India’s Dash for Coal Loses Pace
First published in Cornerstone in 2016 (references sorted in final version)
India has huge potential for growth in energy demand. It hosts one-sixth of the world’s population and boasts the third largest in purchasing power parity terms1a, but currently accounts for only 6% of global energy use, while 20% of the population – 240 million people – still lack access to electricity.1 The World Bank suggests India’s GDP will grow by 7.9% in 2016, more than twice the global average.2 This growth, combined with modernization, urbanization, and government policies to assist those affected by energy poverty are all expected to help drive electricity sector growth, which has averaged 6.34% since 2009.3
FIGURE 1. Growth in electricity production Cornerstonecharts072016
As a result, the International Energy Agency (IEA) estimates that India will add a quarter to global energy demand by 2040, overtaking OECD Europe, and nearing consumption levels of the U.S.4 To achieve this, the power sector needs to almost quadruple in size, which will require an estimated $2.8 trillion of investment by 2040.4 According to the IEA, the use of coal in power generation and industry is expected to rise sharply, increasing demand for coal and making India by far the largest driver of growth in global coal use.4 India is also expanding renewables and nuclear, targeting a 40% share of non-fossil fuel capacity in the power sector by 2030.5
India is expected to be the world’s largest coal importer by 2020, overtaking Japan, the EU, and China, due to the expansion of domestic coal supply and its use in the energy and industrial sectors,4 which is part of broader economic policy. However, recent events may cast some doubt over the IEA predictions. First, for over a year imports have been falling (after having risen sharply as expected into early 2015), partly due to high domestic production and stocks, but also due to lower peak power shortages, low thermal power utilization rates, and since COP21, a greater emphasis on renewables.
“India’s import of thermal coal in FY16 will be around 155–160 million tonnes (mnt), compared with around 185 mnt in FY15 because of low imports by power generation companies and increased availability of domestic coal,” said Viresh Oberoi CEO and MD Mjunction services in June.17 The imports may decline further, to about 150 mnt in the next fiscal year, with only coastal power plants—some of which are only able to run on higher quality coal imports. However, he cautioned that the situation may change if plant load factors increase from the record low of 61.6% reached in FYI15.16
There is disagreement over whether the dip in imports is temporary. The Global Institute of Energy Economics and Financial Analysis claims imports will soon cease completely: “The country is now firmly on track to meet its publicly-stated goals of ceasing thermal coal imports by 2017-18”, it said in an April article.18 However, a report from Fitch Group firm BMI Research stated in January that “coal imports will remain strong over the coming quarters as India will continue to be unable to meet domestic coal consumption.”4 It claimed India had a structural deficit of 187 mnt in 2015. “Over the long term, as India attempts to hit its ambitious plans of doubling production by 2020, and production from its auctioned coal mines finally come online, then we expect imports to fall,”
Second, there have been cutbacks announced for coal-fired capacity. India currently has a thermal power capacity of 211 GW, after 20.8 GW was added in 2014 and 2015—the highest on record and well above the target of 17.8 GW. The plan was to add an additional 113 GW of new coal capacity by 2022—most of which is already under construction. In addition, India currently has a further 289 GW of coal capacity in the planning stages. The IEA estimated that this would require around US$1.2 trillion investment by 2040.5 However, the finance available for new capacity is restricted by high network losses – both to illegitimate users and sub-optimal network operation – among India’s local distribution utilities, which eats into revenue.
Back-sliding on coal capacity
In April 2016 the Power Ministry announced it had scaled back its projected thermal power capacity growth forecast by 50 GW, reducing the target from 289 GW to 239 GW by 20225. Then in May 2016, the chairman of the Central Electricity Authority, announced plans to close up to 37 GW of antiquated subcritical coal plants—equal to 20% of India’s current coal fired power fleet, or 12% of the total system capacity. These units can produce electricity at a relatively low cost and their closure is opposed in some regions where electricity cost is a particularly sensitive and politically charged issue.
