Monday, June 4, 2012

Indian Coal Sector - Need For Speed !


The Approach Paper to Twelfth Five Year Plan (2012-17) proposes a faster, more inclusive and sustainable growth with a target of 9% annual growth rate of Gross Domestic Product (GDP). Considering India's elasticity of commercial energy demand with respect to GDP, which currently is being used as 0.80 for all planning purposes, translates into a commercial energy growth rate of 7%. The ability to meet this energy demand depends on our ability to expand domestic production in critical energy sub sectors (coal, petroleum, natural gas etc) and meeting the balance requirement through imports.

World Energy Consumption Scenario

There has been a huge increase in world energy consumption in last 200 years. This rise in energy consumption is primarily from increased fossil fuel use. As we see from the figure below that per capita consumption (divided by total population) of oil peaked in the 1970 to 1980 time period, and has since been declining. The fuel that has primarily risen to take its place is natural gas, and to a lesser extent, nuclear.
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Per Capita consumption of various fuels ; Source: BP Statistical Data of World Energy 2011 ; (Click to enlarge)
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As we see in the chart above, Coal consumption per capita stayed pretty much flat (meaning that coal consumption rose about fast as population growth) until about year 2000. Since 2000, there has been a huge rise in coal consumption, particularly led by China and India. This increase in coal consumption seems to me, to be related to the increase in manufacturing in Asia following the liberalization of world trade that began with the formation of the World Trade Organization in 1995, and the addition of China to the organization in 2001. India also followed several reforms in its coal sector(as I will describe later) to boost its domestic production.
Let's now quickly analyse country-wise data, which presents a different pattern.
Approach: I took Primary Energy Consumption figures since 1965, country-wise, from BP Statistical Review of World Energy 2011 here. Then I took world population figures since 1965, country-wise, from World Bank site here. After that I took the conversion figure of “1 Tonne Oil Equivalent = 41.867 Giga Joules” from here. In the end, I applied excel formulas, taking care of correct units(Giga and Millions) and came up with the data to plot this excel chart. The excel sheet (.xls) can be access here
Why Giga Joule? Well, otherwise my Y-axis figures would have been very high and difficult to display in one chart. One could argue using Logarithmic axis, but that would have confused many ! :)
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Per Capital World Energy Consumption
Source: BP World Energy Statistics 2011; World Bank Data; (Click to Enlarge)
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Above chart shows that since the 1970s, energy patterns have varied. US energy consumption per capita has declined, while that of European Union have remain relatively flat. Per capita energy consumption of two Asian giants, China has greatly increased recently; whilst that of India is a marginally increase. In my opinion, the passage of the Kyoto Protocol in 1997 may have contributed to rising Asian coal consumption because it encouraged 'developed countries' to reduce their CO2 emissions, and while developed regions reduce coal use, the developing regions have an incentive to expand coal-based energy sources to take advantage of low coal prices. So, due to tighter environmental regulation, if the US Coal demand falls,  US coal production may not decline if the output can be redirected overseas and a likely recipient of the excess coal might be China (where 90 % of electricity generation is coal-based).
Considering the limited reserve potentiality of petroleum & natural gas, eco-conservation restriction on hydel project and geo-political perception of nuclear power, Coal will continue to occupy centre-stage of India 's energy scenario.
Energy Sources of India; Source - Planning Commission

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Indian Coal Sector

Coal is the most important and abundant fossil fuel in India. Based on exploration carried out by Geological Survey of India till 2011, Coal reserves in India stands at a cumulative total of 286 Billion Tonnes (BT). See here for details.
The coal resources of India are majorly available in two regions of India:
    • Older Gondwana Formations of peninsular India – Predominant coal supplier region in India
    • Younger Tertiary formations of north-eastern region
Coal Reserves of India; Sources - Geological Survey Of India
Major characteristics of Indian Coal deposits:
    • Limited reserves of coking coal (major ingredient of Steel Industry) only 12% of India's total coal reserves (i.e ~33BT of the 286 BT). The lion's share(~88%) is that of non-coking coal(used mainly  in Thermal Power Production). Small quantities of Tertiary coal is also produced in India.
    • High ash and low calorific value (less energy produced by consuming more coal).
    • Mismatch in location of deposits (eastern and central parts of India) and major consumption centers (North/West and Southern India).
    • Due to factor (3) above, there is high transportation costs - through railway rakes. Currently Indian Railways(IR) run around 165 rakes/day. On an average a full rake has 40 wagons carrying total of 2200 tonnes of coal. Recently CIL asked IR for more rakes (195 rakes/day).
History of Coal Sector:
Commercial coal mining started in India around 220 years ago by East India Company in Raniganj Coalfield along the Western bank of Damodar river. However, for about a century the growth of Indian coal mining remained sluggish for want of demand but the introduction of steam locomotives in 1853 gave it a fillip. Since then demand have been average, except during the two World Wars when the demand spiked.
Major developments in Coal Sector since Independence can be traced as follows:
Major Developments in Indian Coal Sector (1970-2012) (Click to Expand)

