Peering into Coal India’s ambitious pivot

“We do not want to be a coal mining company any longer. We do not even want to be a mining company. We want to be a producer of cheap pithead power.”

From his office in New Delhi’s Shastri Bhavan, coal secretary Anil Jain is working on a radical recasting of Coal India, the biggest coal-producing company in the world.

The logic is unmissable. India has large coal reserves but is running out of time to use them. As the first instalment of this series reported, the country’s thermal power sector, which accounts for as much as 73% of all coal consumption in India, is in crisis. 

Over a slightly longer term, as global commitments on emissions tighten, the window for coal itself will close. As Jain himself has written in Energizing India, a 2019 book edited by government advisor Shreerupa Mitra, “As such, India would appear to have a window of approximately two decades to make the most of its vast coal reserves.”

The negative consequences extend beyond an existential crisis for the country’s coal sector – its firms, employees and technocrats. They also touch the economics of coal-producing states like Odisha, Jharkhand and Chhattisgarh. “Coal India supports the economies of several states. Not to mention all the people employed by the sector. We cannot afford to have CIL go down along with coal,” said Jain on the morning CarbonCopy met him.

Enter, an ambitious makeover.

The logic at work

The first part of this series explained why India’s thermal power plants, the biggest customers of Coal India, are in deep trouble. 

In response, Coal India is planning a two-stage makeover. First, as Jain said, the company will enter thermal power generation. “At this time, the cost of coal is less mining cost and more statutory levies,” he told CarbonCopy. “Coal costs ₹500 a ton to mine. But taxes and levies, like mineral development fund and clean coal tax, add as much as ₹1,200 to the cost of coal.”

And then, there is Indian Railways. “If I move G9 grade coal 500 kilometres, that costs me ₹1,352/ton. If I move that coal 1,500 kilometres, that becomes ₹4,871,” he said. (This is one reason why coal-based power is losing competitiveness. Even as renewables become cheaper, the price of coal is rising.)

By siting its thermal power projects close to coal mines, however, Coal India can produce cheap pithead power — initial calculations by the ministry peg cost/unit at ₹3 or ₹3.5. Next, as Jain said, the PSU could use that cheap pithead power as a competitive advantage and diversify into energy-intensive manufacturing sectors.

At this time, two diversifications are being considered while a third is underway.  

The first is aluminium. According to media reports, Coal India is planning a ₹38,000-crore green-field aluminium project, and an ₹23,400-crore aluminium smelting unit with state-run National Aluminium Company Ltd. “At this time, India produces just 4 million tons of Aluminium,” said M Nagaraju, an additional secretary in the Coal Ministry overseeing the makeover. “What does it take to make aluminium? You need to mine bauxite and you need power — power is 40% of the cost of making aluminium,” he added. “Not only can CIL produce power near the pithead, most bauxite is present in the states that also have coal.”

The second is polysilicon ingots. “At this time, India imports solar wafers and makes solar modules and cells out of them. But we could make ingots. We need to purify sand – by heating – to 999.99%,” said Jain. In December, speaking to The Hindustan Times, ministry officials had said: “Electricity is about 60% of the cost of production in a polysilicon facility, which will be supplied through a dedicated power plant at a very economical rate, which will make the plant globally competitive.”

Apart from these, Coal India has already forayed into coal gasification – to produce SNG and Syngas, which can be used either as fuel or inputs like urea. These diversifications have been okayed by both the central government and the CIL board. Management consultancy Deloitte is now putting together a Detailed Project Report. 

Will it work?

As organisational makeovers go, this is as ambitious a pivot as any the world has seen.

Essentially, the Indian government wants Coal India to create fresh revenue streams that will keep it growing even after the sun sets on coal-based power. 

The first question is predictable. Can a company, with an organisational culture steeped in coal mining, execute such a shift? The second question is predictable as well. Each of these industries has its own market dynamics and entrenched players. Can a newcomer take them on? 

CIL says it will not execute these diversifications on its own. Instead, special purpose vehicles (SPVs) will be created for each of these diversifications. “We are not going to take any technology risk or too much of capital risk,” Coal India chairman Pramod Agarwal told investors in a call. “We will form an SPV, get all the clearances and offer this to some partner who can come along with his technology and who can invest most of the money.” Most of the technical and capital risk, he said, will be taken by the partner.

