Give coal the attention and effort that it needs
The fundamental issue remains woefully short stockpiles. With a recent increase in the domestic demand, and high global prices, the key is to address crucial issues of planning, feedback (or lack thereof), and risk
India is facing one of its worst electricity crises in recent years, but unless the underlying issues and structural problems are addressed, this won’t be the last. The arithmetic solution is to make sure coal power plants stockpile enough fuel — measured in days of stockpile — but they’re woefully short of norms. However, this “obvious” solution doesn’t tell us why we don’t have enough stockpiles. We need to change our planning from one of primarily managing scarcity to one of flexible resiliency. We also need to introduce feedback loops in the ecosystem so that stakeholders have both carrots and sticks — incentives to achieve or exceed compliance but repercussions if they don’t.
I wrote about the crisis six months ago, showing that a lack of stockpiles was a drawn-out — and not a sudden — problem. Sadly, that is still true.
Three more factors have made it worse. First, demand is actually high this time – with early heatwaves and post-Covid recovery. Second, the Railways, which dominate long-distance transport, now face high passenger traffic on shared tracks (the last time, passenger traffic was still recovering from the second wave and associated lockdowns). Third, global prices are even higher than those in October, which were already multiple times above the average price over the previous five years.
We can’t resolve this issue until we address fundamental issues of planning, feedback (or lack thereof), and risk. Coal powers more than three-quarters of the electricity sector, but coal has perpetually been in short supply – in typical years, India imports about 20% of its thermal coal requirements. Coal power plants were never set up to receive all their required coal through fuel supply agreements (FSAs) with Coal India Limited, the dominant supplier. Contracted ACQs (Annual Contracted Quantity) were kept well below aggregate needs. Plants were explicitly expected to fend for themselves for a portion of their demand through imports and also auctions outside coal FSAs. This scarcity model sufficed as plant load factors were gradually falling and normative levels of coal requirements often weren’t required. Relatively lower demand also offset shortfalls in captive mining. Unfortunately, a decline in coal use went hand-in-hand with misleading narratives of surplus, even though the surplus was primarily of coal power plant capacity, and not of fuel.
Power demand is seasonal, and stockpiles take time to build, but the lumpy nature of railway delivery means one can’t easily increase stockpiles by, say, 10%. We never quite recovered from the last coal crisis, but coal usage surged 15% between the end of January 2022 and the end of April, while delivery was virtually flat. This is meant to be the peak period of coal deliveries (supply quotas vary by season, with January-March getting the highest share, 28%, in preparation for the summer season that follows) and indicates that beyond mining limitations, we also have logistical challenges.
What is supposed to happen? We traditionally backstop supply via imported coal, but import stockpiles fell precipitously during the post-pandemic recovery, and now imports are unaffordable. The same is true of gas imports. Low supply and high prices mean the gas output is actually low, close to the levels seen during Covid. Discoms can’t go to the power exchange to get more power – what little is available is priced at a premium, often hitting the (revised) ceiling price limit of ₹12/kWh. Normally, discoms get coal power at around a quarter of this rate. We can throw money at the problem, but bridging the procurement gap will need a manifold jump in spending. Importing coal at any price takes weeks.
Long term solutions will take time, and we need to change how we manage scarcity. Today, we plan coal around not just location but even plant ownership type. Instead, we need to plan for coal use efficiency and system performance that includes security and resiliency. We also can’t ignore captive power and industrial coal users who are the last to get access to domestic coal. Discoms should pay power plants on time, plants cannot be delinquent on paying for coal, and everyone needs to plan better for both power and coal demand. A lackadaisical attitude is not only dangerous but also embeds moral hazard as many costs pass through to consumers. Discoms need clarity on what happens when expensive alternatives (coal supply or power) are required.
Normative planning won’t properly answer how much coal a plant needs. It depends on its expected duty cycle. Instead of static stockpile norms by distance, we need norms that factor in dynamic demand and alternative coal supply options. Renewable energy will also help enormously, more so in the short run when it displaces coal production. But in a few years, we will face issues of coal power plant capacity, and not just fuel. At that point, more solar power alone won’t help the evening demand.
Ultimately, we will have to pay for resiliency and buffers. Stockpiling coal has a cost. Sufficient railway stock or any infrastructure that may not be fully utilised all the time has a cost. Even properly forecasting demand has a cost. Peaking power capacity used occasionally has a cost. We have to revamp our planning, not just to avoid cycles of boom and bust, but also because of larger trends in the sector, including decarbonisation. Even with a high renewable energy contribution, half of our power will still come from coal in 2030. Renewables are vital, but cannot distract us from giving coal the attention and effort it requires.
Rahul Tongia is a senior fellow, Centre for Social and Economic Progress
The views expressed are personal
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