A fresh start: coal and power in India

Jonathan Rowland asks what lies ahead for India’s coal and power sectors under the government of Narendra Modi.

Less than a month after Narendra Modi was sworn in as India’s prime minister, the country is facing a crisis of coal supply with the Indian press reporting that a number of coal-fired power plants are down to less than a week’s supply of coal.

Meanwhile, the government has said that it will review 27 captive coal blocks that have not yet reached peak capacity or are expected to come into production this financial year. Earlier this year, the government cancelled a number of coal allocations over delays in developing them.

Against this background, World Coal talked to experts at the HDR Salva and Business Monitor International (BMI) about the Indian coal and power sectors and what would be required to prevent the current shortages happening again.

The challenges facing India’s coal and power sectors are many…

When it comes to India’s coal sector, the challenge is seemingly clear: not enough coal. But behind this there are a range of issues that will need to be addresses to improve the country’s coal production, explained Annabel Worthington of HDR Salva.

The first of these is stagnant domestic production due to the underperformance of state-owned coal miner, Coal India (CIL), which has consistently failed to meet its output targets despite sitting on the world’s fifth largest coal reserve. Exacerbating this situation is the fact that “private coal producers can’t sell coal into the market and this means that resources are not being maximised,” Worthington explained.

Beyond CIL, legal and regulatory delays are holding up mine development. “Red tape, protests against land acquisition and the failure to obtain environmental approvals have continued to stifle production in the coal sector,” noted Xinying Chia and David Ng of BMI.

Finally there is an issue of transporting coal from the mining regions to where it is burnt: “Coal evacuation logistics from mines are not being upgraded and the primary transporter of coal – Indian Railways – has continued to focus on populism rather than capacity addition in terms of railway wagons and higher-powered engines,” explained Worthington. “Bottlenecks in coal production are being accentuated through logistics bottlenecks.”

In the power sector, one of the main challenges is the pricing of energy. “Low tariffs without fuel price pass through means that higher imported coal prices are being absorbed by the government through the State Electricity Boards,” said Worthington. “As these become debt heavy trying to finance power purchases, they become less credit worthy, which in turn affects their capability to buy power. If they can’t but power, then the only option is rolling blackouts.”

There is also an issue of idling capacity at power plants that were planned for the power demand of an economy growing at 8%, continued Worthington. Faced with slower growth (and thus lower power demand), these power plants are either idling or are operating at very low plant load factors (about 53%), making them uneconomical.

“Energy poverty has long been a major bottleneck for India’s economy,” said Chia and Ng. Solving these issues is thus a vital task for Modi and his new super-minister for power, coal and renewable energy, Piysh Goyal, if the country is ever to regain the levels of economic growth seen in the last decade.

…but there are solutions to the tangle of coal and power challenges

A first step to meeting some of the challenges is to improve the country’s domestic coal production by allowing private-sector mining beyond the current captive mines and restructuring CIL. “India’s coal sector is rife with theft and corruption and hampered by primitive mining techniques,” explained BMI’s Chia and Ng. “The coal industry [needs] to be opened up for private investors in order to enhance operating efficiency and boost production”.

On the question of restructuring CIL, a number of plans have been mooted from outright privatisation to breaking up the company into smaller, state-based entities. Champions of the latter approach hold up the example of Singareni Collieries – India’s second biggest coal miner but a minnow compared to the behemoth of CIL. Yet unlike CIL, Singareni has consistently beaten its annual production targets.

A key difference between the two is the ownership structure, S. Narsing Rao – both the outgoing chairman of CIL and a former head of Singareni – told Reuters. CIL is owned by the central government; Singareni by Telengana state. This has made it far easier for the smaller company to acquire land for mining, access infrastructure and get environmental approvals – all of which are managed at a state level. “CIL, being a federal company, is somehow not proving to be very successful in influencing state governments and district administrations to positively respond to our requests. That is the challenge," Rao said. "[As] Singareni [is] a state government company, it is much easier to do that."

Singarani has also found it much easier to implement modern coal mining practices, while CIL consistently runs up against the formidable opposition of its heavily unionised workforce when attempting to introduce new technologies. Breaking up the behemoth and allowing private-sector competition would make it harder for unions to play such a blocking role in the development of India’s coal mines.

Beyond such discussions of CIL, HDR Salva’s Worthington points to the country’s infrastructure as being another key area for reform, suggesting that CIL’s idle funds be invested in enhancing rail capacity through wagon procurement and the purchase of high-capacity and high-power engines for dedicated coal rakes. The government should also speed up the development of the Dedicated Freight Corridors Project, Worthington added.

In the power sector, reform of electricity pricing is urgently needed. “At present, a complex system of price controls and government subsidies has created a situation in which retail electricity prices are lower than the cost of generations,” explained Chia and Ng. To change this, “price controls against domestic utilities such as Tata Power and Adani Power should be relaxed to allow greater margins from existing operations.”

In addition, those plans that “look good on paper but suffer from changes realities” – such as the Ultra-Mega Power Projects (UMPPs) – should be supported through “prudent and timely government intervention,” suggested Worthington. “The UMPPs have been a dismal failure with cost overruns, delayed projects and non-viable tarrifs with higher imported coal prices impacting some of them. Lack of planning has been glaringly obvious.”

In need of a hero: Piyush Goyal as minister of coal and power

Despite being only weeks into his administration, there are signs that Modi will take the issues affecting the coal and power sectors seriously. In this vein, the appointment of Piyush Goyal as a “super minister” covering the often fractious and competing coal and power briefs is a promising start.

“This is a really positive move and should help,” said HDR Salva’s Worthington. “A classic example [of conflict between the coal and power ministries] has been the NTPC [state-owned power company] arguing with CIL over the quality of coal being received at its plants. A central minister overseeing both these two ministries should be able to resolve such issues without any turf issues cropping up.”

BMI’s Chia and Ng were similarly positive: “The appointement of Goyal will pave the way for more positive reforms in the energy sector,” the two analysts said. “Bringing the power and coal ministries under a common leadership with unleash positive synergies between these two sectors.”

“Furthermore, Goyal is seeking to emulate the success that Modi had in the power sector during his time as the chief minister of Gujurat between 2001 and 2014,” continued the BMI analysts. “Modi introduced several reforms, which are widely credited for helping the state avoid persistent power shortages prevalent in the rest of the country. Gujurat is now the only state in India with a consistent power surplus.”

More generally, the election of the Bharatiya Janata Party (BJP) in such convincing style should be positive for India’s growth prospects. However, there remain a great many obstacles to implementing reform, note Chia and Ng – most notably resistance from the states, which could hold up reform indefinitely. “State-level governments have a high degree of control over their respective power sectors and the BJP will have to work together with these governments to effect meaningful reforms. Furthermore, the BJP still lacks a majority in the Rajya Sabha [upper house of parliament], which may block bills from the lower house.”

“This government and its performance will be scrutinised heavily – both domestically and internationals,” concluded Worthington. “How it performs will decide if India only talks the talk or is able to walk the walk.”

Written by Jonathan Rowland. Note: Annabel Worthington is consulting services manager at HDR Salva (www.salvareport.com). Xinying Chia is Asia analyst for commodities/mining and David Ng is Asia analyst for energy at Business Monitor International (www.businessmonitor.com).

Read the article online at: https://www.worldcoal.com/special-reports/16062014/what_lies_ahead_for_indias_coal_and_power_sectors_coal981/