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Indian Coal - Demand Vs Supply Mismatch

Coal has been recognized as the most important source of energy for electricity generation in India. About 75% of the coal in the country is consumed in the power sector. In addition, other industries like steel, cement, fertilizers, chemicals, paper and thousands of medium and small-scale industries are also dependent on coal for meeting their process and energy requirements.
Coal India limited (CIL) and its subsidiaries are the major producers of coal in India. Singareni Collieries Company Limited (SCCL) is the main source for supply of coal to the southern region. Small quantities of coal are also produced by TISCO, IISCO, DVC and others.
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Coal - Demand Vs Supply in India
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As you see from table above, there is a huge gap between demand and supply of coal in India. Power Sector Cos., which depend heavily on coal is the most severely hit. It has been estimated that if this rate of production continues, India could become the world’s biggest thermal coal importer by 2015. It is already largely dependent on imports of coking coal, used to make steel.
The main policy measure used by India for regulating imports remains the import licensing system, which contains five categories of goods - "Open General Licence", "Automatic Permissible", "Limited Permissible", "Canalized"(imported through State agencies) and "Restricted" items. The "Banned" list has been abolished as from April 1984. 
As per the terms of reference to WTO (World Trade Organization) agreement, India has to put most of the items under Open General License (OGL) for import which means these items can be freely traded. Coal is an item in OGL
Few reasons for a sluggish production of coal in India are:
    • Much of India's impressive coal reserves sit under protected forests or land set aside for ethnic minorities.
    • Land Acquisition, Environmental & Forest Clearances takes ages to complete. Ministry of Environment & Forest (MoEF) has a 'Go/No-GO' policy for mining clearances, which, to me is more of an escapist approach. Whilst the environmental concerns are genuine, but the method adopted by MoEF is neither helping the environment nor the economy. Recently there was news of MoEF putting moratorium on new & expansion projects in areas having Comprehensive Environmental Pollution Index (some random number !!) above 70 which included 7 coalfields of CIL. Read here
    • Resettlement & Rehabilitation (R&R) issues and its ensuing effect of law an order in that region leads to huge delays.
    • Currently surplus mining of coal from captive mines (with private cos.) are not allowed to be sold in open market. This leads to coal lying waste in these mines.
    • Indian coal is generally of poor quality, which makes it unsuited to newer, more efficient, coal–fired power stations. Apart from this, low quality coal consumes more coal for same amount of power generation and hence demand increase.
    • Inefficient distribution of coal - so older power stations with inefficient machines consume more coal, whilst the newer more efficient ones sit idle with lack of sufficient amount of coal.
    • There is an absence of a mechanism to negotiate bulk rail contracts and therefore the transportation cost of coal increases. There is also issue around availability of sufficient railways rakes.
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Coal Linkages:

Coal linkage means that a coal consumer (power, cement, steel) is assured of the supply of coal. This requires approval from a committee headed by the coal ministry, called Standing Linkage Committee(Long Term) [There is a short term committee as well].
The linkages of coal demand is primarily done with the objective of planning of coal supplies, keeping in view domestic coal resources as well as the need to supply fuel of appropriate quality to the consumers and at the same time making the most economic use of the available capacity for production and of coal.
Two types of linkage committees (long-term and short-term) function for deciding availability of coal and distribution to the consumers belonging to Cement, Power & Steel including Sponge Iron Units.
Coal Ministry from time to time, receives requests from State Governments, Public Sector Undertakings, Private Cos. for providing coal linkages for power, steel, cement sectors. See the details of such linkage request and their approval statuses here. Based on the recommendations of central administrative ministry, coal availability and other factors, linkages are then provided.
Consumers who have no linkages have to purchase coal at higher rates through Spot e-Auctions, Forward e-Auctions and/or from Open Market.
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New Coal Distribution Policy 2007:

Before 2007, coal consumers were broadly classified in two categories - Core and Non Core Sector and the basis for classification was solely based on their role in economic development.
Realizing coal as a scarce resource and seeing the increasing number of applications for coal linkages, government notified a new coal distribution policy in 2007. Under this policy each sector/consumers have been treated on merit and the old classification was dispensed with.
Earlier Standing Linkage Committee (Long Term) used to grant long-term coal linkage to consumers with firm commitment of coal supplies. However, it was observed that many of the power projects, which were granted long-term coal linkage, did not come up as planned resulting in pre-emption of coal linkage.   Therefore, under the New Coal distribution Policy it was decided to introduce the concept of “Letter of Assurance” (LOA), which provides for assured supply of coal to developers, provided  they meet stipulated milestones, which occurs when the consumers make legally binding commitments to mobilize funds.
Once the milestones as stipulated in the LoA are met by the developers, LoA holders(i.e. the coal consumers ) would be entitled to enter into Fuel Supply Agreements (FSAs) for long-term supply of coal. This FSA will be signed by the coal consumer directly with the coal companies i.e. in majority of case it is Coal India Limited (CIL).
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Power Sector & Coal - Structure & Process Flow (Click To Enlarge)

