Avoiding the coal scarcity trap

In 2021, the Indian government gave instructions to generators to import coal while we were already in the midst of a power crisis. However, this time around, the government was more careful. It directed the power stations in December 2021 itself to import coal to the extent of 4 per cent of their requirement and blend it with domestic coal.

However, as luck would have it, the measure was not enough. With the sudden early onset of summer in 2022, power demand spiked, riding on the back of the post-Covid economic recovery. The matter was further exacerbated by the Ukraine conflict, which led to a sharp increase in the price of imported coal. Even today, the average price of imported coal is about $140 per tonne against about $60 per tonne a year ago.

Consequently, power stations designed on imported coal stopped importing because it was no longer economical for them to generate, given their contract price with the distribution companies. About 17 GW of generating capacity dependent on imported coal was affected. Some of these units started hunting for domestic coal as a substitute, thus putting pressure on domestic coal. It’s not that domestic coal was not available since enough stock had been built in the mines. The issue was of availability of railway rakes for transportation.

There has been a flurry of activity in April and May to deal with the situation. First, all generators have been asked to import coal to the extent of 10 per cent (as against 4 per cent earlier) and that half of this should be physically available by the end of June. This would involve importing about 38 million tonnes of coal. The earlier instruction that each generator will import on its own has now been replaced with the direction that Coal India will function as the aggregator on behalf of the generators. CIL functioning as the aggregator is a better idea and it may be able to import at a cheaper cost by accumulating demand as well as standardizing the coal grade to be procured. Moreover, it would be easier for regulators to calculate the revised energy charge since the price at which coal was imported would be well-documented.

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Second, the government invoked Section 11 of the Electricity Act 2003 (Act) and directed imported coal-based plants to run at full capacity with the assurance that their enhanced cost of operation would be compensated. Penalties have also been announced if power plants fail to import coal, including curtailment of domestic coal entitlements.
Third, the government invoked the concept of tolling, which allowed states to transfer their allotted coal to private generators located near the mines instead of transporting it to far away state generators. This move would ease the burden on the availability of railway rakes.

Fourth, the government issued policy directions to the Central Electricity Regulatory Commission (CERC) overriding CERC’s regulations that made it mandatory to seek the consent of beneficiaries if the tariff went up by more than 30 per cent, if some alternate fuel is used. Fifth, a committee of officials was set up to rework the energy charge for imported coal-based generators. Sixth, the government is cognisant of the fact that there is a need for additional working capital and has advised REC/PFC as well as commercial banks to arrange for this.

When the government invoked Section 11 of the Act, the question being asked was whether it can really give a direction to private generators to import coal at a higher cost. For the benefit of readers, Section 11 is reproduced below verbatim: “(1) The Appropriate government may specify that a generating company shall, in extraordinary circumstances operate and maintain any generating station in accordance with the directions of that Government. (2) The Appropriate Commission may offset the adverse financial impact of the directions referred to in sub-section (1) on any originated company in such manner as it considers appropriate.”

Going by Section 11(2), the government should have left the job of working out the energy charge to the regulator instead of setting up a committee of officials to do so though, of course, the CERC was represented in the committee. Section 11(2) of the Act clearly mentions that the adverse financial impact would be offset by the regulator. The committee, therefore, has no locus standi. It also gives the impression that there is an element of trust deficit between the government and the regulator and this is something we have seen on several occasions in the past as well.

Second, the committee has already worked out the revised energy costs for six of the plants but there is no transparency regarding the coal cost assumed, its calorific value, transportation cost, etc. It is no surprise, therefore, that a major generator has contested the energy charge, saying that it has been underestimated by about 33 per cent and has now approached the CERC. It is learn that some other generators may also follow suit.

Third, we have to bear in mind that the coal problem arose because of the non-availability of rakes. With 38 MT of coal to be imported by October this year, and half of that by end of June, the need for rakes will not only go up but would be front-loaded. Back of the envelope calculations indicate that each rake can carry about 38,000 tons of coal. This means that we need 1,000 additional rakes to ferry 38 MT of coal over five months. One sincerely hopes that the requisite number of rakes would be available because otherwise, we are back to where we began. What is most important, however, is that we ensure that there is no dip in the production of domestic coal during the monsoon season.

The writer is Senior Visiting Fellow, ICRIER and former, Member (Economic & Commercial), CEA

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