Understanding India’s Coal Imports (GS Paper-3, Mineral and Energy Resources)
Context:
- As the country braces itself for hot weather, the looming threat of electricity shortages resurfaces. In recent years, the combination of increasingly erratic weather patterns and a rapidly expanding economy has driven a significant surge in electricity demand, presenting a formidable challenge in ensuring reliable supply. However, certain aspects of the discourse surrounding this issue warrant closer examination.
The Shortage of Domestic Thermal Coal:
- Primarily, the shortage of domestic thermal coal, utilized in electricity generation, is pinpointed as the main culprit behind the electricity deficit. For instance, in August 2023, which witnessed the most pronounced electricity shortage of the year, the situation echoed similar strains experienced during summer months.
- The shortage amounted to approximately 840 million units, primarily attributed to a deficient monsoon leading to heightened demand and diminished supply from certain sources. It’s worth noting that this shortage constituted a mere 0.55% of the demand for that month.
- Furthermore, addressing this shortfall would have required a modest 0.6 million tonnes of domestic coal, whereas coal mines possessed over 30 million tonnes collectively in August and September.
Availability or Logistics- Which is the Main Culprit?
- This disparity underscores that the core challenge lies not in the availability of domestic thermal coal, but rather in the inadequate logistical infrastructure for transporting coal to power plants.
- This perspective finds support in a recent advisory from the Ministry of Power, which acknowledges that “supplies of domestic coal will remain constrained due to various logistical issues associated with the railway network.”
Auctions:
- Given that coal currently stands as India’s primary solution to address deficits, the logical response appears to lie in exploring alternative coal sources. Yet, this notion often leads to a common misconception—the assumption that imports represent the sole alternative.
- Coal India Ltd. typically sells approximately 10% of its annual production, equating to roughly 70 million to 80 million tonnes, through spot auctions. Although the price of coal obtained through such auctions surpasses that of coal supplied to many plants, it still remains significantly lower than the price of imported coal.
- Despite the fact that certain plants may not encounter logistical obstacles in acquiring coal from auction sites, they still do not regard auctions as a viable alternative.
Imports:
- The issue of imports further complicates matters. Even if auctions are utilized, some thermal coal imports may be necessary for blending with domestic coal. Consequently, the pertinent question revolves around the extent to which coal plants should rely on imports.
- In response to this dilemma, the Ministry of Power recently issued an advisory to power generators, urging them to continue monitoring their coal stocks until June 2024 and to import coal as needed, up to 6% by weight. However, there’s a notable distinction between an advisory and a mandate. While widely perceived as an extension of a “mandate” for importing 6% coal, it’s imperative to recognize that advisories can be conveniently interpreted as mandates by many coal-based generators.
- This interpretation is particularly advantageous for them as any increased costs resulting from coal imports can be passed on to electricity consumers through distribution utilities.
- Therefore, it falls upon electricity regulators, entrusted with ensuring the prudence of electricity costs, to refrain from regarding such advisories as mandates.
- Furthermore, initial analysis indicates that a mere 0.3% additional blending, in addition to the 3.4% of imported coal blended between April and December 2023, could have eradicated all shortages during that period.
- Consequently, the third erroneous narrative emerges, suggesting that 6% coal imports are indispensable when, in reality, it represents merely an upper limit of imports that might be necessary.
- Misinterpreting the advisory as a mandate could carry significant cost implications, particularly considering that coal still accounts for over 70% of India’s electricity production.
- Mandatory blending of 6% imported coal by weight for all coal-based generation, instead of the current blending levels, could inflate the variable cost of coal-based electricity by 4.5%-7.5%. Notably, according to the Annual Rating of Power Distribution Utilities report, power purchase costs surged by 15% in FY23, attributable to increased demand, coal imports, and prices of imported coal.
Generation and Geographical Placement:
- Not all power plants operate under the same conditions. Typically, those plants that produce the highest output, known as pit-head plants, are situated near mines, far from ports, and generally do not experience coal shortages.
- Conversely, during periods of heightened demand, plants located farther from mines, which typically generate less power, are more susceptible to shortages.
- Therefore, there is no valid rationale for interpreting the advisory as a mandate to import 6% coal by weight for all plants nationwide.
Conclusion:
- Clearly, the discourse surrounding coal shortages in the country requires a shift in direction. It cannot be automatically assumed that coal imports represent the default solution to address shortages. The primary challenge lies in surmounting logistical obstacles that hinder coal delivery to the necessary locations.
- In the interim, regulatory commissions and distribution utilities must ensure that all coal-based plants remain vigilant regarding the potential for coal shortages and identify the most cost-effective alternative sources— which may not necessarily involve imports— to bridge any gaps.
