Untangling coal and power shortages
Remember the rupee panic of 2013? When the current account deficit climbed to danger levels of 5% of gross domestic product, and the currency tumbled? That panic had origins in the “taper tantrum” of Ben Bernanke, then US Federal Reserve chair. But it was also connected with India’s burgeoning imports. It wasn’t just import of gold or Chinese telecom equipment, India was also importing coal, iron ore, fertilizer and edible oil in very large quantities.
The awkward fact was that the country with the world’s third largest coal reserves was forced to import one-fourth of its coal requirement, at record high prices. India imported 171 million tonnes in the fiscal year ended March 2014, which was 15% higher than the previous year. But worse was to come. The imports for the next fiscal year climbed to 215 million tonnes, possibly the highest in history. This was also partly a consequence of the Supreme Court’s September 2014 decision to cancel all coal block allocations to private coal miners, virtually stopping all captive coal production.
One of the Narendra Modi government’s first priorities was to swiftly move to a transparent auction-based mechanism (as implied by the Supreme Court verdict) for allocating coal mines and restarting them. An inadvertent fallout was that end-users, spooked by coal shortages, bid aggressively in the mining auctions, taking domestic prices above global level. This was like winner’s curse plus. Meanwhile, the country’s coal consumption grew 12% during FY15, and then abruptly slowed down in the next two years. This caused imports to also drop, and coal prices stabilized.
Cut to late 2017. There is talk of a coal shortage. Global prices have shot to above $90 per tonne, a rise of 40% in seven months. The power sector and the coal producer are engaged in a blame game. Last month, Maharashtra State Electricity Distribution Co. initiated load shedding, due to a shortfall of 2,000MW out of a total power demand of 18,000MW. The reason for the shortfall? Shortage of coal at generation companies. Similar stories came from other states. At the other end of the supply chain is Coal India Ltd (CIL), the monopoly producer of coal. CIL has been consistently increasing production.
In the summer, CIL claimed that coal stock at its pithead had climbed to a record 60 million tonnes. Thus it’s not a story of coal shortage, but of non-evacuated coal from their mines. The pile was so high that it was creating a risk of flash fires in the summer heat. Why weren’t the power utilities lifting the coal? Was it because the cash-strapped distribution companies (discoms) were not buying electricity? Were the power cuts due to coal shortage or the discoms’ inability to purchase adequate power? This situation was made worse by a steep fall in hydro and nuclear power output in August and September. So, coal-based power had an additional burden to bear.
Ahead of the monsoon, the power ministry asked utility companies (and also non-power sector players) to stock adequate coal in their premises, which they did not do. Heavy rains affected CIL production badly. In the middle of the supply chain is the railway network. The evacuation rate from the mines is also constrained by rail capacity, measured in terms of connectivity, rake length (number of wagons) and tonnage per wagon. But rake length is constrained by the state of the railway network, the safety at crossing points, the narrow and crumbling bridges or the number of free railway lines.
Indian rakes can typically carry 4,000 tonnes, as against 10,000-20,000 tonnes in Australia, the US, Russia or China. Since the situation was turning into a crisis, rake movement had to be monitored daily, and coal was diverted to power producers as priority, denying other users. The promised coal to non-power users like metal producers through fuel-supply agreements (FSAs) has not been delivered. The shortfall on this “linkage coal” is as high as 80%. Who should be blamed for this breach of contract? The penalty for FSA shortfall is woefully small. Besides, it is a zero-sum game, since coal not given to FSA is given to power producers.
Coal mining, power reforms and logistics management together make for a complex optimizing exercise. It is not decentralized enough, and monitoring or management by a central super computer in Delhi (à la Soviet style) is not the solution. CIL has increased production steadily, but stranded coal pile at pitheads, or unavailability of rakes, or the reluctance of utilities to purchase and stock the coal and, finally, the inability of discoms to pay are all part of a giant jigsaw puzzle.
So here are a few practical suggestions. First, allow more private players in coal mining or as mining operators. Second, allow private coal users to own or lease and run their own private rakes. Third, allow road movement of coal in addition to rail, at least in the monsoon months. This is prohibited on environmental grounds, but during the rainy season it should be less of a hazard. Fourth, increase the penalty for FSA non-compliance. Fifth, make it mandatory for power companies to have a minimum inventory of, say, two weeks of coal at all times. Sixth, speed up completion of rail links from pitheads to nearby power users on high priority. Seventh, since electrons travel smoothly and without pollution, improve the national grid for electricity so that surplus power is never stranded, unlike surplus coal at pitheads.
Last, improve the health of discoms. This last suggestion is actually a big reform agenda already initiated as UDAY (Ujwal Discom Assurance Yojana). Let’s not forget that coal is an integral and large part of our energy for the foreseeable future.
Ajit Ranade is chief economist at Aditya Birla Group.
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