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Cover Story | December 2017

Logistics clouding coal

Though weak logistics support and lack of preparedness of power plants are to be blamed for the recent coal shortage at power plants, the crisis could have been avoided with better co-ordination among stakeholders. <p></p> <p> In February 2016, the newspapers were abuzz with the news of electricity prices at power trading exchanges dropping to 50 paise in some areas, and 80 paise in some others for off-peak demand periods. Contrast this with the situation prevailing in September and October 2017. Electricity prices at power exchanges spiked above `9/kWh, even if it is for a few time blocks of 15 minutes each during this period. The reasons are not far to seek. In 2016, less-than-anticipated demand growth, excess coal at thermal power plants and restrictions imposed by the National Load Despatch Centre (NLDC) on long-distance power transmission, in the wake of wintry conditions, were at play. In 2017, the power crunch felt due to a reduction in hydro, nuclear and wind power generation, coal-based power plants running on less than half-a-day stocks on an average when there was a demand surge, and inability of coal supply logistics to ramp up at short notice.</p> <p>These contrasting scenarios highlight that there is something amiss even as coal was not in short supply in the latest turn of events, and also highlighted the absence of any institutional mechanism that can handle such emergency. This situation has lead to several state governments and independent power plant (IPP) operators looking to importing coal to meet their feedstock requirements, even going against the government's narrative that India should stop importing coal and exploit its own resources gainfully.</p> <p>'We do not wish to import coal from anywhere in the world. We have sufficient coal capacity in our country,' said Piyush Goyal, the then Union Minister of State (IC) for Power, Coal, New and Renewable Energy and Mines, who still holds Mines portfolio along with Railways, recently.</p> <p>Thus, the sudden rise in demand and spike in power tariffs have caught the power plants, which were having just 'super critical' level (enough for 4 days) of coal stocks. Coal shortage arose in August when India was experiencing heavy rainfall, humidity and warm weather. The events unfolded in the following sequence: The demand in August suddenly spiked by 18 per cent, coal stocks at power plants were down to precarious levels, some of the coal-based plants had to be shut down due to paucity of coal, leading to spike in spot prices of power on power exchanges. </p> <p> <span style="font-weight: bold;">Spot Prices</span><br /> Due to shortage of coal at power plants and lack of logistics support to ramp up coal supplies lead to closing down of coal-based plants with aggregate capacity of 8,500 MW for different periods during August to October 2017. To meet the demand for power, distribution companies (discoms) had to rush to power exchanges, the short term markets for electricity, for buying power. The discom rush has boosted the spot prices beyond Rs.9/kWh. According to the Indian Energy Exchange (IEX) the power prices shot up to a peak of Rs.11.55/kWh during October 2017, though the Average Market Clearing Price (MCP) for the month was at Rs.4.08.</p> <p> 'You saw a spurt in spot prices above Rs.9/kWh. These kinds of tariffs were unheard of in the last 2-2.5 years. And Rs.9 was actually there for few time blocks of 15 minutes each. These high tariffs are seen only over the last 3-4 months. Around Rs.2.8-3 rupees a unit was the norm earlier. Certainly beyond `4 is something which is not sustainable, given the overall sector scenario... Our expectation is anywhere between 3.5 or at best `4,' says <span style="font-weight: bold;">Girishkumar Kadam, Vice President and Sector Head, Corporate Sector Ratings, ICRA Limited.</span></p> <p>Power costs started rising in August as coal stocks at power plants declined. The average monthly spot prices are the highest since October 2014. </p> <p>'The average MCP for October 2017 at Rs.4.08 per unit was almost same as in September 2017, and was 66 per cent higher over Rs.2.46 per unit recorded in October 2016. The price of the power remained on the higher side through the month due to buy bids exceeding sell bids as well as supply side constraints,' said Indian Energy Exchange (IEX), the largest power exchange in the country, in its latest report. The Day-Ahead power market at IEX has seen a growth in cleared volume of 4,078 MUs in October 2017, marking a rise of 13 per cent over October 2016. Kadam believes that higher prices in spot power prices on the power exchanges are unlikely to be sustained. 'Because, the overall thermal capacity is significantly high compared to demand. Almost 25- 28 giga watts (GW or 1,000 MW) of capacity is still not having long term PPAs and this capacity is available in the short term market,'he points out. Even Plant Load Factor (PLF) of thermal plants at/below 60 per cent is also reflecting this surplus capacity.</p> <p> <span style="font-weight: bold;">Reasons</span><br /> Looking at the reasons, it was found that hydropower generation dipped 12 per cent on low rainfall and wind power capacity dropped 36 per cent due to unfavourable weather conditions, shifting the onus of power supply to thermal plants. Meanwhile, several Central thermal and nuclear-generating units were under annual maintenance. Many state generation companies have long closed their inefficient plants, with discoms started buying electricity at lower prices in the spot market. Actually, this mix of events should have kept the coal-based power plants elated, but for emergence of coal shortage at their plants. This exposes the lacunae in management of emergencies in an efficient manner or co-ordination between various agencies involved in the power sector.