Despite consisting of a major chunk of India's energy mix, the coal sector is emerging from the dungeons, backed by GoI's production targets.
In the past five years, coal power made up over two-thirds of capacity additions in India's generation, and currently accounts for more than 60 per cent of India's power capacity. According to the International Energy Agency (IEA), India's coal demand will see the biggest growth over the next five years, despite a global slowdown.
While Governement of India (GoI) has said that domestic coal production will expand rapidly in the next two to three years, removing the need for imports, this appears highly unlikely. New mining projects and expansion projects taking inordinately long, owing to land acquisition, environmental approvals and other hurdles. As such, imports are still expected to play a big role, if the country has to reach its goals for æ24x7 Power for All'.
In order to meet the coal demand in next five years, Coal India Ltd, the main coal producer, has an ambitious plan of increasing its production to one billon tonnes by FY2019-20. CIL production is showing an increasing trend, having gone up from 494 MT in FY15 to 554 MT in FY17. Even with this production, the pit head stocks of CIL are around 66 MT and the cumulative stocks at power plants in the country is more than 35 MT. This increase level of domestic production has already shown a decline in imports of coal which has reduced to 200 MT level (including coking coal of about 53 MT).
In addition to the availability through CIL, a number of state power utilities like NTPC, WBPDGCL, KPCL, CSPGCL, OPGCL, APGENCO etc., will be producing coal through the coal blocks allocated to them. Majority of the said coal blocks will be fully operational in next three-five years. Additionally, some private utilities are already operating captive coal mines. The GoI is also opening the coal sector for commercial mining.
Rajendra Prasad Ritolia, Independent Director, India Power Corporation Limited, points out that while opening of new mine is a challenge, because of various constraints such as land acquisition, RR, environment clearances, statutory clearance etc, CIL has still increased production on a Y-oY basis - from both existing mines and a number of new projects.
'All these measure will make the availability of coal more than sufficient to meet the domestic demand. But the coastal plants will continue to import coal because of commercial reasons. Due to their location advantage, import of coal for these plants shall continue be cheaper. The coking coal import however will increase as India do not have enough coking coal reserves in the country,' feels Ritolia.
It is therefore anticipated that at the end of five years, the thermal coal demand will be fully met from domestic production. However, plants located in coastal areas may continue to import because of the commercial reasons. The total estimated imports at the end of five years shall be about 75 MT of coking coal and 50 MT of thermal coal - making a total of 125 MT.
Therefore, while imports will not be completely eliminated due to use of imported coal by port based power plants, the imports may continue to drop and domestic coal would be used increasingly. GoI is also considering stopping any import of coal by government power utilities.
It is also widely believed that Indian thermal plants have been unable to reach full plant load factors (PLF), due to coal shortage and/or low quality of coal. Recent improvements to support their financial health, supported by the central government's UDAY programme, as well as in metering and electrification, have given uneven results and high operational losses persist in some areas.
However, Ritolia feels that the low PLF of the Indian thermal plants is not necessarily on account of coal shortage or poor coal quality, but that the main factor leading to low PLF is on account of poor financial health and high T&D losses of various discoms.
'They are not able to pay to the power producers resulting in to reduced drawal of power. This in turn has put financial stress on the power producers. Coupled with this, the Banks are also reluctant to adequately finance the power producers to meet their financial commitments. All this have forced the power producers to generate sub-optimum power leading to low PLF,' he observes.
Samir Ashta, CFO & Director-Finance, CLP India concurs that because discoms have struggled to pay on time, there is not much power off-take, which in turn restricts the output of coal plants. 'The reason is more likely a systemic issue rather than an infrastructural problem,' he points out.
When the cost of buying power is more than the price of selling power, such imbalances are bound to occur - it is simple economics. If you look at the discoms' balance sheets, the average revenue is lower than the cost expended. No industry can sustain businesses in such conditions and it is a big challenge for the sector.
Furthermore, it is important to consider another factor - price fluctuation. This is especially troublesome for generators since the regulatory commissions do not allow pass-through of such costs, by way of power purchase and fuel cost adjustment. The fluctuations in coal prices in domestic and import market has necessarily an adverse impact not only on the profit margins but at times on the financial viability of the plants because the increased fuel cost is not always allowed to 100 per cent pass through.
'The case of Tata Power and Adani Power in Mundra is a burning example where in such big power producers have gone into serious financial troubles because of this issue,' points out Ritolia. The CERC and the related state ERC should seriously consider to compensate such price fluctualtions which are beyond the control of the power producers. Otherwise the viability of the plants shall always be under threat.
