Request you to kindly drop in all your mails/queries to support@infraline.com or call us at
+91-120-6799125 (D); +91-120-6799100 (B)

A few urgent issues relating to Coal, Gas and Atomic Power, Shri R V Shahi, Former Secretary, Ministry of Power

Last week, three important news items, which have significant bearing on generation of electricity and on development and growth of Indian power sector, appeared in different Business Dailies. These relate to (a) Declining trend in the growth of power generation, particularly quite sharp during the current financial year, (b) The thinking of the Government about the Policy of coal block allotment, and (c) Role of other agencies, in addition to Nuclear Power Corporation, in future growth of nuclear power capacity.

As we are aware, in last several decades, it is the poor growth rate of electricity generation that became the most important factor in not enabling Indian economy to grow at the rate of 8 to 10%, which China could do, again primarily on account of a very supporting electricity infrastructure and satisfying electricity generation growth. Even during the IXth Five Year Plan, electricity generation towards the end of the Plan varied between 3.1 to 3.2%. Several steps were taken during the Xth Five Year Plan to see that in the short and medium terms the existing capacities could be performed in a manner so as to maximise electricity production. These measures included : (a) regular monitoring of power plant performance, (b) timely actions on removing the loose ends in maintenance, (c) effective steps on bridging the gaps in fuel supplies including coal imports when domestic production did not prove to be adequate, (d) renovation and modernisation of old and poorly performing power plants, (e) supporting non performing power stations through deputation of outside experts from better run power plants etc. As a result of all these, generation of power picked up. The growth rate increased from 3.1% in the year 2001-02 (the final year of the IXth Plan) to 5.2% in the year 2004-05 (the middle of the Xth Plan) and further to 7.2% in the last year of the Plan i.e. 2006-07. India could achieve a record GDP growth of 9.5% in 2006-07 because electricity growth during the year fully supported this level of economic activities covering agricultural sector, manufacturing sector and service sector. In 2007-08 the generation growth reduced to 6.3% as compared to 7.2% in the previous year. This year (2008-09), in the first six months (April - September), the electricity generation growth is reported to have gone down to an all time low figure of 2.5%. Seeing this trend, even though generation normally increases during the remaining six months of the year, it is unlikely that the growth for the whole year would be more than 4% or so. This is because during the period of April - September in 2007-08, the growth was 7.6% but the annual growth for the whole year was only 6.3%, as compared to 7.2% in the year 2006-07.

Several reasons are being brought out for such a drastic decline in electricity generation during the current year. Two factors which are at the top include inadequate supply of coal and shortage of gas. We need to analyse the whole issue in the following manner:

  1. How much of loss in generation has been on account of coal shortage and how much on account of short supply of gas need to be clearly ascertained. Both these factors have been experienced in all the years even during the better period of Xth Plan when we could achieve the generation growth of 7.2%. The hypothesis given by coal and gas sectors indicate that though there could be shortages here and there, entire decline in electricity generation cannot be totally attributed to inadequacies in supply of fuels.

  2. I recall, in the year 2004-05 we experienced substantial gaps in coal supply, so much so that the 2,000 MW (expansion stage) of Talcher Super Thermal Power Project of NTPC was commissioned but the linked coal mines of the Mahanadi Coal Field had not even been opened up let alone smooth supply from these mines. A large number of power plants were in critical and supercritical lists of coal stocks. After making a little bit of noise, which normally happens in such situations when different players start indulging in blame games, we generated a consensus, on an action plan, among the power generating utilities, both among the Central sector as well as the State sector, including, in fact even a few of private sector power plants. It was recognised that with all the difficulties and failings of the coal sector, we must accept that they had been able to meet the requirement of the power sector to the extent of 90 to 95%. It was agreed that if power sector needed to supplement the domestic efforts to the extent of 5 to 7% of demand being met through import of coal, it was worth doing and, therefore, must be done. We mounted massive efforts and mobilised all possible resources, including augmentation of Port capabilities, co-ordinated Railways and Road movements etc. to see how best maximum amount of gaps are bridged through import of coal. We did have initial hick-ups, reservations on the part of certain power generating companies. Yet, we greatly succeeded in maximising generation at the existing power plants. Therefore, while the grievance of the power sector about the inadequacy of coal may be genuine, it cannot be allowed to be stretched beyond a point. They need to tighten their belts, be a little more serious than they have been about taking effective steps to import coal.

