The amount of energy a country consumes is often a good indicator of how the economy is doing. Only in that sense, this is good news for India because our electricity consumption has gone up to an extent that we are now facing a coal shortage like many other nations in the world. Recently we’ve heard about the coal shortage fueling a power crisis in China. We're not there yet as far as India is concerned but we are beginning to see a fairly worrying trend as far as the supply of coal is concerned.
So, for example, India's 72 coal fuel power projects now have less than three days of stock. About 50 plants have stocks ranging from 4 to 10 days and we have another 13 projects with stocks of coal supplies of coal for just a little over 10 days. All of this is as of 1st October. The figures that have come from the Power ministry are alarming us about the coal stocks running pretty low than what is usually expected during a crisis.
But this isn’t something out of the blue. The Power minister had been warning us for quite some time that the country's energy crunch could drag on for another half a year. Electricity demand is surging and a slump in local coal output has left those stockpiles at the dangerously low end. Last month, power stations had an average of just four days worth of coal which is now the lowest in the years.
India's Power minister Raj Kumar Singh says the situation has deteriorated in the past week and coal plants currently have less than three days of fuel stocks. The call accounts for about 70 percent of India's electricity generation and consumption is expected to rise over the next few years.
Why is India facing a shortage of coal supply?
In India, companies have a fixed coal linkage with Coal India and its subsidiaries which assures them of a specific supply annually. However, the heavy rains at several mines in the country have led to a dearth of domestic supplies. But why there wasn’t enough stock this year? Coal India says this was all unpredicted.
Every year, Coal India asks utilities to stock up prior to the beginning of the monsoon season. Usually, the rain makes transport and output of raw materials difficult. Despite this, many coal firms could not stock up sufficiently due to the early monsoons this year. This left them with domestic supply on the shorter side and the imported coal being at a record high.
Eventually, many companies which run primarily on imported coal had to curtail production and shut down their operation temporarily.
What is being done to resolve it in the immediate term?
The government is working with Coal India Ltd. (CIL) which is responsible for 80% of India's coal output and NTPC which is the country's largest power generator to increase the amount of coal that's being mined. But even though India has the fourth-largest coal reserves in the world, it's actually heavily dependent on imports. Hence, it is also the second-largest importer of coal.
That's the major reason why it's facing this challenge at the moment because coal prices have risen globally and India's dramatically reduced imports are resulting in this supply crunch. It’s a really big challenge for the country as this can eventually lead to widespread power outages.
Now the government has asked Coal India to invest in EVs (electric vehicles) and charging stations but clearly, this would take a while.
India is going to be dependent on coal for some time to come or in the near future especially given the fact that India's demand for energy is only rising as the economy grows with urbanization trends. So, its appetite for energy is growing at the same time. Hence, coal is going to remain king for some time in India.
How badly could this power crisis derail India's economic recovery?
It was being observed that India had just starting to see a recovery in its economy. This was after the massive second wave of Covid-19 infections earlier this year which resulted in strict lockdowns. After that the economy started to open up, factories got back to work which is in turn actually adding to this supply crunch on coal.
Because of this, there’s a massive surging demand for energy in the country. But there's a concern that this could partly derail some of that recovery. If it impacts factories and businesses with power outages or it continues, then that's going to have a massive impact on the economy.
Also, we need to consider the fact that there are non-power companies as well that use coal. Due to this domestic shortage or supply failure, they’ll have to turn to imports which are more costly for them. So, in all, it has a number of implications for the economy and there are really big concerns about that at the moment.
Why coal imports have become costly for India?
There has been a global spike in demand for thermal coal, with the Covid-19 vaccination drive in full swing. And now, just like India, many other global economies are scaling up production to reach their pre-pandemic levels.
For example, China being the biggest consumer of coal is also facing a severe shortage of coal supply. Reports suggest that the country's government has placed restrictions on power use in homes and shops. Not just that, China is also the biggest producer of coal.
With its large-scale domestic industries facing a power crisis, China has effectively put restrictions on the export of coal and is competing for imported coal in the international market. This has led to thermal coal prices soaring up with a 100% increase in the international market this year. (Read more)
This sharp rise in global thermal coal prices is a major factor affecting the ability of the Indian power and manufacturing sector to import on a large scale. This has bound many firms with no option but to scale down their production.
How will India fulfill its coal demand?
Recently, Coal India claimed it would increase its production to meet the domestic demand. The announcement saw a significant effect on its shares. Shares of other power producers such as NTPC Ltd, Tata Power, and Torrent Power also experienced a rapid rise this week.
"This is an opportunity for Coal India to scale up production but it is somehow unable to grab it for now. Due to the monsoon season, Coal India is facing logistical issues to ramp up production. However, in the coming two months, the situation will improve," said Pankaj Nyati (expert on Thermal coal trade)
He further added that after the central government wanted to reduce India's reliance on imported coal, Coal India surged up to its resource availability, which is a good thing.
However, the scaling up of production requires higher input costs or increasing the coal prices. For this, Coal India has informally discussed the matter with board members. They too have acknowledged the need to hike the prices of coal. The state-run firm raised coal prices by at least 10-11%, which would be the first hike in dry fuel since 2018.
The current regulated price realization of coal is Rs 1,394 per tonne. Coal India is awaiting the government's nod, following which it will take its final call.