In brief, the issues are not totally insurmountable. Having said this it is essential that the government should seriously think of creating single window clearance system for mining projects. Mining being site specific activity, the state governments would have to play major role. Online time bound monitoring of project implementation is a welcome move in this regard.
Ritolia adds, 'Along with this the 'Make in India' approach and growth in industrial activity will add to the demand side leading to improvement to PLF. If all stake holders including central and state governments are sincere, the situation can substantially improve within the next one to two years.'
As industry players may face challenges in securing the required funding for the projects. Efforts are required to attract domnestic and international investment, for which GoI should consider exploring new options, such as structuring of equipment leases, attracting private equity investors, providing tax incentives, etc.
In the last few years, more funds have been raised through non-traditional instruments such as bonds. Similar trends of capital investments have been observed across the global mining sector.
Explaining one such innovative financing structure available for thermal power plants in India, Ashta points out, 'As the operational performance of Jhajjar improved over a period of time, we took a look at the debt capital markets and found that they reflect the changing interest rates in the country.'
The benefits of adopting such a financing structure are that it creates cash reserves. If you consider the fact that the principal amount in a loan must be repaid every quarter and for the bonds, the company can negotiate repayment schedule with the investors. In the second scenario, all the cash gets retained in the business for a period, for capex and other uses.
The second benefit is that the interest rate for bonds remains the same, whereas in the case of the banks, the interest rate gets reset periodically. A tuned interest line helps in matching the tuned PPA revenue.
Furthermore, discoms today do receive credit enhancement from their state governments. There have been many instances, where discoms have issued bonds on the basis of standalone performance or on the guarantee of their state government which credit enhanced their bonds.
Additionally, the opening up of coal mines has also have a positive impact. States Ashta, 'If you look at the PPA of our Jhajjar plant, our plant availability - which has gone up significantly. March 2016 was the first time where the Jhajjar plant availability went above 85 per cent, from April 2016 to August 2016 our plant availability has been around 91 per cent.'
Indicating a significant shift in the Indian power sector, the Central Electricity Authority (CEA) has, in its National Electricity Plan (2017-2022), said India does not need any more coal-based capacity addition till 2022, as India would add massive renewable-based capacity. At the same time, the 4,000 MW UMPPs would also be not needed if CEA projections are adhered to by the Centre.
However, Ritolia feels that despite GoI focus on renewable energy sources due to environmental considerations, coal will remain the leading source of energy for India in the foreseeable future.
'Even in COP21 at Paris, GoI has committed that by the year 2030 renewable energy sources will contribute to 40 per cent of the total fuel mix in the country. Rest will be contributed from fossil fuels and other sources,' he points out, adding that in any energy mix scenario - depending upon the commercial viability, the share of coal will continue to remain not less than 50 per cent.
Here, NTPC too is an example, evident from its plans to be a 130 GW company by 2032 with diversified fuel mix. Coal would continue as predominant fuel with 65 per cent share in the generating portfolio; non-fossil fuel based capacity would achieve a share of 30 per cent and thermal based generating capacity share would be 70 per cent. States a NTPC spokesperson, 'NTPC has committed to GoI for setting up 10,000 MW of renewable energy projects during the next five years.'
The way forward
Even with the improved demand for power and improved PLF, sufficient coal will be available. So far the quality is concerned, a number of steps have already been taken by the government and CIL by engaging CIMFR, ISM, IIT etc as independent quality monitoring institutions.
Already there is a significant improvement on the quality front and it seems that this issue will be addressed to the complete satisfaction of consumers in coming years. Presenting an improved view of the current status, the NTPC spokesperson added, that the Group's generation crossed 276 BUs in FY17.
Furthermore, NTPC's coal stations achieved a PLF of 78.6 per cent and nine coal stations - Rihand, Vindhyachal, Sipat, Farakka, Kahalgaon, Barh, Bongaigaon, Mouda, NTECL-Vallur, clocked highest ever generation. In fact, Koldam hydro stations achieved the highest ever generation of 3.225 BU at a PLF of 46 per cent.
The company has also started mining activities from its first coal mine at Pakri-Barwadih and its first high efficiency 800 MW unit at Kudgi in Karnataka was also commissioned during the year.
In order to meet coal demand internally and make India self-sufficient in coal production, the government is focused on increasing domestic production, which includes efforts to expedite clearances, land acquisition and movement of coal. Thus, to achieve the ambitious coal production targets set by GoI, strong concerted efforts are required from all stakeholders, especially the Central and states governments, industry players, investors, and funding agencies.