Unleashing Coal: India Should Give Coal A Leg-Up To Neutralise Ukraine Impact

Unleashing Coal: India Should Give Coal A Leg-Up To Neutralise Ukraine Impact

by Pratim Ranjan Bose - Wednesday, March 9, 2022 07:00 PM IST
Unleashing Coal: India Should Give Coal A Leg-Up To Neutralise Ukraine ImpactCoal supply
  • The impending crisis is the perfect opportunity to incentivise the pivate sector and create a framework for fast-track statutory approvals for quick production ramp-up.

    The timely focus on coal doesn’t mean the end of India’s renewable agenda. It will be a short-term intervention and for a reason.

During the apartheid, South Africa developed a huge coal-to-oil industry to survive trade barriers. Apartheid was deplorable. But self-reliance is back in the reckoning because of the Ukraine crisis and the weakening of the globalisation agenda that rocked the world in the 1990s.

The concern is not restricted to price volatility but also the availability of energy resources. Russia is the world’s second-largest producer of gas, third in oil and sixth in coal. Unless the US-led NATO abandons their attempt to choke the fund flow to Russia, volume impact is inevitable over the next few years.

India has failed to capitalise on the global coal boom in the past. Between 2001 and 2011, China’s production increased by roughly 150 per cent from 1400 mt to 3600 mt. During the period, Indian production increased by only 65 per cent to 580 mt. The captive sector in particular failed miserably.

Captive mines were deallocated in 2015. The Narendra Modi government completed denationalisation of the sector in 2020 – in the middle of global energy price meltdown - and distributed many blocks to the private sector through auction over the last two years.

The impending crisis is the perfect opportunity to incentivise the private sector- by allowing them to taste a part of the fruits of the global price rise- and create a framework for fast-track statutory approvals for quick production ramp-up.

It may insulate the economy from global price volatility and ensure desired growth in investment, manufacturing and employment over the next few years. Coal producing states should cooperate as the initiative may bring windfall revenue gains to boost their finances, which are in bad shape, to say the least.

Amending The Energy Strategy

The timely focus on coal doesn’t mean the end of India’s renewable agenda. It will be a short-term intervention and for a reason.

Including large hydro (46.5GW), renewables now contribute 38 percent of the 395GW generation capacity. The plant-load factor (PLF) in coal-power was down from 77 per cent to 57 per cent over the last decade. Roughly 62 per cent of the new generation capacities added in 2021 were renewable. The Hydrogen policy has already been announced, and India is fast adopting electric vehicles.

Any greater push to renewables may be detrimental to Indian interests. New energy being an evolving technology, a faster transition may leave the country with a huge pool of inefficient assets. Solar projects are getting more efficient with time.

Moreover, India is still dependent on China and other destinations for sourcing raw materials and equipment for solar as well as battery technology. Disproportionate emphasis can increase India’s geopolitical vulnerability in the emerging scenario.

The energy transition was planned when commodity prices were low. The aim was to ensure access to a wide basket of alternatives and insulate the country from future oil shocks. Post-Ukraine, the challenge is shifted to ensuring the availability of base energy, to both power producers and industrial users, at a predictable price to beat inflationary pressure and keep the growth momentum going.

Covid had left behind global supply chain disruption and worldwide inflation. From food to construction material everything became costly. The USA and the UK were reeling under 30 to 40-year high inflation. Global agencies predicted the prices to cool down in the second half of 2022.

India was successful in keeping the headline inflation to a manageable six per cent (USA 7.5 per cent). The planners were in the mood to brace for a short-term price hike and continue with the easy money policy to fuel growth. Ukraine had upset this calculation.

On Sunday (6 March), Brent crude prices hit a 14-year high of $139 per barrel, up from an average of $97 in February and $86 in January. Crude prices firmed up in February in anticipation of the attack. The Economic Survey pegged India's basket of crude at $75 per barrel.

Gas has already hit the upper circuit in Europe. It will impact the cost of spot Liquefied Natural Gas (LNG) imports to India. High import costs will influence the price index for domestic natural gas. More than the high price, such volatility is killing. South African coal prices increased by nearly $100 a tonne over the last week.

India doesn’t have much reserve of metallurgical coal, used in steelmaking, and is largely dependent on imports. Overseas buying of thermal coal, mostly used in captive generation by energy-intensive industries, touched 203 million tonnes in 2019.