The moves reflect a change in tone among many national level politicians since the COP21 deal was signed in Paris last December. Piyush Goyal, Minister of State for Power, Coal and New and Renewable Energy’s call in 2015 for “universal and affordable energy access 24/7 … is the mission of this Government under Prime Minister Modi,”6 has been replaced by less bullish comments such as this from Mr Dubey, speaking in May: “Our first concern is emissions … We also want plants to be more efficient in use of resources.”7
The change in emphasis was reinforced in June, when Prime Minister Modi, speaking in the U.S. was clear that the focus on driving Indian economic growth at 7.6%, must “be achieved with a light carbon foot print, with greater emphasis on renewables.”8 In his meeting with President Obama, Modi also confirmed India would ratify the Paris COP21 Agreement this year. India pledged to cut its GDP carbon intensity by 33–35% and bring renewable and nuclear capacity up to
After the visit, the Indian Energy Ministry announced the cancellation of four ultra-mega power plants (UMPP) across Chhattisgarh, Karnataka, Maharashtra and Odisha, with a combined capacity of 16 GW.7 For eight years, these four proposed plants remained in the planning, preparation, and land acquisition stage. Community resistance to compulsory land acquisition and forced resettlement combined with electricity power surpluses helped persuade the government to cancel. It had been expected that the UMPPs would facilitate the proposed closure of the 37 GW of old coal-fired capacity, but India appears to be going ahead the closures even without these new coal plants.
SUPERCRITICAL TECHNOLOGY CRITICAL TO LIMITING EMISSIONS
The news of the UMPP cancellations has been complimented by signs that the government appears to be preparing the 13th Five-Year Plan (2017–2022) to call for the development of 100% supercritical technology for those plants that do get built.9 Anil Razdan, the former Secretary for Power said an “efficiency tax” might be levied to encourage operators to upgrade their capacity. He also suggested that the coal levy (currently Rs 400/t or $6/t) that contributes to the Clean Environment fund, could be expanded to include clean coal technologies.
Cost differences, however, could still impact developers’ choices. Analysis show that if all coal plants built from 2020 onward were ultra-supercritical, total capital expenditure would reach $500 billion by 2040, compared to around $387 billion if all coal plants built from 2020 onward were subcritical.10
Supercritical clean coal technologies are an important component in India’s INDC in the COP21 agreement. If India is to drive economic development as planned through electrification, with 290 GW of coal fired plant under construction or in the pipeline, a wholesale switch to supercritical plant is essential if emissions are to be kept down.
CO2 emissions are 25–30% lower in a supercritical plant, and a long term cost effective option to reduce emissions. In addition, the technology lays the groundwork for carbon capture and storage (CCS), according to a report by the WCA in late 2015.11 The report claims the cost of saving a tonne of CO2 would work out at around $10 per tonne by replacing subcritical (old) plants with supercritical and ultra-supercritical coal technology—making it the most cost-effective form of CO2 abatement, allowing economic development and poverty alleviation efforts through electrification to continue at lowest cost.
Power: Sector targets higher utilization and more renewables, nuclear
With the utilization rates of the average coal fired power plant in 2015/16,16 – having fallen steadily since 2008 (see FIGURE 2) – the government believes part of the reduction in coal fired expansion plans can be covered by increasing utilization rates at existing plants. Among the factors constraining utilization are coal supply bottlenecks. A more reliable source of coal is needed, which could mean a shift in demand towards imports, which are often higher quality and more reliably delivered than the coal produced in India.
In addition, peak shortages have been falling quickly over recent years according to the Power Ministry, indicating that supply is coming more in line with demand across the country – anecdotal evidence, however, suggests the official figures may be overoptimistic, with black and brown-outs still common across the sub-continent. Nevertheless, the Power Ministry said in June 2016 that this would mean that it would not need any new thermal capacity for the next three years beyond what was already under construction.
FIGURE 2. Falling utilization rates and narrowing supply deficits
Coal generation will face more competition from alternatives. India plans to ramp up solar power from 7.5GW now (up from 10MW in 2010)11a to 100 GW of capacity installed by 2022 – this is a sharp rise on the 2009 target for 2020 of 20GW, but could be attainable due to high solar intensity, cheap land, falling solar panel prices and strong regional and central government support. In June the World Bank Group (WBG) announced more than $1 billion in lending over FY 201712 – the Bank’s largest-ever support for solar power in any country, and in stark contrast to its decision not to support higher efficiency supercritical coal-fired units. The WBG is also backing the India-led International Solar Alliance which aims to promote solar use globally by mobilizing US$1 trillion in investments by 2030.