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Coal & Power Sector Issues

Fuel (i.e. Coal) shortages have emerged as a key challenge that the power sector in India is facing. Power plants either commissioned or to be commissioned in 2010-11 (6,911 MW) will not operate as they have no coal, while plants to be commissioned in 2011-12 (10,070 MW) will also not operate as they will have no coal. This sudden and substantial reduction in the coal availability by CIL will result in stranded capacity of around 24,000 MW and will cause serious problems to financial institutions and overall investment climate in the power sector.
This is due to the fact that domestic coal production has not kept pace with the capacity addition witnessed by the power sector in our country. On the logistics front as well, since most of the linkage–based plants are in the interiors of the country, there is a logistical challenges in importing and transporting coal to the plants.
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Capacity Additions by Power Sector in India (2010-15)
Source: EdelWeiss Research
Info: 1 MW = 5000 T of coal consumption
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Between FY10 and FY15 India would have likely added ~80GW to 85GW of power capacity, of which ~61GW is expected to be based on domestic coal. However the domestic coal supply to power sector by Coal India (CIL) is not expected to rise concomitantly, and would rise only to 486MT by FY15 given the difficulty in scale up of volumes.
Issues of Power Sector:
Before we discuss the power sectors issues, it is important to understand the typical power investment arrangements.
For an Independent Power Projects (IPPs) there are three options available for setting up an Independent Power Producer (IPP)
    • Merchant Plant - The power producer does not enter into long term off-take arrangements, and instead sells power on a short-term basis on the spot market or through a power exchange.
    • Negotiated/MoU Route - A memorandum of understanding (MoU) is negotiated and executed with a state government for setting up the project within its jurisdiction. This route is often referred to as the MoU route.
    • Competitive Bidding Process - To bid for an identified project envisaged under the Competitive Bidding Guidelines of the Ministry of Power (MoP) and the winning bidder is required to execute a Power Purchase Agreement (PPA) with the power distribution companies (DISCOMS). Power procurement in the Indian market is increasingly being done through competitive bidding process. MoP recently made this route mandatory for long term power procurement in India.
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Power Generators and Discoms
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Issue 1: Coal India Limited (CIL) FSA not bankable
Until few months back, FSA which Coal India Ltd. (CIL) signed with power companies was only for 50% supply guarantee, which is significant risk for the power project developers. Such project developers also run risk of defaulting on the loan that they have taken from banks, because there is no full guarantee(only 50% by CIL) of getting its fuel(i.e. coal which runs its plants).
Moreover, CIL signed FSA’s with power producers for only 5 years where as the Power Purchase Agreements (PPAs) are for 20 years and so the entire fuel cost risk is with the power producer and a very limited share on CIL.
In a recent Presidential directive, CIL has been directed to  sign FSAs for supply of coal as per Annual Contracted Quantity (ACQ) signed in FSA with assured level of 80% (revised from 50% current)  to  the  Power Plants which have been commissioned and/or would get commissioned between April 2009 and March 2015. This will be only applicable with respect of plants having long term Power Purchase Agreements (PPAs) with Distribution Companies (DISCOMS) and which have been identified by Ministry of Power.
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Issue 2: Mismatch of obligations/liability under FSA Agreements
Under the Competitive Bidding Route and signing of PPA thereafter, the Power Producers are entitled to get their full charges from DISCOMS only if their power plants operate at certain level of availability(85%). If it falls below this, the power producer is required to pay DISCOM a penalty and its contract can even be terminated by the power purchaser if actual average availability falls below 65%. There is, as such, no relief available to the power producer under the standard PPA if it cannot achieve the normative availability due to short-supply of fuel(i.e. coal) by the fuel supplier(for majority of case its CIL).
Hence, unless a power producer is able to procure an alternate source of supply cheaply and quickly (both of which may be unachievable), not only does the power producer run the risk of reduced revenues and penalties, but it also risks its PPA being terminated altogether for reasons wholly outside its control, with effectively no recourse against the coal supplier, which is a big cause of concern for power project developers.
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Issue 3: No passing of increased cost of imported coal
Given the domestic coal supply constraints(issue-1) and the resultant inadequacies in risk allocation(issue-2), various project developers have sought to source imported coal either through long term long arrangements or by bridging shortfalls in domestic supply. However recently there has been a surge in international coal prices coupled with minimum price controls introduced by foreign governments (Indonesia), which are both outside the control of the power producer. This has resulted in increased cost for power producers.
Usually an increase in fuel price is often passed through to the power purchaser (who in turn passes the incremental costs on to the ultimate customers) as it would be unfair to expect the power producer to bear the repercussion of increase in costs due to reasons outside its control. Also one can argue that an incremental increase spread out over the numerous customers (the ultimate users of the electricity generated) would be significantly less than what single power producer has to bear.
However, currently all PPAs entered into by Individual Power Producers(IPPs), under the Competitive Bidding Route do not allow for pass-through of increased coal costs. As a result, most power producers relying on imported coal will likely incur significant losses, which is clearly not a sustainable model or one that encourages foreign and domestic investment.
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Issue 4: High Transportation Costs of Coal
Although domestic coal supplied to the Indian power sector comes at a deep discount to international prices, significant cost is incurred in transporting this cheap coal from mines to power plants. While most coal deposits are in the eastern and middle‐eastern parts of the country,  power plants on the other hand, have been set up in individual states to meet its demand. Hence on an average CIL coal travels a distance of 700km.
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Major recommendations to resolve these issues:
    • FSA should capture the essence of the New Coal Distribution Policy, 2007: Coal suppliers (such as Coal India Limited) should be required to make a firm commitment to supply 100% of the normative requirement or compensate the power producer.
    • Amendments in PPA & Competitive Bidding Guidelines: If a 100% supply commitment cannot be given, the power producer should be excused from performing its obligations under the standard PPA to the extent of non-supply of coal. Accordingly the power plant’s mandatory availability (currently 85%) should also be reduced accordingly so that the power producer does not suffer any economic loss as a result of non-supply of coal.
    • Efficient planning of coal transportation routes:(i) Coastal power plants and other end users located up to 250 km from the coast should use only imported coal or any local/nearby available fuel. This will work out to be much cheaper than transporting it from mines.(ii) Power plants located on the mainland (beyond 250 km from ports) should get domestic coal to meet their full requirement.
    • Allocation of Coal only to efficient plants: Some of the existing plants operating under FSA have been operating at sub‐optimal level due to frequent shutdowns, lack of adequate repair and maintenance and being inefficient due to old technology. Given high coal consumption because of high coal consumption by these dated equipment it is uneconomical to supply coal to such plants while the new and highly efficient plants lie idle. The key idea is to use the scarce resource in an efficient way i.e., by diverting the coal to new plants which consume less fuel for same rated output.
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Reforms in Coal Sector

