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Strange times ahead for India’s coal sector

As CarbonCopy reported in the middle of last year, India’s energy policy is distinctly muddled.

By 2030, the ruling NDA government says oil demand will double; and gas demand will treble. It has also told Coal India to boost coal production to one billion tonnes by 2024 – up from 600 million tonnes in 2018-19 – and replace imported coal. It is also auctioning coalblocks to commercial miners.

In tandem, the country has an ambitious renewable energy target — 450 GW by 2030, up from the current 86 GW. Big plans aside, India’s economy is not growing fast enough to absorb all this ambition.

One fallout? In the absence of a policy roadmap, pricing will determine whether India will see an energy transition.

In September last year, CarbonCopy began taking a closer look at the economics of India’s principal fuels. We started with the government’s claim that gas would account for 15% of India’s energy mix by 2030 – and concluded domestic gas is too limited, and imported gas not competitive enough, for that to happen. Coal is a different story. It’s cheap. But the industry which consumes most of it – coal-based power – is shedding competitiveness.

And so, this three-part series on where India’s coal sector is headed.

India’s coal sector is behaving in unfamiliar ways.

With less than half the 41 coal blocks put on sale finding a buyer, the country’s much-hyped commercial coal mining auctions last year received a tepid response.

The board of Coal India, the country’s biggest coal producer, has given the state-owned enterprise an in-principle approval to diversify into aluminium smelting and manufacturing of polysilicon ingots.

That is not all. A clutch of other companies in India’s coal-based power sector, including behemoths NTPC and Adani Enterprises, are not just foraying into renewables, they are also integrating vertically, remaking themselves into enterprises that have their own coal mines, power plants, transmission lines and distribution networks.

These are discontinuities. In the past, coal blocks were prized assets; Coal India limited itself to coal mining; and thermal power producers focused on power generation.

The immediate reason for these is the existential crisis facing thermal power plants. “India’s total installed capacity in the national grid is 375 GW,” said Vinay Shrivastava, the recently-retired executive director (western region) of India’s Power System Operation Corporation, a state-owned enterprise which manages India’s electricity grid. “Of this, the most we have used – on 30 January 2021 – was 190 GW.”

One fallout of this under-utilisation has been visible for a while. Unable to sell power and saddled with bank loans, several thermal power promoters have defaulted on bank loans and lost their units to India’s bankruptcy courts.

These discontinuities are the next fallout. Not only do thermal power plants produce most of the electricity in India, they also account for most coal consumption in India – as much as 73%, according to Niti Aayog. As the sector fades, coal-based firms in India are trying to reinvent themselves. CIL is attempting to create a new future around supplying coal-based power to industrial plants. As for NTPC and Adani, they are betting vertical integration will shore up their thermal power plants’ viability.

SectorDemand (in MT)
Power (utilities) 533.40  
Power (captive units)  77.15 
Cement 8.6 
Sponge iron 10.44
Others 59.18 
All India coal demand and supply in 2019-20 (for non-coking coal)

How these pivots fare will determine how much coal India will burn in the coming years.

Why thermal power plants are not likely to recover

To understand these pivots, we have to first grasp why coal-based power plants are in trouble. Why such under-utilisation?

It’s a story that starts in 2003. That year, India passed a new electricity act allowing private players to set up power plants. It was a bullish time. “By 2003, a few private companies had made a lot of money selling surplus power from their captive power units,” recalled Anand Mishra, a senior executive at Avantha Power who was with NTPC at that time.

That was also a time when the national grid was yet to come up – the country had five poorly connected grids. Moving power from surplus regions like the south wasn’t easy. One outcome? Units in power-starved regions were making super-normal profits, said Mishra, selling power for as much as “eight or nine rupees a unit”.

Now, not only did the centre liberalise power generation and promise promoters a pre-tax 16% return on equity, bodies like the Central Electricity Authority and the big consultancies came out with rosy projections. Forecasting high demand, said Mishra, they pegged EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization — a proxy for cash flow on which a commercial entity’s operating performance can be gauged) at “35-40% and Internal Rates of Return at 17-18%.” Those numbers were unrealistic. “NTPC, with its huge fleet, has an EBITDA of 24%. how would a single plant get 35-40%?”

Nonetheless, an investment frenzy took shape.