On the trip, Modi also agreed to Westinghouse building six AP1000s nuclear plants in India, which could represent an equally significant challenge to coal as intermittent solar, given that nuclear produces a steady baseload that has the potential to produce electricity less expensively than coal or solar. This is, however, conditional on the plants getting built, and so far construction times and costs are far longer and less certain than easily constructible coal-fired plants – adding substantial uncertainty to nuclear investment.
It is the first such opportunity for a U.S. company since the countries signed a civil nuclear deal in 2008, partly due to a 2010 Indian law on nuclear liability—remedied through India’s ratification of the Convention on Supplementary Compensation for Nuclear Damage. The ratification could pave the way for further nuclear deals with overseas investors. A weaker international gas market could also present a challenge to coal, with Essar Power planning to restart two gas plants in western India that have been idle for three years. Essar expects the lower gas prices to last 5–8 years, although they remain above coal on a unit energy basis.
Coal: Rising coal stocks, surplus production, and falling imports
Coal India and its customers have managed to build up a massive coal stockpile of 97 mnt,10 which needs to be consumed quickly to avoid fire risks13. The total includes 58 mnt at Coal India’s mines and a further 39 mnt at its customers’ power plants. The company has cut prices of higher grade coal to encourage buying, but so far Coal India has been unable to shift the surplus, due to a lack of demand from plants13. Part of this could be due to a drought that has seen a number of water-cooled coal plants shut down. Another reason is problems with domestic distribution, partly due to Indian coal’s high ash content, which makes transportation more problematic.
FIGURE 3. Rising stocks
Early in March a senior official at Coal India said: “The power companies are not in a position to take any additional coal and we are being requested, both officially and unofficially, to cut supplies, which has prompted us to scale down production at several other mines apart from the ones where we have stopped production temporarily.”14
Another Coal India executive was also quoted, saying that cutting the price of coal to boost sales would have “far-reaching unfavourable implications” for the company’s profitability.15 Prices have been cut by between 10–40% until the end of March 2017, as the company attempts to reduce stocks.
The price cuts could also provide a further challenge to coal imports, which fell by 15% to 132.3 mnt tonnes in nine months to January this year, from 155.4 mnt a year ago.16 NTPC, India’s largest power generator and coal consumer, will not import any coal this year for the second year running. It plans to source its entire requirement of 155 mnt from domestic resources. In early July the finance ministry sought a presentation on the feasibility of power projects running on imported coal from the power ministry, expressing concern that cost of such projects could be subject to changes in law internationally.
The situation could threaten the remaining plans to develop overseas mines for the Indian market, such as Adani’s proposed 60 mnt Carmichael low-grade thermal coal mine in Australia. Before the recent price slump, a number of Indian companies—including Adani, Jindal, Reliance, and the ICVL consortium of NTPC, Coal India and others—had begun plans for mines in Australia, Indonesia, South Africa, and Mozambique. But by undermining imports with low prices, Coal India should be well placed to take advantage of future growth, provided it can prove itself a reliable provider.
FIRST MOVES TO BREAK UP COAL INDIA MONOPOLY
While Coal India attempts to undercut imports and shift stock, many smaller industrial consumers remain short of coal. In an attempt to overcome such bottlenecks, the Ministry of Coal has recently earmarked 16 coal mines to be allocated to states for sale to private companies – an important step in dismantling Coal India’s monopoly.
The states will then mine and sell coal to their own industries, helping curb black marketing of coal that results from the supply shortfall. The Coal Ministry is in the “last lap of designing” a guiding mechanism for transparent mining and sale of coal by the states. So far coal blocks allotted to the states under the new mechanism have stipulated end-use, and no sale of coal was allowed. Any commercial mining will have strict guidelines.
Depending on how successful the policy emphasis continues to move toward environmental priorities, the ambitious one billion tonnes per year production targeted by Coal India by 2020 may not all be needed, and imports could be squeezed further. However, the current slide in imports and hiatus in coal plant construction is unexpected and may only be a temporary factor. The continuing fast growing economy is likely to drive power demand sharply higher. This should increase utilization, absorb stocks, and provide a growing market for rising domestic coal production, while maintaining space for some imports—for the supercritical coastal plants.