</p> <p>'There are multiple factors that have lead to this situation,' says Kadam. The first trigger has come from fall in generation from nuclear, hydro and wind segments, even as demand for power has grown 4.5-5 per cent during the half year ending September 2017, compared to the previous year. These developments have increased generation demand from coal-based power plants, for which they were not prepared. The coal stocks at the plants deteriorated since August to October 2017.</p> <p> The coal supplies could not be ramped up in a jiffy as more rail rakes were not available for coal. </p> <p> <span style="font-weight: bold;">Inventory at plants</span><br /> The coal shortage deepened at the inventory level at coal-based power plants, which cater to about 70 per cent of the demand, by end-September. The overall inventory level stood at 8.5 million tonnes (MT) in September 2017, down from 16.7 MT in July and 11.9 MT in August. The number of plants with critical and supercritical levels substantially increased to 21 in September 2017, up from two in July and 12 in August 2017. Even private sector plants didn't stock enough coal to operate their plants at least a month, before the demand for power spiked suddenly.</p> <p>'Power generation, excluding that from renewable resources, increased 4.5 per cent year-on-year (yoy) to 102.5 billion units (BUs) in September 2017. Thermal plant load factor (PLF, for coal and lignite) improved 280 basis points (bp) yoy to 60.7 per cent in the month,' said India Ratings and Research in its monthly report. The improved thermal demand is on account of lower generation from other sources, including nuclear, hydro and wind.</p> <p>According to CEA data released on October 26, as many as 26 generation units were running out of dry fuel - 16 had coal stock of less than four days, a 'Super Critical' level; and 10 less than the 'Critical' seven days stock.</p> <p>Power Secretary, Ajay Kumar Bhalla, Ministry of Coal, and Union Minister of Railways and Mines, Piyush Goyal blamed the power plant managements for not keeping enough stock of coal at plants. Goyal, who was earlier in charge of power and coal, denied any coal shortage, stating that the states did not stock the right amount of coal to their power plants, because of easier availability.</p> <p>In the first week of November, Bhalla said things were much better and that the number plants facing acute coal shortage has come down to 10 critical and 12-13 super critical plants.</p> <p> <span style="font-weight: bold;">Plants shut</span><br /> About 8,500 MW of coal-based power capacities of over 18 power stations were shut for want of coal at sometime or the other over three months to October 2017, according to reports. A 500-MW unit at the Mejia Thermal Power Station and 600-MW unit at Raghunathpur have been rendered un-operational over these three months. The 500-MW Unit-1 of four units of NTPC Simhadri Super Thermal Power Station was also shut down for a few weeks due to short-supply of coal from Mahanadi Coalfields Ltd.</p> <p>'This kind of spikes (in demand) happen at a short notice. Unless you have adequate coal at the plant, it is difficult to address such situations. Structurally coal availability is not a concern. We have seen coal availability improving quite significantly and the overall coal dependence for many stations is now below 10 per cent, down from significant levels earlier,' says Kadam.</p> <p>In fact, those plants that used to operate up to 30 per cent on imported coal mix, are not using imported coal at all. So coal availability is no longer the concern. This is a logistic concern which has come into picture, explained Kadam of ICRA. </p> <p> <span style="font-weight: bold;">Coal production</span><br /> From April and October 2017, Coal India Ltd (CIL) produced 278 MT of coal, while it sold 317 MT, thus liquidating around 40 MT of existing stocks from its pit heads. Its total stock at the beginning of the year was about 68 million tonnes, which has dipped to 29 MT, by end-September.</p> <p>However, CIL missed its production target for the period April-October 2017 by 5 per cent and sales target by 3 per cent despite power companies seeking adequate coal supplies. During the period it was 15 MT short of its production target.</p> <p>A large number of power plants did not lift their full quota of coal during the beginning of the year when power demand was not as firm as it is now, mainly contributing to the present crisis. However, constraints in coal supply logistics have resulted in shortfall of supplies to a large number of plants. </p> <p>Coal supplies to power plants were hit due to rains. Goyal said, ôDue to rains it was difficult to load and transport coal. Because of heavy flooding in some of the mining areas, we could not load coal. The Dhanbad line had to be shut down due to safety reasons,' Goyal said at a press conference recently. </p> <p>Meanwhile, a subgroup is constituted for reviewing infrastructure constraints, under the leadership of the Coal Joint Secretary and consisting of power, coal shipping and railways' representatives, CEA, Coal India, Singareni Collieries and NTPC.