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Import of Coal for Power Sector is inevitable, but not at any price , Shri R V Shahi, Former Secretary, Ministry of Power

M/s McCloskey and Mjunction organized a two day "Indian Coal Markets Conference" on August 31st and September 01, 2010 at New Delhi. I had the opportunity to address the Conference on the issue of "Coal for Power Sector: Demand and Supply Perspective". Other Panelists also focused on the Power grade Coal. Important points from the observations made by me, the clarifications sought and given, and questions - answers, are summarized below:

(a)

It is true that for almost ten years - during entire period of 90's - the power sector showed a highly indifferent attitude and unreliable profile of growth. The policy initiatives of early 90's did not work. Obviously, the two most important linked sectors, viz. power plant equipment manufacturing and coal, took it that it would take much more time for the power sector to gear up to grow and consequently place demands for equipment and for fuel. To this extent, it would not be totally correct to find fault with these two sectors, not to adequately expand to meet the emerging phase of power sector expansions. Where, however, we must pin point their failure is their inability to appropriately assess and prepare for the powerful impact which the ensuing legislative and policy changes would create. On any number of occasions, the CMD's of Coal India and BHEL did make the point that all their previous plans and programmes during ninetees went wrong, primarily because the promised expansion of power sector, through several MOU's, gave a highly misleading expectation. We may concede this point. But, it would have been better if both these groups could have appreciated the likely enthusiasm that the new policy regime in the power sector would generate, leading to such massive expansions.

(b) Power sector growth in India, over last three decades, has been largely scripted around the growth of coal sector. The mutual interdependence of power and coal sectors is so intense that while power generation in India is contributed to the extent of more than 70% from the coal based power stations, coal sector consumption is more than 75% by one segment of the industry i.e. power. This has been the past of the coal sector, this is its present and, most likely, it will also be its future.
(c) It may be difficult to predict the power sector profile 50 years from now because of several unpredictable variables. But, it is comparatively easier to do so for next 25 years. That is what was done through the exercise of evolving the country's Integrated Energy Policy (2006). While evolving the Integrated Energy Policy, we tried our best, but without much success, to minimize dependence on coal based power generation. The outcome of such an attempt is as follows - (a) total capacity till 2032 could be targeted at 800 GW, (b) though it would be optimistic, entire hydro power, with a potential of 150 GW, nuclear to rise to about 7% at 60 GW, gas to retain its present proportion of 10% at 80 GW and non-conventional power generation to retain its present proportion of 10% at 80 GW may, all together, lead to about 370 GW, (c) that leaves the balance 430 GW, which inevitably has to be based on coal. There could be some variations in these assumptions. But, it seems that the estimates on nuclear and hydro, as reflected in the above figures, may turn out to be on optimistic side, and, therefore, coal may, in fact, occupy even larger space. 430 GW of coal based capacity would mean almost 2.25 to 2.5 billion tonnes of annual requirement of coal.
(d) These are relatively long term projections. Obviously, 20 year time frame may provide some unexpected developments, and, therefore, these projections might undergo commensurate adjustments. Coming to Eleventh (2007-12) and Twelfth Five Year (2012-17) Plans, the estimates could be expected to be more realistic. Over 60,000 MW of capacity in the current Five Year Plan and over 80,000 MW of capacity in the Twelfth Five Year Plan appear to be realistic and realizable targets. In fact, in the Twelfth Plan it could be substantially more. Looking to the likely outcomes from other sources of generation, it would be reasonable to assume that in these two Plans more than 70% may have to be based on coal. Therefore, out of 150 GW from these two Plans, approximately 110 to 120 GW may be from coal based capacities. Therefore, additional coal requirement annually, by the end of Twelfth Plan, taking beginning of the Eleventh Plan as reference, will be of the order of 500 million tonnes.
(e) If we look at the near term requirement, where the realities are before all of us, the picture is as follows - (a) at present there are as many as 24 power stations in the country where coal stocks are in "critical" category, which means they hold less than seven days of stock. There are as many as 13 power stations where the stocks are in the "Super Critical" category i.e. they hold stocks equivalent to less than four days of requirement. For the country as a whole, the stock position is less than 12 million tonnes.
(f) For the year 2010-11 the requirement was projected at 445 million tonnes. The gap is likely to be of the order of 50 million tonnes equivalent to 35 million tonnes of imported coal. The reasons for continuing and increasing gaps in domestic supply include problems within coal companies and challenges of land acquisition and forest clearance.
(g) For the year 2011-12, the mismatch between the requirement in the power sector and domestic supply is likely to be of the order of 45 million tonnes. If a few more projects get commissioned, which are in the categories of "best effort" basis, and this gets compounded on account of slippages in the development of new coal mines, it is very likely that in the final year of the Eleventh Plan, 2011-12, the requirement of import of coal may be as high as 75 million tonnes.
(h) The Presentation from Barclays Capital Commodities Research, made in this session, brought out a number of perspectives on coal markets in Asia and other regions. One of the aspects that emerged, from this Presentation, is about the market outlook in respect of prices. The Presentation highlighted that with surging demand from China and India, more than offsetting the weakness in European demand, the failure of key exporting countries to meet rising global demand for coal is set to provide the largest upside risk to prices. Therefore, in the opinion of the Barclays Capital Commodities Research, as compared to actual coal price between 70-72 $ per tonne during 2009, the prices are estimated to rise between 94 to 100 in 2012 and between 108 to 120 in 2015. During the Question Answer Session I took up this issue and stated that while Indian power sector would definitely procure imported coal to meet the shortfall between demand and supply, it cannot and should not be assumed that the power sector will import coal at any price. The cost of power generation is highly sensitive to cost of coal. Indian power sector demonstrated that when the price of LNG was very high and unsustainable, the sector preferred to back down generation rather than resorting to procuring excessively costly LNG. It needs to be underscored that India needs a lot of electricity, but beyond a level of price, affordability does become a relevant issue. Therefore, I stated that it was my considered view that foreign suppliers of coal must not think that just because there were likely to be serious mismatches between demand and supply of coal from domestic sources, they could price coal at very high levels and Indian power sector would import at such high prices. It needs a balanced approach in which a win-win situation could be created.
(i)