Government has initiated steps for reforms in coal sector of the country. The major steps taken/being taken for the development of the coal sector of the country are as follows:
    • Setting up of a Coal Regulatory Authority: Government of India has initiated action for setting up of an independent Coal Regulatory Authority for more optimal development and conservation of coal resources, more effective regulation of price and quality, adoption of best mining practices, better coal distribution and creation of a level playing field for new entrants in the sector.
    • Switching over from UHV to GCV based Grading System: In line with the best International coal trading practices, the Government has switched over to the Gross Calorific Value (GCV) classification of non-coking coal, in place of Useful Heat Value (UHV) based grading and pricing system.  This will improve the quality of coal supply and reduce the consumer complaints. For more details see here(Note: Power Sector Cos. opposed this move stating it would increase the price of coal.)
    • More Autonomy to the Government Coal Companies: Towards granting more financial autonomy for faster decision making, Government has granted Coal India Limited (CIL), a Maharatna company status and six of its subsidiary companies, Mini Ratnastatus.  Besides, Neyveli Lignite Corporation Ltd (NLC) has also been granted a Navratna company status.
    • Signing of Long Term Fuel Agreements: As per the provisions of New Coal Distribution Policy (NCDP), Bilateral Fuel Supply Agreements with all valid licensed consumers have been signed.  FSAs with power utilities are also being signed by CIL under a Presidential Directives.
    • Allowing Coal Mining by the Private Sector: Currently private cos. are only restricted to captive mining. To allow Indian companies both public and private sectors to mine coal in the country without any restrictions of captive mining and to be engaged in exploration of coal in the country, a Bill has been introduced in the Parliament - Coal Mines (Nationalization) Bill, 2000. (Note: As usual, Left parties and the trade unions under them are heavily opposing it, so much so, that being first tabled in parliament in 2000, it still hasn't seen the light of the day)
    • Encouragement to acquire coal blocks abroad: The Government is encouraging coal companies to invest in coal assets abroad.  In this regard, CIL has acquired two coal blocks in Mozambique.

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1 comment:

  1. Very informative and intresting to read...

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