</p> <p> <span style="font-weight: bold;">Logistics</span><br /> Most of the transportation of coal is done through railways, at concessional freight rates. When there was a sudden spurt in demand it could not make available more rakes as most of over 1000 rakes available in the country were deployed for various sectors. </p> <p>CIL officials said that supplies could not be increased overnight as it was facing logistics constraints. This resulted in falling coal stocks and generation. In fact, a few generation units had to shut. In order to make sure the situation is not repeated in the future, Coal India is working along with railways to increase rake loading to 250 on a daily basis.</p> <p>In July-September 2016 quarter of CIL was loading about 195.2 rakes a day, that has gone up by 7 per cent to 208.8 rakes per day in the same quarter in 2017. Recently, Bhalla told reporters that coal loading has been quite good and over 220 rakes in the last few days has been coming for coal and that the demand side the situation was improving with the onset of winter. </p> <p>Ministry of Coal's constant coordination and building synergies with Railways helped ease the situation over the last three months. By mid-November CIL was loading 249 rakes a day, almost achieving its target. Coal shortage is expected to be passT if the same trend continues for a few more months. However, it may take a few more days or weeks for the captive power plants to get reprieve from coal shortage.</p> <p> When coal shortage was about to reach crisis proportions, in an effort to shore up stocks at power plants, CIL has offered an option for plants to lift coal on trucks beyond their yearly quota directly from pitheads. Power plants lifted about 93 MT of coal by road during April-October 2017, up 12 MT.</p> <p> <span style="font-weight: bold;">Coal Imports </span><br /> When the sector was facing shortfall in domestic coal supplies till end of FY15 (2014-15), import dependence was significant, But since then the overall coal import dependence has been coming down, alleviating pressure on power generation and prices, an important development from distribution companies' (discoms) perspective. </p> <p>'Going forward, with the kind of coal availability domestically, coal import dependence would be limited, except for coastal power plants, which are imported-coal based,' said Kadam. </p> <p>India wants to end coal imports by government-owned power companies by end-March 2018. However, coal imports for October came in at 16.65 million tonnes (MT), against 16.68 MT in October 2016 and 15.68 MT in September 2017. </p> <p>On the import trend of coal, mjunction CEO Vinaya Varma said recently, 'While there was a revival in demand for imported material, especially from the thermal power plants facing low coal stock situation, the prevailing high price in the sea-borne coal market was seen as a dampener. As a result, there was cautious buying ahead of the winter months. However, going forward, the volumes may go up if there is a correction in the prices of coal.' </p> <p> <span style="font-weight: bold;">Receding demand</span><br /> Due to the rising electricity demand and excess rainfall a few months back, the power sector has been witnessing supply shortage. However, the recent pleasant weather is lowering electricity demand and in turn demand for coal.</p> <p>However, the ministries of Coal, Power and Railways plan to take this weather to their advantage and increase coal supply to power plants to help them build stocks, so that the coal shortage will not repeat in the near future. Demand for coal increases in winter because of heating requirement and agricultural purposes. In fact, winter has already started to reduce power demand at certain locations, according to reports.</p> <p> <span style="font-weight: bold;">Looking ahead</span><br /> For now there are expectations that the coal supply situation and the stock at power plants will improve in a month or two. However, this is the time that the stakeholders in the power generation supply chain have to take measures to ensure that the crisis faced in the last four months will not recur. </p> <p>Kadam of ICRA feels that minimising the transportation constraints, so that rake availability and adequate coal supply is ensured, and better co-ordination among the regulators and stakeholders of the power generation supply chain to avoid any kind of emergency situation, are the lessons that could be drawn from these events. Incremental new Power Purchase Agreements (PPAs) virtually dried up over the last 2 years as discoms in many states are not in a hurry to lock into long term PPAs. During the first half of the current year, there are visible signs of demand improvement and improved capacity off-take of discoms. 'But that is a function of demand forecast and tariff expectation on the new PPAs. And industrial capex recovery is a must for rise in power demand,' says Kadam.</p> <p>The upcoming elections in several states are expected to keep power demand up as the incumbent governments try to provide uninterrupted power before elections. If there is revival in PPAs, that will help 25,000-28,000 MW of stranded capacities lacking PPAs. </p> <p>Renewable power capacity is building up in the country. Tough they are not likely to replace thermal power, which is the basic power, this kind of emergencies are expected to be more frequent.</p> <p>Last but not the least, the recent events reflect that there was a kind of complacency that has set in among the power sector stakeholders, including the regulators and the government. It seems to have crept in because all the stakeholders have settled for the low PLF of 55-60 per cent for planning purposes. At least in planning, this figure should be at least 10 per cent above the prevailing levels to remove supply chain bottlenecks in the sector in future. </p> <p> <span style="font-weight: bold;">- BS Srinivasalu Reddy</span></p>
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