currently, the quantity of coal bought and supplied to users is governed by the fuel supply agreements (FSAs) that the CIL group companies sign with customers. But these are only supply contracts with a penalty and incentive mechanism in place and do not make stocking mandatory. CIL can terminate an FSA if a power generator lifts below 30 per cent of its annual contracted quantity (ACQ), and 40 per cent of the basic sale price is levied as a penalty if the power companies lift 50-40 per cent coal. “Power generators on an average lift 80-85 per cent of the ACQ; a penalty kicks in only if the quantity lifted is less than 75 per cent of ACQ,” a senior government official explained.

For a commercial organisation like CIL, inspecting stock positions at power plants is neither part of its mandate nor does it have the wherewithal to do so. Current stocking norms are not mandatory and are monitored by the Central Electricity Authority (CEA), which has standard classification norms for judging which power plants are in the critical stocking position.
 
CEA is the technical body for the power sector. Those units that are at the pitheads are advised to stock a minimum 15-day requirement. Depending on the distance, the requirement increases to 30 days (see chart).
 
With alarm bells going off on coal stocks, the Union power ministry in August decided to limit the stock holding to 15 days, which implied it wanted power plants to stock the bare minimum of what the CEA advises. According to a government statement of August 29, this freed up 177,000 tonne of coal or just about 10 per cent of a day’s requirement of 1.8 million coal for power plants that have coal linkages.
 
According to a CARE Ratings analysis, power plants on an average had stock equivalent to only four days of consumption as on 30 September, 2021, significantly below the September 2020 level of 19 days and September 2019 level of 11 days. CIL’s inability to produce more and generators' refusal to stock up adequately led to this year’s unprecedented crisis. A letter from the ministry of coal indicated CIL could produce about 237 million tonne (mt) of coal against a target of 261 mt from 1 April to 21 September, while dispatches were 293 mt against a targeted 351 mt in the same period. This indicates that earlier stocks were being used for supply.
 
Usually, the shortage of domestic coal is made up by coal imports, which this year was restricted due to a surge in imported coal prices. Higher prices of imported coal and natural gas added fuel to the fire.
 
CARE Ratings’ report said the Indonesian HBA (Harga Batubara Acuan) thermal coal price remained benign during 2020 at less than $60 a tonne but more than doubled to $161.63 on 5 October, 2021. “This extraordinary price rise is largely attributable to China-related issues, including surging power demand, its lower domestic coal production and an unofficial ban on import of Australian coal,” the report said.

Both China and India are among the top global producers of coal but shortages in the coal supply and power market have put a question mark on their energy policies. Assuming that the government mandates higher stocking at power plants and aligns CIL production as well, the other issue of whether generators will be able to bear the carrying cost will have to be addressed.
 
The working capital requirement of power generators will go up and that will reflect in higher power tariffs. This cost will have to be borne by power consumers. It will also mean a constant struggle to get past the state and central electricity regulatory processes of tariff petition approval. At the distribution end, power retailing companies with their poor balance-sheets could keep payments pending.
 
Apart from these reasons that could make mandatory stocking norms tedious for generators, it will also mean the Union government, the CEA or even state power departments will enter into micro-level management of a coal market that is clearly not out of the woods.