Coal: The Black Diamond

“Coal is king and paramount Lord of industry is an old saying in the industrial world.” Industrial greatness has been built on coal by many countries. In India, coal is the most important indigenous energy resource and has industrial applications in industries such as power, iron and steel, aluminium, and cement. Coal is extremely important for industrial progress of developing India and is regarded by many as the black diamond. These were the sentiments expressed by the Chief Justice of India, R.M. Lodha, in 2014 in a judgment of the Supreme Court of India on allocation of coal blocks in the country between 1993 and 2010. It underlines the importance of coal in fuelling the engines of growth of the economy in the country.

Coal is the most abundantly available fossil fuel resource in India. It plays a significant role in meeting India’s energy needs. Its uses include power generation for meeting the energy needs of the industries as well as the households. In India, coal reserves are found mainly in the states of Jharkhand, Odisha, Chhattisgarh, and Madhya Pradesh.

Coal in India’s Current Energy Mix

Most of the coal produced worldwide is used directly or indirectly in the generation of electricity. India is the second largest producer and consumer of coal. India is currently producing 729 million tonnes (MT) of coal, as per data from the Ministry of Coal, in 2019–20. More than 80 per cent of domestic coal supply is produced by the state-run Coal India Limited (CIL). However, domestic production of coal is not sufficient to meet the total demand of the mineral in the country despite India being the fifth largest country in terms of coal deposits. As a result, India imported coal to the tune of 248.53 million tonnes in 2019–20, making India the second largest importer of coal after China. India’s overall coal requirement is expected to grow further. India’s power sector is the largest consumer of coal in the country.  

Of India’s total installed power generation capacity of 388 GW (September 2021), coal-fired thermal power plants accounted for about 52 per cent (202 GW), as per data from the power ministry. However, coal-based thermal power plants produce 70 per cent of India’s electricity. Gas-based thermal power plants, hydroelectricity, renewable sources of energy (solar, wind), and nuclear energy make up for the rest. Generation of power using coal makes good commercial sense. The operational scale of coal-based thermal power plants makes the cost of building the plant economically viable. In essence, coal-fuelled power generation remains the mainstay of India’s energy mix.

Why a Shortage of Coal?

Not a Real Shortage. As per the Energy Statistics India, 2021 report, published by the Government of India’s Ministry of Statistics and Programme Implementation, India’s total estimated reserves of coal was 344.02 billion tonnes in 2020. Of the total coal reserves in the country, some 47 per cent may be called proven or proved reserves, i.e., reserves that can be extracted in an economically viable and feasible manner with existent equipment at present geological exploration level. That translates to approximately 161 billion tonnes of proven reserves available for extraction. Overall, coal production in India stood at 716 million tonnes in 2020–21, down from 728.71 million tonnes in 2018–19. This amounts to roughly 0.45 per cent of coal reserves extracted annually. Clearly, it is not dearth of coal reserves in the country that lies behind the lower supply of coal to power plants. The reasons for the shortage are both operational and structural.

Problems on the Operational Front On the operational side, power plants are required to maintain a minimum coal stock of 15 to 30 days of normative coal consumption as required by Central Electricity Authority (CEA). However, power plants often fail to comply with this directive due to two main reasons: (i) the financial cost of maintaining such an inventory; and (ii) the bleeding finances of the power generation and power distribution companies in the absence of rational power pricing from the end consumers. As a result of the pricing policy, the power plants persistently fail to pay their dues on the coal they buy. This has created problems for coal producers in the country.

Problems on the Structural Front On the structural front, too, the most prominent problem has been due to irrational pricing of power in the country: the price that the end consumers pay is not commensurate with the production costs. With an amendment in the Coal Mines Nationalisation Act in 1993, the government permitted captive mining of coal to end users (industries). However, these captive mines (that produces coal or minerals solely for the company that owns them and under normal conditions are not allowed to sell what they produce to other businesses) failed to produce any significant quantity of coal to meet the rapidly rising power capacity in the country. In 2014, the cancellation of 214 coal blocks by the Supreme Court (which were allocated to private sector by the government between 1993 and 2014) further added to the problem of undersupply of coal domestically. As mining of coal is almost monopolised by CIL, commercial mining of coal, which could have brought more coal into the market to bridge the demand-supply gap, was prevented. 

Demand-Supply Mismatch With persistent shortage of coal produced domestically, the gap between demand and domestic supply of coal has been increasing year-on-year. This has forced the country to import coal to meet the domestic demand.

The current coal crisis is purely a case of demand-supply mismatch. On the demand side, with the economy recovering from the pandemic, there has been a surge in demand for power for economic and industrial activities. On the supply side, an extended monsoon disrupted open-cast mining due to flooding of mines. This disrupted supply of coal domestically. The domestic supply disruptions have come amid a broader energy crisis globally with the prices of coal, natural gas, and crude oil rising sharply in the international market. This has made coal imports costlier as imported coal prices rose to $ 240 a tonne in October 2021 against $ 75 a tonne in October 2020, which led to a substantial reduction in power generation from imported coal-based power plants. This, in turn, led to more dependence on domestic coal: power plants that usually relied on imports were now heavily dependent on Indian coal, adding further pressure to the already stretched domestic supplies.

