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Indian Power Sector on Move, Coal Crisis Holds It, Shri R V Shahi, Former Secretary, Ministry of Power

Indian economy is mainly dependent upon domestic coal as the source of energy.  Coal constitutes more than 50% of commercial energy.  Indian power sector is dependent on coal based generation to the extent of almost 75%, even though, in terms of installed capacity, coal based power plants constitute 55% of the total capacity.  Power sector and coal sector are so much mutually interdependent that while 75% of power generation is coal based, more than 85% of domestic coal production is consumed by the power industry.  It is precisely for this reason that the adverse performance of coal industry, in last three years, with virtually no growth in production, has so severely impacted the power sector, so much so that, as at present, more than one third of 95 power plants across the country are faced with critical and supercritical stock position.   During the three year period 2009-10 to 2011-12, almost 40,000 MW of Thermal Power capacity has been added.  Unfortunately, during the same period, production in Coal India has stagnated at around 430 million tonnes.  Obviously, the crisis created is unprecedented.  The problem has got compounded because of the disproportionate amount of coal that needs to be imported to see that power plants do not close down.

Fuel mismatches have not only severely affected the smooth operations of the power plants, but also the investment sentiments.  In view of the similar performance in the gas sector, in the past, gas based power plants always had the problem of shortage, resulting in reduced capacity utilization, as low as 50 to 60%.  This did affect their financial performance.  But, since the total capacity of the gas based power plants is only around 10% of the total installed power generation capacity, it did not affect so significantly the overall power supply.  But, if a similar phenomenon is faced by the coal based power plants, which seems to be an emerging scenario, the adverse impact would be huge, affecting all sectors of the economy. 

Power sector reform initiatives, led by Electricity Act 2003, were indeed responded overwhelmingly by private sector, resulting in massive capacity additions completed or underway.  Based on the understanding given by the Indian Coal Companies, large number of power plants have been established and are being established.  However, Coal India has been reluctant to sign Fuel Supply Agreements which would commit them to supply only 80% of the requirement, fearing that they may not be able to ramp up coal production to meet these obligations.  In spite of rising import of coal, whose price is becoming excessively high, thus making power cost unaffordable, uncertainties about adequacies of fuel supplies for the power plants have led to serious concerns among Developers and Lenders.  Financial closures of new power projects are faced with serious question marks.  Even disbursements in cases of those power projects, already financially closed, are also becoming uncertain.  Large capacity additions in the last few years are the outcomes of power projects started in Tenth and early years of Eleventh Plans.  Fuel mismatch uncertainties, leading to issues of financial closures, are going to severely impact interests of developers, and hence capacity addition programmes in the future. 

This situation has obviously been caused primarily on account of virtually no reform initiatives in the coal sector.  Indian power and coal industries are like two wheels of a cart - one has moved forward, another has remained stagnant.  Coal Mines (Nationalisation) Amendment Bill 2000 was introduced in the Parliament earlier than the Electricity Bill.  Electricity Act became a reality in June 2003, Coal Bill is still pending in Parliament.  Several recommendations made in the Integrated Energy Policy (2006) have remained unattended.  It was decided almost six years back that Coal Regulator will be put in place at the earliest.   This is still to happen.  On the top of it, a lot of uncertainties have been created by the new MMDR Bill, which seeks to allow 26% of profit to be shared to the locals at District levels.  This provision has created a large number of questions than answering the major issues confronting the development and growth of coal sector. If a greater degree of energy security has to be brought about, and power sector facilitated to grow at 9 to 10%, a similar growth in the coal sector is essential. This could be possible only through a radical restructuring of the coal sector, just as was done in the case of power sector.  Coal sector has to be opened up, and the Bill, which has been on the back burner, for over a decade, needs to be enacted.  

The method of allocation of coal blocks has come under debate.  It is needless to emphasise that it does require a transparent process to be followed.  But, any attempt at Bidding/Auction, with the sole objective of generating revenue for the Government, would be counterproductive.  Bidding must aim at reducing the cost of production and, accordingly, price at which coal will be supplied to the power industry.  In India, manufacturing sector needs power at a price which will make them competitive globally just as service sector, agriculture, and other consumers also need power at affordable rates.  This will not be possible, if the Government wishes to, through Bidding, generate huge revenue.

Enhancing Coal Production

Production in Coal India had been witnessing a growth of 5 to 6%, prior to 2010-11. With serious efforts we could expect that the production could pick up to provide 6 to 7% growth.  On account of the backlog created in view of stagnation during last two years, unless domestic coal production grows at around 9 to 10%, the crisis would continue even though the supply is augmented through import. 

In the short term, following two steps could partly mitigate the problem - (a) Emergency Coal Production Plan, and (b) Deployment of Mine Development Operator.

  1. Emergency Coal Production Plan

Each subsidiary of Coal India may formulate Emergency Action Plan to commit a growth of more than 6.5%, which has been the average in the last few years.  During 2005-06 such an action did lead to positive outcome.

  1. Mine Development Operator

Without any need for change in Law or Policy, beyond a projected growth of 6 to 7% assigned to CIL, about 3% additional growth could be earmarked for production through Mine Development Operator(MDO).  The following outline presents a brief about Mine Development Operator.

  • CMPDI/concerned Coal India Subsidiary may identify investigated coal blocks with a potential of five to ten million tonnes of annual production each.  The companies could be NCL, SECL, CCL, and MCL or any other subsidiary in which this could be easily done.