Obviously, the high prices will bring in new players. Many are anticipating withdrawal or easing of US sanctions on Iran and Venezuela. However, rest assured no one will let the windfall profit opportunity go. It means, even if volatility recedes, the high price regime may continue in crude and gas, which in turn will keep the sentiments up in coal.

In the emerging scenario, only domestic coal can save India’s day. According to the coal ministry, India produced roughly 731 million tonnes of fuel in 2019-20. Non-coking or thermal coal production was estimated at 678 mt.

State-owned Coal India Limited (CIL) contributes 80 per cent of the domestic produce. The rest is divided between Centre-State joint initiative Singareni Collieries and captive producers. Private commercial miners are yet to start production.

Index Based Coal Pricing

Historically, CIL insulated the Indian power sector from global turbulence. During April-February 2021-22, the miner supplied 23 percent more fuel to the power sector taking the total despatch to gencos (power generation companies) to a record 493 mt. That bulk of the additional supplies was made only in the last six months, when the economic growth started to peak, made the performance extra special.

India’s total power generation reached 8.5 per cent during April-January FY22, highest since FY15 and on the back of a stagnant electricity demand in the previous two years. Subdued hydel supplies added pressure on coal-based generation, which grew by 9.5 percent.

However, this is not enough. The captive generation sector meets the majority of the demand through imports. As fuel was supplied to the power sector on a priority basis, the industrial consumers missed the opportunity to increase procurement from the domestic market and hedge against uncertainties. This is not going to help India’s growth and export ambitions.

The government seems to be aware of the challenges. As the first step, they have done away with highly prejudiced sector-specific e-auction sales by single-window auction. This will ensure a single price for fuel in the open market. However, this too is insufficient.

The majority fuel is sold through firm agreements at flat card rates. Though the government formulated a coal index, it was not brought into force. Coal prices continue to be administered and highly biased in favour of the power sector.

This pricing formula was drawn a decade ago, riding on a set of flawed policymaking- starting from captive block allotment on nomination basis to competitive tariff for electricity generation– by the UPA government. Non-power consumers were denied long-term linkages, as they were offered captive blocks.

The policies, however, proved a non-starter. Captive blocks were deallocated and auctioned. Independent power producers (IPPs) struck power purchase agreements through competitive bidding. But State and Central gencos didn’t give up the cost pass-through advantage.

To cut the long story short, the domestic fuel supply scenario is skewed against the non-power consumers on both price and availability front. In the prevailing scenario, further denial of support can be deadly for the economy.

As part of a redressal, the government may consider reducing the pricing gap between the two sets of customers in a graded manner and allowing coal producers to sell fuel at an indexed price. Together, they will create the right incentive for miners to step up domestic production.

If domestic gas prices can be linked to global movements, why not coal? Historically, domestic fuel prices never increased by more than 10 per cent, that too after long gaps, and the average electricity tariff impact was in the range of 5-7 paise per unit.

Such impacts too are notional. As a thumb rule, higher fuel prices should invite greater emphasis on fuel efficiency. Consumer demand shifted to fuel-efficient cars as petroleum became costly. The norm is ignored in power generation.

Generally, generation utilities under State governments are relatively old and fuel-inefficient, compared to the newly built private power plants. This year, PLF of the state gencos increased from 44 per cent to 57 per cent, while that for the IPPs, it declined from 53 per cent to 52 per cent.

Many state gencos complaining about low fuel stock are highly fuel-inefficient too. A more transparent fuel pricing may see efficient utilisation of resources and lesser impact on the electricity tariff.

Join our Telegram channel - no spam or links, only crisp analysis.
Get Swarajya in your inbox everyday. Subscribe here.

An Appeal...

Dear Reader,

As you are no doubt aware, Swarajya is a media product that is directly dependent on support from its readers in the form of subscriptions. We do not have the muscle and backing of a large media conglomerate nor are we playing for the large advertisement sweep-stake.

Our business model is you and your subscription. And in challenging times like these, we need your support now more than ever.

We deliver over 10 - 15 high quality articles with expert insights and views. From 7AM in the morning to 10PM late night we operate to ensure you, the reader, get to see what is just right.

Becoming a Patron or a subscriber for as little as Rs 1200/year is the best way you can support our efforts.

Become A Patron
Become A Subscriber
Comments ↓
Get Swarajya in your inbox everyday. Subscribe here.

Latest Articles

    Artboard 4Created with Sketch.