Avoiding the coal scarcity trap

News: In 2021, the Indian government gave instructions to generators to import coal while India was in the midst of a power crisis. It directed the power stations itself to import coal to the extent of 4% of their requirement and blend it with domestic coal.

What are the causes of the power crisis?

India has been facing high power demand due to the sudden early onset of summer in 2022, and the post-Covid economic recovery.

The Russia-Ukraine conflict has led to a sharp increase in the price of imported coal. Therefore, the average price of imported coal is about $140 per tonne against about $60 per tonne a year ago.

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. The stations started hunting for domestic coal as a substitute, thus putting pressure on domestic coal.

The domestic coal supply has seen disruption due to the issue of availability of railway rakes for transportation.

Measures taken by the government to deal with the power crisis situation

First, all generators have been asked to import coal to the extent of 10% (as against 4% earlier). Instead of a generator, Coal India will import the coal and function as the aggregator on behalf of the generators. CIL can import at a cheaper cost by accumulating demand as well as standardising the coal grade to be procured.

Second, the government has directed imported coal-based plants to run at full capacity. They have been given assurance that their enhanced cost of operation would be compensated. Further, if power plants fail to import coal and curtails domestic coal entitlements, they will be penalized.

Third, in order to ease the burden on the availability of railway rakes, the concept of tolling has been implemented. The states can transfer their allotted coal to private generators located near the mines instead of transporting it to far away state generators.

Fourth, the Central Electricity Regulatory Commission (CERC) has to seek the consent of beneficiaries if the tariff went up by more than 30%, if some alternate fuel is used.

Fifth, a committee of officials has been set up to rework the energy charge for imported coal-based generators.

Sixth, the government has advised REC/PFC to arrange for the additional working capital.

Whether the government can really give a direction to private generators to import coal at a higher cost?

As per Section 11, the government may direct a generating company to operate and maintain any generating station in extraordinary circumstances.

Further, the Appropriate Commission may offset the adverse financial impact of the issued directions on any generating company in such manner as it considers appropriate.”

What are the issues the government’s directions?

First, there are elements of trust deficit b/w the government and the regulator. For example, in accordance to Section 11(2), the regulator has to work out the energy charge rather than setting up a committee of officials to do so. Further, the adverse financial impact would be offset by the regulator.

Second, the revision of the energy costs by the committee have been done without transparency with respect to the coal cost, its calorific value, transportation cost, etc. Therefore, a major generator has objected to the energy charge, calling it an underestimation by about 33%.

Third, the coal problem has been because of the non-availability of rakes in India.

Way Forward

There is a need for 1,000 additional rakes to ferry 38 MT of coal over five months. In addition, there should be no dip in the production of domestic coal during the monsoon season.

Source: The post is based on an article “Avoiding the coal scarcity trap” published in the Indian Express on 10^th June 2022.