Similarly, on the gas supply, while power sector can keep hammering the point, which we have been doing, about inadequate production of gas, this would be in order only up to a point. If we have to utilise the already built up power plant capacities, we need to supplement gas supplies through imported LNG. In both the cases, it has been established, beyond doubt, that cost of fuel (coal or gas) if imported can be significantly higher, yet, not producing power will be costlier because the fixed cost is a sunk cost and additional generation becomes available only on variable cost. I can say, without hesitation, that while the criticism and complaint by the power sector has validity up to a point, their less than serious approach to solve the shortage problem by suitably supplementing the fuel supplies, both in respect of coal and gas, cannot be considered justified. Impressing upon them about the need and rationale of importing coal and LNG, I recall, was a tough task even during 2005-06. But, the fuel and power equation was and continues to be simple. For an existing power plant, where the capital cost is already invested, additional generation, beyond the level which can be achieved through domestic fuel, becomes available only with fuel cost. A simple sensitivity analysis would establish the limiting levels of the cost of imported coal and gas which can be sustainable.

The problem was not only limited to the mindset of electricity generators, in fact, even the buyers of power viz. the Electricity Boards and Distribution Companies, in many cases, were reluctant on accepting power with higher cost of fuel, though some of them were keen. The same Boards/Distribution Companies would be faced with a situation of getting electricity at the Unscheduled Interchange (U.I.) rates, which were three to four times higher than the normal rates and yet would refuse to be convinced about somewhat higher price of power generated using the imported fuel. It has taken time to convince them but the conclusion has now been appropriately understood. Both generators and buyers of power need to continually evaluate, in a dynamic fashion, the equation of additional power generated through imported fuels and see to it that the existing power generating sets are used in an optimal manner. Many of the State Electricity Regulators also need to be persuaded to think on these lines. The sector needs to learn to live with a situation in which total dependence on domestic fuel can, no doubt, be expected, and should continue to be desired, but alternate strategies should always be there so that any disruption and consequent disappointment caused by local shortages is minimised.

The second news of the last week is about the Government Policy on allotment of coal blocks, for which it has been reported that there will be a procedure for Bidding for allotment of blocks. Though it is not clear as to what would be the criteria for Bidding, but it is being generally perceived that the Government will expect a premium, and it is the amount of premium that would be the basis for evaluation. If it is true, there is a total disconnect between the approach that the Government is following for allotment of power projects on the basis of competitive bidding and the premium based criterion, as mentioned above, for coal block allotment. In the case of power projects, in the Ultra Mega Power Project Policy for large projects, as also for similar projects of lower capacities to be tendered by State Governments, the only basis for evaluation and allotment is the price of power. The underlying principle is that the process should lead to competitive price discovery of electricity and the philosophy is that such a competition should lead to best possible price for consumers. This Scheme has amply demonstrated, in terms of its outcome, that the philosophy and the objective behind this approach has been fully met. A price level of Rs. 1.20 per Kwhr for pit head power station and of Rs. 2.20 per Kwhr for imported coal based power plant have not been only very attractive but in fact highly aggressive. These indeed would serve the larger interest of consumers. The process, therefore, has led to best possible price. The approach for Bidding for coal blocks, if it is around getting maximum revenue for the Government, and for that if the main basis for evaluation is the amount of premium, would be totally contrary to the objectives of the Government to deliver the best possible price of power for consumers - industry, service sector, domestic and agriculture.

It is quite possible, and also it is desirable, that the Coal Ministry formulates a Scheme similar to Ultra Mega Power Project and the coal blocks are allotted to developers on the basis of lowest price of coal that they offer to provide to consumers. In the energy sector, the consideration of the Government should be to balance the interests of investors and consumers. This itself, will serve the larger need of the society. Any interjection and expectation to get revenue or premium for the Government, at the stage of allotment of a project, will be counter productive and will totally defeat the main objective of catalysing and accelerating the economic development process. Revenue for the Government would flow from royalty and from various types of taxes and duties which will increase if we facilitate speedy growth. As it is, Indian manufacturing sector, as we all know, has been severely constrained on account of higher cost of energy including power. If Indian manufacturing has to be globally competitive, it is essential that they get electricity at competitive rates. Only Ultra Mega Power Projects cannot deliver this. Two streams of Government should not be talking in two different tones on the same subject. For the price of power to be competitive, Government promotes a Scheme to allot power projects along with coal blocks and the criterion for winning the Bid is the lowest price of power. For coal blocks also the criterion has to be identical for the same reason. In case of coal blocks, where the developers have to supply coal to different power projects and other plants, transfer price of coal should become the basis.

For such an approach to be translated into action, it may be necessary to set up Shell Companies which should undertake the initial activities of coal mine development viz. Geological Studies, Detailed Geological Reports, Land Acquisition and Environmental Clearance etc., just as it is being done in cases of Ultra Mega Projects. Once these essential inputs have been put in place, the blocks could be offered for competitive Bidding by agencies which meet the pre-specified qualifying requirements. The basis for evaluation of Bids should be the price of coal which they propose to offer.

