Dealing with coal shortage in power plants

September 08, 2021 5:00 AM

Divert coal from plants that have enough stocks to others, and anticipate mismatches in coal demand and supply

The thumb rule is that the coal industry will deliver 25% of the year’s target in the first and third quarters, 22% in the second quarter, and the most, 28%, in the final quarter.The thumb rule is that the coal industry will deliver 25% of the year’s target in the first and third quarters, 22% in the second quarter, and the most, 28%, in the final quarter.

By Somit Dasgupta

The Central Electricity Authority (CEA) issues a daily coal report detailing the coal stock position in various power stations in the country. The August 31 report paints a dismal picture—it states that 44 power plants (61,500 MW) have a coal stock that would last for only about three days. This includes seven power plants (11,600 MW) not having any stock for the next day. This precarious situation has developed during August 2021; on August 1, only 10 plants (13,000 MW) had enough coal to operate for about three more days, and there was only one plant (2,300 MW) that didn’t have stock.

Power plants in India being starved of coal is nothing new. Generally, coal supply has been much lesser than demand, leading to imports. This has led to a premium on coal, culminating in coal auctions and schemes such as the SHAKTI. The second quarter of any financial year (July-September) is the worst time for coal supply—the monsoon adversely affects mining business. The thumb rule is that the coal industry will deliver 25% of the year’s target in the first and third quarters, 22% in the second quarter, and the most, 28%, in the final quarter.

The demand during this financial year seems to have picked up. Actual generation during April-August 2021 (till August 30) had reached about 558 billion units (BUs), which is more than what was generated during the same period in 2019 (pre-Covid-19): 549 BUs. Generation during 2020 was much lesser at 486 BUs for obvious reasons; however, if the actual generation vis-à-vis the target for April-August is compared, one finds that thermal generation has always been short, perhaps due to the coal shortage experienced during the monsoon. This year, in addition to this, we have also experienced deficit hydro imports from Bhutan vis-à-vis the target, even though domestic hydropower generation is just about the same.

Although the government concedes that there is coal shortage, it has maintained that thermal generation has not been affected. This seems to be unlikely. The CEA’s daily report shows that thermal generation between April 1 and August 30 of this year has been short of the target by about 2%, estimated at 9.5 BUs. Additionally, the increase in the price of power and the volume traded in electricity exchanges bears testimony to this. The average market clearing price has gone up substantially in August 2021, touching `9.1/unit on August 30 (as compared to the lowest during the month, `1.9/unit, on August 1). At one point on August 30, the market clearing price was Rs 20/unit! Thus, coal shortage has indeed affected generation adversely.

There are two ways to enhance coal supply—waiting for the monsoon to end and importing more coal. Coal imports cannot be enhanced overnight and coal will take a couple of weeks to arrive after the paper work is completed. Imports have other issues—the price of Indonesian coal has gone up considerably as China has started to depend more on it due to its issues with Australia (since last year, China has been unofficially boycotting Australian coal as part of mutual trade conflict). Moreover, importing expensive coal would make power more expensive and, consequently, power generators will not be prioritised under the merit order regime where the cheapest power is dispatched first.

As far as the current crisis is concerned, we have no option but what is already being done—diverting coal from plants that have adequate stocks to those that don’t have enough stock, ramping up generation from idle thermal plants, and increasing coal output from public-owned generators’ captive mines. The moral of the story, however, is that we need to be vigilant and should have our ears to the ground and anticipate such mismatches in coal demand and supply several weeks in advance. Finally, we need to have a more practical approach towards coal imports—these should not be discouraged when domestic production is insufficient.

Senior visiting fellow, ICRIER, and former member (Economic & Commercial), CEA

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