The Union power minister recently announced that India will completely stop, in the next two-three years, coal imports for coal-fired power plants in the country. Another news story said that state-owned Coal India Ltd (CIL) is looking to cut prices for certain grades of coal to stave off competition from imports. For the Indian power sector, beleaguered by huge coal shortages and monopolistic pricing by CIL since long, this is heart-warming.

To understand the importance of coal for Indian power generation, here are some facts: 70% of India’s electric generation is from coal-fired plants; 60% of installed capacity is coal-fired; 75% of the incremental capacity added is coal-based.

The power sector for its coal needs depends heavily on CIL and its subsidiaries. Given the demand-supply gap, the government of India tried to create, unsuccessfully unfortunately, a non-CIL route for increasing domestic coal production by allotting coal mines to power generators. Of the 86 coal mines allotted to power producers, only 15 or so started production and contribute just a fraction to the supply. And CIL production also not keeping pace with increased pace of growth in coal-based generation, the Indian power sector has had to import increasing quantities of coal. The government used to set annual coal import targets for generating companies and monitor it regularly and vigorously. While it was difficult to set high targets for CIL for supply to power sector (CIL would simply not accept them and still get away with it), generating companies were pursued to achieve imports as per targets in order that domestic power production did not suffer.

Over the last decade, mismatch between coal demand and domestic coal supply, principally from CIL, has been increasing. During the 11th Plan (FY08 to FY12), coal-based generation increased at a compounded annual growth rate (CAGR) of 9%, while domestic coal supply to power grew 5% CAGR. In the last two years of the 11th Plan, growth in domestic production was pathetic. In 2010-11, it was a mere 4 million tonnes (MT), growing at less than 1% and in 2011-12 it was 13 MT registering about 2% growth. Consequently, coal import had been increasing exponentially—doubling every two years since 2007-08 and rising in FY13 to 6.5 times the import in FY07. In the 12th Plan (FY13 to FY17), the CAGR for coal-based generation and coal production were expected to be 9% and 6%, respectively. The estimates for imports were ever increasing—200 MT by FY17 and 280 MT by FY22. It was unthinkable that coal imports will begin to come down, leave alone stop, in the foreseeable future. It is in this scenario that the power minister’s announcement that coal imports will cease in the next two-three years assumes great significance.

How has this dramatic change come about? Surely, coal made available by CIL to the power sector has increased. As per the coal ministry, supply to power sector from CIL grew 6.4% for FY16 (up to February) and 8.6% in FY15 year-on-year, compared with 1-2% five years earlier. Another reason is muted demand for coal arising from waning demand for power from distribution companies (discoms).  

Stocks are now reported to be plentiful both at pitheads (57 MT) and with power generators (35 MT). CIL may have to set about clearing this mammoth stock, else production will have to be curtailed. A low-hanging fruit is removal of some restrictions placed earlier by the government of India on coal supply. One such is that even if a power generator has a fuel supply agreement with CIL, coal will be supplied only against a long-term power purchase agreement (PPA) with a discom. This restriction was placed at a time when coal availability was short and “undue” profit by power generators on sale of power against short-term PPAs was a concern. Both conditions are no longer present: coal is plentiful and power rates have come down, particularly short-term rates by and large are lower than long-term rates and discoms have floated few tender enquiries for long-term PPAs. Such a step will contribute to better utilisation of generating assets and more competition in the power market.

The other news that CIL is finally moved by competition to cut prices would have been unthinkable a few years ago. They were charging extra premium (called performance incentive, if you please) from buyers for lifting more than the annual contracted quantity (ACQ)! They are reportedly proposing to give this up. Good start. They have to think of giving up other premia, such as on tapering linkage. They have to pay attention to consumers’ complaints on quality of coal, too. All in all, CIL will have to give up their take-it-or-leave-it attitude toward consumers. The day isn’t far when consumers will demand and probably get discounts for taking more than the ACQ and making timely payments.

P. Uma Shankar is India’s former power secretary, and former chairman and managing director of state-owned Rural Electrification Corp. Ltd.

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