The third news, that was reported last week, relates to strategy for developing nuclear power plants. As reported (one is not sure whether it is true), it appears that it is only the Nuclear Power Corporation which would be primarily responsible for developing new nuclear power capacities. The second strategy is that the NPC may form joint venture with public sector or private sector, but shall have majority stake of 51% or more. We need to evaluate this approach and following comments may be relevant for such an evolution:

  1. In the last about fifty years of our nuclear power programmes, all that we have been able to achieve is 4,100 MW, less than 3% of total installed capacity of power. If we also include captive power capacity, the nuclear capacity would be hardly 2% of the total.

  2. Looking at this performance, we may feel happy that atleast we have over 4,000 MW based on nuclear fuel. But, a critical appraisal would lead everyone to also conclude that fifty years is a long period and we could have done better.

  3. One issue that always comes up, and rightly so, in such an evaluation, is in relation to our institutional framework for developing any sector. After all in 1975 we revisited our Electricity Supply Act, questioned the wisdom of entrusting the entire development programmes only to Electricity Boards and came out with alternate strategies. We created a few Central Government organisations to also take care of developing power generation capacities. The results have been rewarding.

  4. Atomic Energy Act 1962 has remained without any such review for forty five years. There may be valid reasons for such a static approach and it may be for strategic purposes. But, now in the changed scenario, when we are trying to substantially augment our power generation capacity in the country, we need to have an uneasy look and a fresh approach on our old thinking. Department of Atomic Energy is not same as Nuclear Power Corporation. No Ministry/Department should think that a few outfits that have been created to function under their control can be expected to provide total solutions to the tasks entrusted to the Ministry. We need to think beyond these organisations.

  5. Energy needs of the country are so enormous that it would be wise and desirable that all the alternative strategies are mobilised towards the objective and goal. Necessary regulatory safeguards will have to be put in place, so that any specified objective or even controls (in case of nuclear power facilities) are properly taken care of. Our skill will lie in conceptualising the structure, the jurisdiction and the empowerment of such a regulatory instrument rather than in throttling the process by attempting to confine the jurisdiction of nuclear power development programmes to a few organisations.

  6. Even during the transition period of a few years (may be five years or so) if the thinking is not to let it go under the management control of private sector and keep it within the control of Government, there seems to be no justification that Nuclear Power Corporation has to have 51% or more even if it forms joint venture with the public sector companies. This is not even the requirement of Atomic Energy Act. One of the justifications which have been provided for such an approach is that only Nuclear Power Corporation has the required experience and background. This argument is not only illogical but also its rationale is not supported by our own experience. If such an approach had been allowed, today we would not have had organisations like NTPC, NHPC and many others in many sectors which started afresh, assembled teams of experts and professionals, developed systems and procedures, created a learning culture and started performing not only at par with but much superior to organisations which had decades of experience. It requires a fresh look, a team building approach and definitely it does not require necessarily a background of the past. It would be desirable for the Department of Atomic Energy to look beyond Nuclear Power Corporation if it has to deliver what it wishes to deliver.

  7. A target of 60,000 MW by 2032 is not an easy task. It requires integration of a number of strategies. We need to revisit our legislative provisions. In 2004-05 some work had been done to amend the Atomic Energy Act. If it requires further fine tuning, the same should be done so that the required amendments are in place to facilitate fast and massive expansion of nuclear capacity. We need to enhance our manufacturing capability over a medium to long term time frame because initially we may have to depend on import of plant and machinery. Our preparations for construction of large number of projects with required skill and quality needs to be enhanced. Even for the power generation programmes, other than nuclear, these issues are being faced in a significant way adversely affecting the smooth progress of capacity addition programmes.

These three news items of the last week have substantial potential to either positively impact our power generation programmes or adversely affect it, depending on what approaches we adopt and follow. Successes and failures of the past have provided us a lot of learnings. We can ill afford to remain stagnant in our thinking with rigid mindset. Challenges are evolving and dynamic and, therefore, we need to formulate our strategy to effectively predict what is to happen and we should be prepared to innovatively handle and meet these challenges. Declining power generation during the current year is a serious cause of concern. In the next six months there could be possibilities to partially make up. We have not been able to have a comprehensive Coal Act, but if we falter even on our coal block allotment policy it could create such a disconnect in our overall energy strategy that later on it may be difficult to remedy the situation. On the nuclear programmes, we have to very carefully work out our long term policy and come out with innovative approaches. The issue of immediate concern is obviously how to plug the loose ends and maximise power generation. Next six months of the financial year provides biggest challenge. Coal, gas and power groups in the Government, with required supports from Railways and Port authorities, may need to work in tandem to reverse the decline in growth of electricity generation.