4 min read.Updated: 06 Nov 2018, 06:41 PM ISTAjit Ranade
India needs to allow private sector entry into coal production and laying of private railway lines (connecting to major hubs), otherwise, the mesh of policies on coal, power will end up strangulating growth
There is an apocryphal story that goes like this: Prime Minister Jawaharlal Nehru on a visit to Bihar enquired why mining activity was down. He was told that there were not enough wagons to evacuate the coal from the mines to the factories. Why not enough wagons? Because there wasn’t enough steel for making the wagons. And steel production was constrained because of power shortage. And why was there power shortage? Because there wasn’t enough coal coming out of the mines! Our present coal production is much higher from those early days, but we still seem to be caught up in the deadlock of circularity.
There are at least two new factors in this deadlock of circularity. One is the stress in bank loans given to the power sector. More than ₹ 1.8 trillion are in these stressed accounts, which might all land up in bankruptcy proceedings. Hence, no further bank funding is forthcoming either as fresh loans or working capital. This can lead to more bottlenecks in projects as well as operations. The stressed banking assets (bad loans) include an estimated 15 gigawatt (GW) generation capacity that is stranded for want of fuel.
The other is the related stress in electricity distribution companies, who are deeply in the red. As tariff reform is not politically feasible, and certainly not when elections are looming large, the distribution companies (discoms) lose money on every unit of electricity that they sell. Hence, they prefer to buy less from power generators and supply less to their consumers, thereby cutting their losses. The result is long hours of power outage, or “load shedding". This story has been around for some time and, once every decade or so, it erupts into a full-blown power and banking crisis, leading to a fiscal relief package. The Ujwal Discom Assurance Yojana (UDAY) scheme launched three years ago was exactly that. However, the package required the utility companies to do their bit (tariff reform), without which the rescue package is fruitless and simply a temporary relief till the next crisis. One flip side of the retreat of discoms is that average plant load factor (PLF) across the country has fallen to a multi-decadal low of 58%. This implies inefficiency and extra burden of fixed costs.
The shortage of fuel for power plants has become very critical in recent months. Many of the coal mines sold off in auction, mandated by the Supreme Court verdict, are simply not operational. The irony is that India is the third-largest repository of coal in the world. Yet, for the past four years, coal imports have been close to 200 million tonnes annually. With rising international prices, this poses a significant drain on foreign exchange and is of great concern because of the widening current account deficit.
To some extent, the growth in import of coal, compared to the trend growth prior to 2014, has slowed down. Some import is inevitable as some of the larger and newer power plants were designed to be run on imported coal of a specific kind not available in India. However, continued and increased dependence on imported coal points to deficiencies in augmenting domestic capacity, which needs to be addressed urgently.
This problem is more acute for the captive power producers (CPPs) who are in the steel, cement, aluminium and chemical sectors. Not very long ago, almost one third of industrial power was produced by captive producers. This was because, in many (especially process) industries, uninterrupted and quality supply is essential. If the grid cannot guarantee that, a captive power plant becomes necessary, though the additional capital expenditure is an extra burden and a competitive disadvantage. However, unlike grid power, the PLF for captive units can be very high, making the power plant very efficient.
The existence of CPPs also relieves the pressure on state-owned utilities and reduces transmission and distribution losses. Even today, the CPPs represent nearly 50 GW of installed capacity, of which 30 GW depends on coal. This excludes thousands of sub-one-megawatt captive plants, which run on diesel generators. The coal for CPPs comes from an allocation mechanism of linkage to Coal India’s production. As there is national shortage, there is inevitable rationing and CPPs are down in the pecking order, below state-run utility companies and independent power producers who feed the grid. During election season, the highest priority is reducing load shedding. Hence, CPPs starve for fuel, which in turn affects industrial production.
In the past three years, the share of coal dispatches to CPPs has steadily gone down, from 10% to 8% to now 6%, whereas, the share going to independent power producers has increased substantially. However, overall national coal production itself has stagnated and not kept pace with industry demand. In this scarcity scenario, an additional constraint is the availability of railway rakes. Coal gets lower priority than foodgrain when it comes to movement by rail. Within the aggregate, the share of rakes that goes to CPPs is very low—10%, for instance, from April to August during this year. So, CPPs have to depend on trucks, which burn diesel and are more harmful to the environment. The railways must consider introducing the own-your-rake scheme, as an upgrade to the own-your-wagon scheme.
In the medium to long term, there is no getting away from allowing private sector entry into coal production and commercial mining in a big way. This needs to be supported by a policy that allows laying of private railway lines (connecting to major hubs) and other logistical innovations such as multi-decker exclusive cargo lines. Otherwise, the mesh of policies on coal, rakes and power will end up strangulating growth.
Ajit Ranade is an economist and senior fellow, Takshashila Institution.
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