  • As much as possible, pre-construction risks such as Geological Investigations, Land Acquisition, Environment and Forest Clearance could be completed by CMPDI and/or concerned CIL subsidiary.

  • On a global basis Expression of Interest could be invited, as a parallel exercise, to shortlist such potential mine developers as have the capacity to render atleast five million tonnes of annual production and have commensurate financial strength.

  • After pre-qualification, during the commercial Bidding process, the only criterion to evaluate may be the extent of reduction in prices for similar grades of coal, with reference to Coal India prices, that the Bidders could offer (this exercise proved to be very successful in case of DVC selecting the mine development operator in 2004-05).

  • In order that the Bidders make required investments in plant and machinery, the Contract could be for a period of, say 25 years.

In the short term, one of the actions to increase coal production could be to allow additional production, to the extent of 25 to 30%, from the present coal mines for which Ministry of Environment and Forest and other authorized agencies would have given clearances.  There are several instances in which it is feasible to substantially enhance production, but that is not permissible.  In view of the fact that several other mines in the area may not have started production, even though environmentally cleared, such increases in the existing mines may not interfere with the environmental limits that might have been stipulated.  This initiative could lead to increased availability of coal in the shortest possible time.

The announcement by the Ministry of Environment and Forest, couple of years back, putting embargo of "No-Go-Area", which meant almost 50% of coal reserves declared untouchable, has been the single most important factor causing coal crisis in the country.  It is good that this decision has been neutralized in principle.  Its outcome, however, needs to materialize in ground realities, because even now the Forestry Clearance process is unduly long.  A significant dent on the problem would be possible only if Coal India and other Companies are facilitated to secure faster clearances (both environment and forest).  The present uncertainties on Land Acquisition Policies are also impacting the opening up of new mines.  A reasonable formulation in Policy and commensurate cooperation from the State Governments would be essential, if these important projects have to move forward.  The present thinking in the Government to shirk the responsibility of land acquisition and leaving it to the Companies, Private or Public Sector, would only mean hurdles and delays in commencement of projects. 

Captive Coal Block Allotment Policy was streamlined as a part solution to the problem caused by inordinate delays in consideration and passage of the Coal Mine Amendment Bill.  However, the outcome of these allotments has not been as expected.  It would be essential that the mines development under this category is closely monitored.  Those who have valid reasons for delays could be allowed extensions, and in cases of those where delays are attributable to the developers, the allotments should be cancelled.  This would send a strong signal and all others would make serious efforts to develop mines and add to overall coal production in the country.

Dealing with Problems of Imported Coal

We may classify the problems into three categories - (a) Coal companies not being able to supply as per committed linkage, (b) Captive coal blocks not taking off, (c) Imported coal based plants being unable to buy imported coal due to steep rise in prices not adequately covered in Power Purchase Agreements.

  1. Domestic coal supplies by coal companies have suffered because of zero growth in production in last two years. This is partly because of draconian step of "No-Go-Areas" declared by Ministry of Environment and Forest, and partly because of internal inefficiency of coal companies. Slight mismatch in linkage and supply was always there, but what is causing a challenge is that this mismatch is reaching a point of supply not more than 60 to 70 percentage of linkage in some cases 50 percent.  Import of coal has become inevitable.

The only solution is that, if a power plant has to import to substitute the shortfall of supply by coal companies, the additional cost burden may be allowed to be a pass through just as it is being allowed in case of Central and State public sector companies.

  1. Wherever a power plant was given Captive Coal Block, and it has not been possible to start production on account of reasons attributable to Government agencies including Ministry of Environment and Forest, it would necessitate substitution of supply either through tapered linkage, e-auction coal, and/or imported coal. In such cases, a mechanism will need to be worked out in consultation with CERC and Forum of Regulators to allow pass through of additional cost burden.

  2. The most tricky situation is in relation to the power plants which have been developed and are being developed based on imported coal. In view of radical increases in coal prices abroad the economics of power generation do not entirely match with the commitments in the PPA's. The problem is most acute in cases of power plants which have sourced coal from Indonesia because of a major change in Indonesian Law. A highly technical and simplistic view, which buyers of power and also authorities seem to be taking, is that it is the Contract which should be binding. Obviously, Law changes requiring such drastic increases in the prices of Indonesian coal were never anticipated. The 4,000 MW Tata's Ultra Mega Project at Mundra has thrown a real problem which needs to be solved. The plant is ready to operate and deliver power. Obviously, they will not do at a loss. The unprecedented change in Law, even though outside India, needs to be recognised and appropriately dealt with. No doubt, it is a big challenge how to analyse the issue, bring out the actual adverse impact, reconcile with the provisions of the PPA, and yet, see that a viable solution emerges, so that the plant is allowed to operate and the developer gets its return on investment.

The problems relating to the first two categories are such that they require just a decision followed by action. Such pass throughs have been in practice in most cases, and, therefore, it should not be difficult to accept them. The third category of problem would need a deeper analysis, but it should be possible to come out with workable solutions in next two months or so. In absence of clear cut approaches in respect of any of the above three categories of problems, power sector has put itself into the riskiest category of investment. Domestic lenders are all scared and have put on hold many of the financial closures, in many cases put on hold disbursements even when financial closures exist. In the last one year among all sectors, power sector stocks have suffered maximum decline.