Opinion | The many dangers from coal shortages

Coal waits to be loaded on train cars to depart the Hobet mine in Boone County, West Virginia, U.S. May 12, 2016. REUTERS/Jonathan Ernst/File Photo - RTSQUBP

Ravi Krishnan

Here’s a new danger to the current account deficit (CAD) — increasing coal imports. Thermal coal imports in the September quarter rose 35 percent over a year ago to 42.7 million tonnes, the fastest pace in three and a half years. After two years of decline, India is now on course to increase its coal imports in the current fiscal.

It’s good news in one sense because it shows increasing demand in industries such as steel, power and cement. On the flip side, it points to inadequate domestic supplies. Indeed, the lack of fuel is crippling some plants in the power sector.

How bad is the shortage?

Consider these numbers: There are 123 coal-fired power plants which have signed fuel-supply contracts. As on October 23, 68 of these plants had less than three days of coal stocks. Look at it another way, about 15 percent of capacity with coal linkages has inventory of less than four days.

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Maharashtra and Karnataka are particularly affected. The shortage has prompted the latter’s chief minister HD Kumaraswamy to appeal to Piyush Goyal, Union minister for railways and coal to ensure steady fuel supply to the state’s thermal power generators.

The fuel shortage couldn’t have come at a worse time. Power demand is growing at a decent clip — about 6.5 percent this fiscal year to date — as more villages are electrified. However, the shortage of fuel has led to a spike in spot market and merchant power electricity rates to as much as Rs 18 per unit. Despite these soaring prices, state electricity distribution companies (discoms) are trying to meet the increasing demand by buying more power from merchant power, possibly because there is political pressure to ensure steady electricity supply in an election year.

Discoms are under a lot of financial pressure and signing few long-term power purchase agreements. True, the UDAY scheme, which allowed discoms to restructure their debt, has led to some improvements. But they are still making losses. In 2017-18, their losses were Rs 17,352 crore, substantial even if they have come from Rs 51,096 crore in FY16. Second, while AT&C losses are down, they are still some away from the 15 percent target. The upshot is that discoms need to do a lot of work to rehabilitate their balance sheets. Paying Rs 18 a unit is not going to allow them to do that.

That’s on the discom side. On the power generator front, there is a risk that lack of fuel could upset the viability of power plants which are already underutilising their capacity. They face a Hobson’s choice: either operate at low capacity or use imported coal at a time when coal prices are high and the rupee is depreciating. Indeed, some plants have chosen not to use imported coal; during April-August this year, power plants’ use of imported coal was marginally lower at 22.5 million tonnes compared to 23 million tonnes a year ago. But choosing to shut down operations or operating at a low capacity is not sustainable. It can add to the huge pile of power sector NPAs. Remember that the government has already identified 34 stressed assets worth Rs 1.8 lakh crore in the coal-fired power sector.

The solutions to this problem are not easy. The key reason for the coal shortage lies not so much in production – which has increased – but in transportation of the fuel. According to Motilal Oswal Financial Services, in the three years to fiscal 2018, tonnage of coal transported by the Indian Railways increased at about 1 percent every year while total domestic coal dispatches rose 5 percent annually. Building more rail infrastructure will take time.

As this column has argued earlier, other reforms could help such as allowing private sector firms in mining and transportation, to which the government now seems open.  Improving the national grid by building more long distance transmission lines should also help in the long run.

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