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India’s coal shortage and its effect on power supply

India’s coal shortage and its effect on power supply

WHAT’S THE ISSUE?

• Coal accounts for over 70% of India’s electricity output, and utilities account for about 75% of India’s coal consumption.

• With increased domestic power demand, Indian utilities are experiencing a significant scarcity of coal, which accounts for 70% of the country’s energy consumption.

• While Coal India, the country’s largest coal producer has stated that it will increase production to satisfy current demand, rising import coal costs have made it difficult for Indian companies to operate smoothly.

CURRENT STOCK LEVELS

According to the Central Electricity Authority (CEA) data, 16 of India’s 135 coal-fired power plants had zero coal stocks as of September 29. Over 80% of the plants had less than a week’s stock left, while over half of them had stocks that would last fewer than three days.

WHAT CAUSED THE COAL SHORTAGE?

• Following the second coronavirus pandemic wave, India’s industrial electricity demand has increased. In the first eight months of 2021, India’s power demand increased by 13.2%.

• Due to a widening price gap between lower domestic prices and record global coal prices, buyers are avoiding imports.

• The power ministry said that heavy September rains in coal-mining areas had hit both production and delivery of coal, while plants themselves had failed to stockpile prior to the monsoon season.

• Coal India, which produces over 80% of India’s coal, said, “An increase in global coal prices and freight costs had led to a curtailment in power production by plants using imported coal, adding to the pressure on utilities using domestically mined coal to ramp up output.”

• “Facing the hottest coal market on record, Indian buyers avoided importing it and relied on domestic stocks to such an extent that the domestic stocks have now fallen to the lowest levels seen in over three years,” said a report by S&P Global Platts.

  • As per the latest data, coal stocks at more than 100 thermal power plants in India have fallen below 25% of the required stock (critical mark). In more than 50 thermal plants, the stock has fallen below the 10% mark, leading to States seeking additional coal supplies from India’s sole coal producer Coal India Ltd (CIL). 70% of India’s power demand is met by thermal power plants, which are mostly powered by coal.
  • Central Electricity Authority (CEA) data shows that as of April 19, 2022, India’s power generation via thermal plants using domestic coal stood at 182.39 GW with an average of 34% coal stock in them. Meanwhile, 16.73 GW was generated by power plants using imported coal with an average coal stock of 34%. Nine thermal plants with the capacity to generate 3.56 GW are currently non-functional.
  • Of the 173 thermal power plants, 85 plants fired by domestic coal have less than 25% stock while 11 plants running on imported coal have hit critical levels.
  1. Why does India face a coal shortage?

The biggest reason for coal shortage is the increasing power demand. In 2021, demand increased to 124.2 BU per month from 106.6 BU per month in 2019. In 2022, the demand has further increased to 132 BU.

In October 2021, when India faced a major coal crisis due to shipping delays with stocks dropping to just four days, the Centre’s core management team (CMT) analysed the reasons for the shortage in supply.

The CMT stated that the heavy rains in coal mining areas like Gujarat, Punjab, Rajasthan, Delhi and Tamil Nadu had resulted in lesser coal production. Moreover, prior to the monsoon season, there was inadequate coal stock build-up in most thermal plants, pushing them below critical levels.

The Centre also stated that there was a 43.6% reduction in power generation from imported coal, which led to extra demand of 17.4 MT of domestic coal, further depleting coal reserves.

    2. What is CIL doing to mitigate the shortage?

On Tuesday, CIL stated that it had raised its supplies to thermal power stations by 14.2% during the first half of April 2022, compared to the same period last year. Coal generation has hit 1.64 million tonnes (MTs) per day compared to 1.43 MTs in 2021.

The company added that it had raised its production to 26.4 million tonnes during the first half of April, achieving 27% year-on-year growth. Additionally, 8.75 MTs of coal will be made available to state and Central generating companies vial rail till May 31, 2022, stated CIL.

   3. How will coal shortage affect power supply and cost?

As per Fitch, the daily electricity deficit in India has increased from 0.3% to 1% in April 2022. This has led to an 85% increase in the price of electricity traded on Indian exchanges from an average of Rs 3/kWh to Rs 8.23/kWh in March. To regulate prices, CEA has capped short-term power exchange rates to Rs 12/kWh. Fitch further estimates that low coal supplies will not allow National Thermal Power Corporation (NTPC) to increase its plant load factor — its power output with respect to its fuel — by more than 70.7%. This was the limit NTPC had increased its load to in 2021, up from 66% in 2020.

The peak in demand has been met with load shedding, planned outages by States like Andhra Pradesh, Gujarat, Maharashtra, Jharkhand, Bihar, Haryana and Uttarakhand. Since April 1, Jharkhand has been facing an average supply shortage of 10-12%, followed by Andhra Pradesh (10%), Uttarakhand (8-10%), Madhya Pradesh (6%) and Haryana (4%).

   4. How does the Centre plan to fix the coal crisis?

The Centre has allowed States to use its captive coal reserves up to 25% to meet growing domestic demand. It has also allowed generating companies to blend imported coal up to 10% to ease the burden on CIL. While the Centre is mulling shoring up imported coal stock, higher coal costs make it difficult.

In 2020, Centre had passed mining reforms to end CIL’s monopoly on India’s coal manufacturing. The law allowed commercial mining in coal sector with 50 blocks to be offered immediately. It also allowed any party to bid for coal mines instead of only captive consumers (i.e companies which use coal for running their businesses).

The law also incentivised early coal production with rebate in revenue share and promised Rs 50,000 crore investment for diversifying CIL’s operations. The law has, however, run into severe Opposition from States — especially mineral-rich states like Jharkhand, Bihar —citing that this will have an adverse impact on a large tribal population and forests. The case is pending in the Supreme Court.

  • As per the latest data, coal stocks at more than 100 thermal power plants in India have fallen below 25% of the required stock (critical mark).
  • The biggest reason for coal shortage is the increasing power demand.
  • While the Centre is mulling shoring up imported coal stock, higher coal costs make it difficult.

WHAT LIES AHEAD?

• Coal India announced that it would increase production to meet the domestic demand, following which it saw a significant impact on its shares.

• Shares of Indian power producers NTPC Ltd, Tata Power, and Torrent Power have been rising strongly in recent weeks, spurred by rising power demand.

• The scaling up of production requires higher input costs, which is difficult in India as the state-run distribution companies have absorbed rising prices to keep power tariffs steady.

• The shortage now raises the prospect of imminent, large-scale power cuts and higher consumer electricity prices.

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