Coal: repenting at leisure

Written by Pallavi Ail | Updated: Apr 2 2014, 08:40am hrs
The coal crisis in India could have easily been averted had government and private sector players been prudent. A well-researched report by Prayas Energy Group (PEG), an NGO working to democratise energy governance in India, squarely blames all actors involved in the chain since the coal availability scenario and the inevitability of imports were clear to them.

The unaccountable functioning of the standing linkage committee-long-term (SLC-LT ), leading to abundant allocation of coal linkages for power generation without factoring in other issues such as realistic domestic coal production, allocation and pricing of imported coal and import infrastructure and logistics, is the primary cause behind the coal shortage, Prayas said.

Though it was known well in advance that import of coal would be necessary, the government did not take any policy measure to address the eventuality. Until the coal shortage became critical, the overt signals from all the concerned actors, such as ministry of coal, ministry of power and others, suggested that all the coal linkages would be met through domestic production, though there was sufficient evidence to suggest otherwise, the report said.

Power plant developers and financiers created business plans assuming abundant availability of domestic coalan unrealistic basis. The other stakeholders, particularly power plant developers and financiers, were culpable of not being prudent about the possibility of shortage of domestic coal though there were sufficient pointers towards it.

The Pune-based PEG criticised the solutions proposed by the government and said it does not address any of the fundamental questions and, only try to paper over the cracks.

The report called for SLC (LT)s role in the current shortage to be investigated, and appropriate strictures passed.

The report said it would be patently unfair to load the incremental costs of coal imports on to electricity consumers as currently being considered, since they had no role whatsoever to play in precipitating this crisis and are merely the victims of others ineffectiveness or adventurousness.

The report suggested that the increased costs of power generation due to imported coal should be shared equitably between the various parties responsible for the situationpower producers, their financiers and Coal India Ltdinstead of passing it on to the consumers.

PEG lauded the proposed Coal Regulatory Authority and said this could be a useful vehicle to implement and oversee some of the desired reforms, if it was structured and empowered appropriately.

Genesis of shortage

Coal imports have been rising in the past few years with a surge in demand. This demand surge has been driven by a 71% increase in installed coal-based power capacityfrom 76 Giga watts in March 2008 to about 130 GW in March 2013. But production of steam coal (used by the power sector) went up only by 20% from 423 million tonnes per annum to 508 mtpa. Because of this, coal imports by the sector surged by about 510% between 2007-08 and 2012-13from 10.2 mt to 62.5 mt, according to the PEG report tilted, Largesse that wasnt: The story of coal shortages in India.

As of 30 September, 2013, CILs total coal supply commitment to power utilities was about 426

mtpa, to be met by 2015-16. But the quantity it supplied in 2012-13 was 345 mtpa. CIL has to supply an additional 81 mtpa over the next three years, or an annual increase of about 7%. In contrast, the average annual increase in its supplies over the last three years was 4%. This means CILs supply to power utilities has to increase by about 75% over the next three years. This steep increase is rather unrealistic to expect from only domestic sources.

Companies are not exactly victims of CIL inefficiency

ALL the policies and contractual documents since the introduction of he New Coal Distribution Policy (NCDP, 2007) clearly state that imports can be used to meet the commitments made in the coal linkage, says the PEG report. Therefore, it is not true to say that coal imports were unanticipated and it was expected that all coal would have been supplied from domestic sources.

It should have been evident from the minutes of the SLC (LT) meetings, CILs annual coal production targets and achievements, and CILs red herring prospectus (2010), all of which are publicly available, that domestic coal production would not be able to keep up with the coal demanded through linkages for the power sector.

So, power generators with linkages cannot legally or morally claim to be ignorant of the need for imports to meet their linkage commitments. Despite this, many power producers who participated in competitive tariff-based bidding bid aggressively low tariffs to win bids. Of the eight Case-I domestic coal-based power procurement bids during 2006 to 2010 won by power generators with linkages, only half the winners quoted any escalable fuel charge at all, though the bidding norms allowed quoting for such a component. This despite the fact that between 2000 and 2006, Japanese steam coal import prices had increased by 10.5% annually, and a similar trend was also observed for other coal prices.

The total fuel related chargessum of escalable and non-escalable fuel charges estimated for 2010-11quoted by the winning bids translates into R604 to R1,977/ton, with five of the eight bids being close to, or less than, R1,313.4/tonthis was the average cost of domestic coal supplied to the sector in 2010-11.

In dollar terms, the winning bids represented coal costs in the range of $13 to $44/tonne, with five bids representing costs below $40. The FOB price of comparable Indonesian eco-coal, used by many Indian power generators, in 2010 was about $48/tonne.

The quoted fuel transport related charges (escalable and non-escalable) were also highly inadequate to meet the costs of international freight, customs etc.

This suggests that most winning bidders effectively assumed that coal linkages would be met through domestic sources despite all contracts and documents clearly stating otherwise.

Thus, power generators, particularly those who won competitive bids for power supply, bid aggressively without either understanding the risks involved, or with the intention of approaching regulators to reopen legally signed power-purchase contracts after winning the bid, though the power purchase agreements for competitively won bids has no provision for passing through increased fuel costs, says the report.

So, it is perhaps fair to say that power generators are also as responsible for the coal shortage rather than just being victims of it, the report points out.