Moreover, power producers failed to build adequate stocks of coal before the onset of monsoon (April–June period). They were working under the belief that demand for power would be suppressed in the wake of another COVID-19 wave. As one industrial analyst has pointed out, though the CIL had enough stocks of coal, it is difficult for it to move it in the monsoon due to technical problems. The power plants should have stocked themselves in preparation for the monsoon, but they did not do so due to low finances and because they miscalculated the demand level during the monsoon months.

Impact of the Shortage

The country could be on the verge of a power crisis since coal-fired power plants supply more than 70 per cent of India’s electricity needs, thus taking it to the brink of joining a growing global energy crisis situation. The situation of a possible blackout threatened to halt the nascent revival of the economy from the stagnation in economic activities due to the pandemic. As supply of coal to power generation plants are prioritised, the shortage of fuel is looming on non-power sectors, including the steel, aluminium, and cement industries. The situation is especially dire for the aluminium industry where fuel accounts for 40 per cent of their production costs. Metal industries which have been projecting huge growth due to rising demand, risk losing the momentum. On account of demand-supply mismatch, metal prices, especially of aluminium and copper, are skyrocketing.

Government Response

With the simmering crisis and the eventuality of a blackout, the government has sprung into action with the following steps:

  • With monsoon receding, the government has been pushing CIL to ramp up production of domestic coal and increase coal offtake.
  • The power ministry directed thermal power plants to import coal for at least 10 per cent blending (blending of imported coal with indigenous coal results in change in the aggregate quality of coal to be fired), citing fast-depleting coal inventories at power stations. This was directed towards softening high import prices. The move is a reversal of its earlier directive to power plants to use domestic coal.
  • Captive mines have been allowed to sell 50 per cent of their annual output in the open market.
  • Power plants with imported coal power purchase agreements have been asked to redirect coal to power generators with low coal stocks.
  • To avoid such a situation from emerging in the future, the Ministry of Power has proposed to tweak the coal stocking norms for power plants. There will a penal provision for power plants failing to follow the norms.
  • The target to produce more power from renewable energy is coupled with the challenge of storing the energy produced from these resources. Accordingly, the government is working on a provision for creating more storage facilities in the grid for power generating from renewable energy in future.

Alternatives to Coal

In the last few years, India’s coal production has lagged as the country tried to reduce its dependence on coal to meet its obligations under the Paris Climate Agreement (2015) in the form of Nationally Determined Contributions (NDCs). Any step in this direction has to consider achieving a balance between meeting demands for electricity by households and industries, on the one hand, and the goal to reduce reliance on heavily polluting coal-based power plants, on the other.

The country is yet to reach that stage of development in which fossil fuel-based power can be effectively substituted by less polluting means. In the wake of climate change due to global warming caused by the emission of greenhouse gases, there is, no doubt, a compelling need to look for alternatives so that we can reduce our dependence on coal to meet our energy needs. However, reducing the consumption of coal for meeting our energy needs is a long-drawn process and cannot be achieved in a short span of time. The process has to be gradual. The alternatives to coal are gas, solar power, wind power, hydroelectricity, and nuclear power. India has taken a lead in harnessing solar energy by forming the International Solar Alliance (ISA) at the 21st session of United Nations Climate Change Conference of the Parties (COP-21) in Paris, France. World over, countries are shifting to cleaner fuels to reduce the risks of climate change. A mix of coal and clean sources of energy can be a solution to the growing energy demand in the country. 

Way Forward

The coal shortage emerged when the economy was just beginning to pick up momentum with a step-up in economic activities. With the monsoon receding, the availability of coal with the power plants was expected to improve gradually with coal production and dispatch being ramped up.

Coal is here to stay, given our development imperatives. Accordingly, the Ministry of Coal must take effective measures to increase domestic production of coal through allocating more coal blocks, coordinating with the states for assistance in land acquisition, and coordinating with the railways for speedier movement of coal to ensure timely supply to power plants. Also necessary is an appropriate policy response to speed up commercial mining of coal to bring more coal into the market.

A long pending and important issue is that of market-determined pricing of power in the country. In fact, some analysts of the recent crisis have averred that the problem was due not so much to demand-supply gap as to the lack of a suitable pricing policy for power. Successive governments have been hesitant about undertaking fundamental pricing reforms in the power sector owing to political calculations. Allowing market forces to determine the price to be paid by the end consumers is the only solution to salvage the debt-ridden power sector in the country. Recently, China announced a major policy shift by allowing its coal-fired power plants to charge their industrial and commercial customers market-driven prices. India too needs to allow similar flexibility in selling and purchasing power. It has already adopted market-driven pricing of petrol and diesel, moving away from the administered price mechanism. 

The present situation calls for the government to consider the impending power sector reforms in the country as well as ponder over a suitable energy policy in the country.

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