1a. Wikipedia: List of countries by GDP (PPP), data from IMF, 2014. https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)
- International Energy Agency (IEA), 2015, 10 November: World energy outlook 2015, p. 428.
- World Bank, 2015: Global Outlook, Summary. http://worldbank.org/en/publication/global-economic-prospects/summary-table
- Indian Power Ministry, July 2016: Power Sector at a Glance (final graph). http://powermin.nic.in/content/power-sector-glance-all-india
- International Energy Agency, 2015: World Energy Outlook, (p.2). https://www.iea.org/Textbase/npsum/WEO2015SUM.pdf
- BMI Research, 2016: India to Remain Hooked on Coal. http://www.bmiresearch.com/content/india-to-remain-hooked-on-coal
5a. Business Standard Newspaper, April 2016: Centre Scales Down Power Demand Forecasts. http://www.business-standard.com/article/economy-policy/centre-scales-down-power-demand-forecast-116042500050_1.html
- Sustainable Energy for All Forum, (2015): India. http://se4allforum.org/content/india
- Institute for Energy Economics and Financial Analysis, June 2016: Cancellation of Ultra-Mega-Power Plants Underscores India’s Commitment to Energy Transition. http://ieefa.org/ieefa-asia-note-cancellation-4-ultra-mega-power-plants-underscores-indias-commitment-transition%E2%80%A8%E2%80%A8/
- Indian Express newspaper, June 2016: PM Modi Full U.S. Congress Speech. http://indianexpress.com/article/india/india-news-india/prime-minister-narendra-modi-us-congress-speech-2842046/
- International Energy Agency (IEA), blogs, coal section, 31 May 2016 By Dr Ian Barnes: HELE Coal Plant in India’s Future Energy Mix. http://www.iea-coal.org.uk/site/2010/blog-section/blog-posts/hele-coal-plant-in-indias-future-energy-mix
- Brookings Institute, 2016: India’s Energy and Climate Policy – Can India Meet the Challenge
of Industrialization and Climate Change? Charles K. Ebinger, Section 4.
http://www.brookings.edu/~/media/research/files/papers/2016/06/india-energy-climate-policy-ebinger/india_energy_climate_policy_ebinger.pdf and IEA Clean Coal Centre, September 2015: HELE perspectives for selected countries, India.
- World Coal Association, November 2015: India’s Energy Trilemma. http://www.worldcoal.org/sustainable-societies/wca-report-indias-energy-trilemma
11a. Wikipedia: Solar Power by Country, India. https://en.wikipedia.org/wiki/Solar_power_by_country#India
- The World Bank, 2016: Solar Energy to Power India of the Future. http://www.worldbank.org/en/news/feature/2016/06/30/solar-energy-to-power-india-of-the-future
- Economic Times newspaper, April 2016: Huge Coal Stockpile May Lead to Fire this Summer. http://energy.economictimes.indiatimes.com/news/coal/a-problem-of-plenty-huge-coal-stock-pile-up-may-lead-to-fire-this-summer/51774774
- Economic Times newspaper, March 2016: CIL Stops Work at Several Mines. http://economictimes.indiatimes.com/industry/indl-goods/svs/metals-mining/cil-stops-work-at-several-mines/articleshow/51248175.cms
- LiveMint E-Paper, July 2016: Coal India Likely to Scale Back Production as Stockpiles. http://www.livemint.com/Industry/e5apwEUsVytgLGq0EbAsRP/Coal-India-likely-to-scale-back-production-as-stock-piles-P.html
- Indian Power Ministry, 2016: Annual report 2015-2016, various. http://powermin.nic.in/sites/default/files/uploads/MOP_Annual_Report_2015-16.pdf
- Economic Times of India newspaper, Feb 2016: Coal Imports May Drop. http://economictimes.indiatimes.com/industry/indl-goods/svs/metals-mining/coal-imports-may-drop-to-155-mt-this-fiscal/articleshow/51038273.cms
- Institute for Energy Economics and Financial Analysis, April 2016: More Evidence India on Track to End Coal Imports. http://ieefa.org/evidence-india-track-end-coal-imports%E2%80%A8/