This model is already at work in coal gasification. CIL has tied up with Chinese firm Wuhuan at Talcher and Air Products for producing Syngas.

Touching on climate, the third question is far more important. Given these new businesses are meant to offset falling sales to the thermal power sector, how much coal will they consume? 

A new source of emissions?

The coal gasification projects are expected to consume 100 million tonnes of coal a year. 

As for aluminium and solar manufacturing, neither Coal India nor Deloitte responded to CarbonCopy’s requests for a meeting. However, some extrapolations can be made.

According to Hindustan Times, Coal India is planning a ₹38,000-crore greenfield aluminium project, and a ₹23,400-crore aluminium smelting unit along with state-run National Aluminium Company Ltd (NALCO). The greenfield project will include an 1 million tonnes per annum (MTPA) refinery and a 0.5 MTPA smelter.

While the configuration of the brownfield smelting unit is not known yet, ₹23,400 crore roughly works out to $3 billion. In 2019, Iran opened a new smelter in the town of Lemerd. The smelter, which cost $1 billion to set up, is expected to produce 300,000 tons of Aluminium in a year. By this yardstick, CIL’s smelting unit should produce 1 MTPA of aluminium in a year.

How much coal will these units consume? Vedanta runs its 1 MTPA refinery at Jharsuguda with a 75 MW captive power unit. Its 0.5 MTPA smelter at Jharsuguda has a 1,215 MW captive unit.

Assuming these as ballpark numbers, Coal India’s Aluminium units will need about 3,720MW of energy – and about 27 million tons of coal a year.

Similar calculations can be made for the greenfield solar plant. According to the Hindustan Times, the centre has pegged expenditure for the integrated (from ingots to modules) solar plant at ₹45,500 crore. One gigawatt of polysilicon capacity costs between ₹1,250 crore to ₹1,500 crore – which would work out to 30 GW of plant capacity.

The Indian market, however, is much smaller. And, as this article will explain, exports are not easy. And so, the Indian government has been talking with PSUs to set up a 10 GW polysilicon manufacturing facility. 

How much coal would such a plant consume? About 38 million tons, says energy researcher, Swati D’souza.

It could well be lower. India’s solar market is slowing. As the country hikes import duties on fully integrated modules, Santosh Khatelsal of Enerpac expects domestic players to hike their prices as well. One fallout? “The absorption of new modules will slow. India will, for the coming years, add a steady 6-8 GW of fresh capacity each year. Elasticity of prices would have pushed this number higher but that won’t happen now.”

What about exports? “Globally, 60% of polysilicon manufacturing goes into solar cells – and the rest goes into semiconductor chips. Manufacturing units get more profits from sales to semiconductor units and volumes from sales to solar units.” The catch here is: India doesn’t have semiconductor chip making facilities. Additionally, given rival polysilicon fabs, like those of GCL and Longi in China, produce as much as 18 GW a year, Khatelsal isn’t sure polysilicon made in Indian will be globally competitive.

The result? If the Indian demand gets capped at 6-8 MW annually, then CIL’s manufacturing capacity gets capped as well. Even in the best case scenario, if CIL sets up a 10 GW unit, it will need about 38 million tons of coal.

Where does all this take CIL?

That adds up, between the three businesses, to about 167.47 million tons. 

In contrast, thermal power projects, even at 60% PLF, consumed 533 million tonnes of coal in 2018-19. “The reality is that most manufacturing plants need very little coal,” agreed Anand Mishra, a senior executive at Avantha Power. “Industries like cement manage with a power consumption of 50/100 MW.”

In other words, if thermal power declines, even with the pivots, Coal India will see a fall in coal consumption. One fallout will be the drastic reduction in coal mining operations. More coalblocks – especially the less profitable ones – will be shuttered, partly because CIL will not need them; and partly because the SPVs will need cheap coal/power to be competitive.

The big variable in all this is time. When will the sun set on thermal power? It’s a hard question to answer. Even as renewables get cheaper, companies like Adani and NTPC are trying their own pivots to keep their thermal power projects viable. 

More on that in the third report. 

This article is the second instalment in a three-part series on India’s major coal mining companies’ efforts to adapt to impending changes in India’s coal sector. You can read the first part here. 

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M Rajshekhar

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