Several of the firms entering the sector were neophytes. Some were attracted by the profits others were making. Others saw thermal power as a good sector to invest their gains from the steel (and iron ore) export boom, which was slowing by then. Others tried to profit from the frenzy itself. They signed MoUs for power projects with state governments; used those to lobby for captive coalblocks or apply for coal linkages; then tried to sell the project (MoU and coal block) to investors. Yet others announced large expansion plans; bought cheap Chinese turbines; inflated the value of those orders; and used debt to replace their equity.

What happened next was extraordinary. “Against the Centre’s target of 70,000 mw of fresh thermal capacity, India found private companies queuing to add much more,” The Economic Times reported in 2012. “According to Prayas Energy Group, a Pune-based thinktank that tracks India’s energy policy, as many as 700 thermal plants applied for an environmental clearance between 2006 and 2010. Between them, they were looking to add 701,820 MW of capacity — about six times India’s overall power capacity in 2011 and seven times the target for the 12th five-year plan (2012-17).”

Then came the first shakeout. India had liberalised power generation but not considered coal supply. Firms with coal linkages found themselves unable to compete with peers with captive coal blocks – coal from the latter is cheaper. For instance, MoUs for no less than 28 power projects had been signed in the district of Janjgir-Champa, Chhattisgarh. By 2012, just nine remained.

The ones that survived found other hurdles. As regional grids got integrated, local monopolies shrank. As economic growth slowed, the gap between projected and actual demand widened. In 2014, when the Supreme Court de-allocated captive coal blocks, a clutch of power plants with captive blocks found themselves at a loss.

Slowly, the economics of setting up a power project changed. Around 2003, the fixed cost of setting up a coal-based power plant stood at Rs 4 crore a MW. By 2012, even as turbine prices remained relatively unchanged, farmland prices surged across India, reaching as high as Rs 3 crore per acre. “Which means that a TPP wanting 1,000 acres will spend Rs 3,000 crore on land alone,” said Ajay Mathur, the former head of Teri. Indeed, fixed costs in the sector today stand at 5 crore/MW.

Variable cost rose as well. “Coal costs Rs 500 a ton to mine. But taxes and levies, like mineral development fund and clean coal tax, add as much as Rs 1,200 to the cost of coal,” complained Anil Jain, India’s Coal Secretary. And then, there is Indian Railways. “If I move G9 grade coal 500 kilometres, that costs me Rs 1,352/ton. If I move that coal 1,500 kilometres, that becomes Rs 4,871.”

These escalations in cost came at a time when payment delays from discoms were rising, running as late as eight to nine months. This left power projects with a cash flow problem — needing to pay for both plant and fuel but saddled with customers delaying payments. Responses, like working capital loans, added to their costs.

Compounding matters, renewables came in. Take Wind. India has about 40 GW of wind-based power today. “Its supply kicks in from mid-April to the end of October,” said Shrivastava. “When it comes, power plants have to either shut down or run at low plant load factors. NTPC’s PLF falls to about 70%; that of private providers falls even lower – as low as 58%.” 

This is a problem. At lower PLFs, not only do boilers burn more coal to produce the same level of energy, further eroding their economics, they also take longer to recover its investments.

Then came demonetisation, the botched rollout of GST and Covid-19, and the economy slowed further.

That is the calculus of this moment. India’s thermal power plants, the biggest consumers of coal in India, find themselves in a market with too much supply, competing not just among themselves but also with renewables that are getting steadily cheaper. Most of India’s thermal power plant capacity gets used only between November and January, said POSOCO’s Shrivastava. “The other nine months, India has a problem of plenty in power.”

It shows. Take the Day Ahead Market at the portal of the Indian Energy Exchange. On 30 March, when this reporter checked the website, the quantum of power up for sale was greater than what buyers want. Nor is that all. Storage technologies for renewables are improving. “SECI has already put out an around-the-clock solar bid,” said Mathur, the former head of TERI. According to him, “Solar storage will be competitive by 2025. Others say 2030.”


Put it all together – the glut of thermal power supply; slowing demand; declining health of discoms; rising fixed and variable costs at a time renewables are getting cheaper (and more predictable) – and it’s hard not to wonder if thermal power has already peaked.

In response to this crisis facing their biggest end-user, coal-based firms in India are responding in significant ways. Take the commercial coalblock auctions. The crisis in coal-based power was one big reason why response to these was muted. No global mining giants participated. A large chunk of the firms that bought coalblocks bought them for their own captive use.

What we see from Coal India is a similar pivot away from thermal power plants. The firm is trying to carve out a fresh future for itself, supplying coal-based power to a clutch of energy-intensive manufacturing activities.

Can that work? Answers in the next part.

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