Crisis in coal could drag growth to pits

Written by Noor Mohammad | New Delhi | Updated: May 23 2013, 07:33am hrs
Indias energy sector is at a crossroads. While there is a growing realisation that prices of output like electricity need to be rationalised, the spike in prices of coal and gas is threatening an emerging regime where fuel costs would be a pass-through item. In a series starting today, FE dwells on this issue and attempts to define the future fuel mix for the economy.

With coal demand rising by over 10% annually and domestic supplies rising just 3-4%, Indias coal imports have grown at a compounded annual growth rate of 23% over the past five years. In terms of rupees, the increase in coal imports has been about 15% (CAGR) during these years.

The coal import bill soared a whopping 75% between 2008-09 and 2012-13. In April-December last year, the period up to which data are available, India imported coal worth R64,852 crore ($11.9 billion), up 72% over the same period five years ago. As a share of the current account deficit, however, coal imports have fallen from 23% in 2008-09 to 16.5% in April-December 2012-13, as the CAD back then was much lower (CAD for April-December 2012 was estimated at $ 71.7 billion, up from $36.5 billion for the same period of 2008). Still, rising coal imports could potentially have a more pronounced impact on the CAD in the short to medium term.

India has been pummelled by the steep rise in coal imports in the last couple of years. With domestic coal production stagnant, power companies are increasingly depending on imported coal. They are seeking regulatory nod to hike tariffs despite binding commitments on lower prices under power purchase agreements (witness the tariff hike demand from Adani Power and Tata Power for their Mundra plants). Power plants based on imported coal either fully or partially are hit badly by the rising cost of the fuel and in many cases, project implementation has faced undue delays and uncertainties on this account.

On average, imported fuel costs 40% more than domestic variants on gross calorific value basis.

Of the countrys total installed electricity generation capacity of 223 gigawatts (GW), two-thirds belong to the thermal sector and within this, 55% are coal-fired, while gas accounts for below 10%. This mix is not going to change drastically in the medium term at least. By the end of the 12th Plan period (March 2017), about 78,500 MW of new thermal capacity is projected to be added and of this, 71,000 MW would be coal-based and just 7,500 MW would rely on gas.

For sure, coal imports, which have already become a burden on the countrys current account, are only going to accelerate (the current account deficit widened to a record 6.7% of the gross domestic product in the December quarter).

Driven by capacity addition in the power sector, the countrys coal imports (thermal and coking coal) could see a 23% growth in the current fiscal 2013-14, as per an estimate, after increasing by nearly a third in the previous year. India imported 135 million tonnes of coal in 2012-13 valued at $15.5 billion. Imports of thermal coal, which is mainly used for power generation, increased 75% to 97.23 million tonnes.

Rising coal import is not good news for state electricity boards (SEBs) either, the majority of which are in financial mess and resorting to load shedding rather than buy costly electricity. States like Gujarat, Rajasthan and Haryana have shown their reluctance to pay up additional fuel costs for electricity supply from plants run by private players Adani Power and Tata Power after the recent increase in the Indonesian coal price.

Tata Powers Mundra ultra mega power project is currently supplying electricity to these states at Rs 2.35 a unit. Buyers may have to pay Rs 0.60-o.85 a unit more if they agree to compensate the generator for additional fuel costs in line with the order issued by the central electricity regulatory commission (CERC) last month.

Similarly, Adani Power has claimed compensatory tariff of nearly Re 1 a unit for power supply to Gujarat and Haryana from its plant located at Mundra. Its plea has been upheld by the CERC.

India has envisaged adding 88,000 MW generation capacity during the current 12th Plan (April 2012- March 2017), the bulk of which is to be fired with coal. Industry experts too reckon that coal imports will increase in the years ahead. The gap between domestic demand and supply of coal is likely to increase further given that production is growing by 5-6% only while demand by more than 10%, said Partha S Bhattacharya, former chairman, Coal India (CIL).

Former Union power secretary RV Shahi agreed with Bhattacharyas assessment. Coal import will rise because of two years stagnation in CIL production, Shahi said. Between 2009-10 and 2011-12, CILs production has remained almost flat.

Indonesia switched to international index-based coal pricing in September 2010, which led to a sharp hike in its coal price. As a result, fuel cost calculations of developers like Adani Power and Tata Power, who had committed to supply electricity at a fixed fuel cost, went awry. Diesel consumption in power generation is increasing, with SEBs not buying power from imported coal based plants and resorting to load-shedding. This too has implications for the CAD, Shahi said.

Against the demand of 769 million tonnes of coal in 2013-14, domestic availability of the fuel from all sources is estimated at 604 million tonnes, leaving a gap of 165 million tonnes which must be bridged by imports. But the actual demand for imported coal could exceed the projection if CIL, which supplies about 80% of domestic coal, fails to meet its production target.

CIL is required to produce 7% more coal this year. However, this may not be easy for the public sector coal producer given that it could achieve just 3.8% growth in its output in 2012-13.

Coal prices in the international market have slightly softened in recent weeks. But this trend could reverse soon given that the volume of coal available in the market is limited while demand remains strong. Global coal demand has already outrun supply, said Dilip Kumar Jena, manager (mining), PWC.