One of the questions, from the participants, which was addressed to me, related to the strategy of the Government on import of coal. The thrust of the question was that when India had huge coal reserves, why should the import not be eliminated, or reduced to the minimum. My clarifications were on following lines :

(i)

It is true that the coal reserves in India are estimated to be of the order of 267 billion tonnes, consisting of 33 billion tonnes of coking coal and 233 billion tonnes of non-coking (Power Grade) coal. Besides, lignite reserves are estimated to be of the order of 39 billion tonnes.

(ii) Even among the Mining Engineers and Geologists there are differing opinions about how much of 267 billion tonnes of reserves are really extractable. Be that as it may, it has been the strategy that even though Indian coal reserves could last for long, is it for the present generation that it should extract and consume all of these, leaving little for the future generations? It is this consideration which led to the definite approach of Ultra Mega Projects being at coal pit heads and at the same time a chain of such projects to be developed along the coastal locations. The coastal projects are expected to use primarily the imported coal.
(iii) There are challenges in developing the coal mines on account of difficulties of land acquisition and more importantly the clearance of such projects from forest angle. As a matter of fact, the recent position of the Ministry of Environment in this regard, has been tough and unrealistic inasmuchas almost 50% of the coal mines have been declared as "NO GO" areas. The silver lining is that PMO itself is not at ease with this rather strong position of the Environment Ministry and we should think that ultimately the Ministry may have to dilute its stand substantially.
(iv) As a conscious strategy it was decided by the Energy Coordination Committee, chaired by the Prime Minister, in 2005 that public and private sector companies should acquire coal mines abroad. Though delayed, this has started happening. This initiative will add to the energy security and provide good support to various industries, mainly power sector.
Therefore, import of coal has to be seen keeping all these in view.
(j)

Liberalisation of Captive Coal Mine Policy and streamlining of the procedure was the second best option in so far as opening up of the coal sector is concerned, the first best obviously could have been a Coal Act similar to Electricity Act, providing much stronger and enabling environment and regulatory regime to create competition in the coal market. But, making Captive Coal Block Policy really work and deliver, requires a lot of facilitative and supportive measures both from the Ministry of Coal and State Governments. Delayed response on this front has been the main reason for long gestation in delivery of production of coal through this route. Gratifyingly things have started happening. A good development is that some of the large private players have entered this field in a significant way. We should expect much better and larger output from the captive coal block categories in next few years.

(k) Whether it is the expansion of domestic coal production or substantial import of coal, transportation would be a challenge. Augmentation of railway infrastructure, road connectivity and major expansions of port capacities would be essential to meet the projected growth of the power sector. Obviously, these infrastructural facilities will need to be expanded for other needs of the economy as well in addition to the requirements of the power sector.
(l) Coal India Ltd. alongwith its subsidiaries has done a great service to the power sector, notwithstanding a number of weaknesses and deficiencies which have been pointed out at various stages. Once this large organization comes to the equity capital market through its IPO in next few months, it can be expected that there would be even more pressure on this organization to gear up for better performance and improved governance. Coupled with this would also be the benchmarks of performance that would get evolved when a number of large captive coal mine developments happen. In coming years, therefore, we could expect more accelerated growth and better performance from the Coal India Group.

In conclusion, the growths of Indian power sector and domestic coal industry are interwined. Stagnations in Policy, organizational framework and indifference to reform have indeed created a disconnect between movements in the power sector and near status quo in the coal sector. We have now reasons to believe that coming years would see this sector catching up with movements in the power sector. Import of coal will be an inevitable requirement. Extent will depend on variety of factors, but large quantities may not be imported if coal markets do not provide a reasonable and responsible price behaviour. Accompanying infrastructure of railways, roads and ports will need substantial augmentation to cope with expansion of power and coal sectors.