By A.M. Shah, Contributing Author, Cornerstone
Originally Published in Cornerstone, Volume 3, Issue 1
The year 2014 saw momentous changes in leadership in India as Narendra Modi took the office of Prime Minister, filled his top ministerial positions, and began to lay out his administration’s ambitions to the world. As was highlighted in a previous article for Cornerstone, while arguably challenging, the plans put forth for India’s energy sector reflected the broader hope expressed during the campaign that the country would break free of the roadblocks that had plagued the past. In the six months since that article was published, the groundwork for progress has been laid. However, major hurdles remain, especially in India’s critically important coal sector.
Every link in India’s coal supply chain requires upgrading for coal to fulfill its required role in meeting perhaps one of Modi’s most important campaign promises: to provide affordable, reliable electricity to every person in India. In a country that has over 300 million people living without access to any electricity, this would be a momentous feat. In addition to providing basic energy access, much hope remains that Modi can make India more favorable for businesses and continue to grow the economy. Despite some lower projections, India’s GDP growth increased from less than 5% to around 5.6% by the end of FY15 (ending March 2015) and Citigroup’s projections in December estimated around 6.5% in FY16 (ending March 2016). To take this momentum further, a bare minimum requirement will be to generate more electricity and have more reliable coal-based power generation. Prime Minister Modi has entrusted India’s Coal and Power Minister, Piyush Goyal, to lead the overall reform effort for India’s coal sector. Goyal regularly conveys his strong desire to rectify the country’s energy situation, especially as it relates to coal. While India’s under-performing coal sector may hope to meet such aspirations, navigating the maze of India’s coal sector is not straightforward.
Improving the coal sector unquestionably begins in the area of coal production. India is coal rich, but continues to import coal from abroad. Goyal is working to achieve Modi’s target to increase Coal India’s (CIL) annual production to one billion tonnes by 2019, far more than any other coal producer generates today. The reasoning is that such a move could push India toward energy security and independence, especially as it relates to its thermal coal requirements.
Aspirations Meet Reality
Although the country is now moving toward opening its coal sector to foreign firms and also looking to modernise some of its mining practices, it remains questionable whether India can ramp up production to meet the stated goals.
The one-billion-tonnes-per-year target set by the Modi government would require a compound annual growth rate of 18%. Such a growth pace has not been achieved in the last decade. India substantially missed its target to ramp up coal output to 680 million tonnes (MT) by the end of the 11th Five-Year Plan (2007–2012), as production touched only 540 MT in FY12, and 565 MT in FY14. For perspective, China produces roughly 3.5 billion tonnes a year. While it remains to be seen how Modi’s coal production goal will be met, there are various approaches underway that could make some progress.
A Time for New Players
For decades, Indian laws ensured CIL a coal mining monopoly, but soon this will come to an end. India reformed its coal mining laws during the most recent Parliament winter session. An executive ordinance was legislated and the Parliament is in the process of enacting a law allowing the entry of private (including international) players to engage in commercial mining. Today, the Indian government is vigorously assuring corporate enterprises that the law will be enacted, despite political opposition and recent strikes from CIL miners.
The new coal mines law allows the government to e-auction mines and was necessitated by the 24 September decision of the Supreme Court to declare the allocation of 204 mines between 1993 and 2008 as illegal and cancel the mining licenses. In October 2014, the Indian government released the ordinance framing the new law amending the Mines and Minerals Act and allowed the participation of private players. Subsequently the government announced the first phase of allocation: The target is to e-auction 104 mines by 31 March 2015. There has yet to be a decision on how to compensate the existing operators that have made genuine investments. It is expected that together these mines could produce an additional 100 MT of coal annually. Out of those with cancelled licenses, 30 mines were already producing a total of 40 MT, 17 were nearing production, and 13 could have begun producing within one year. As a conservative estimate, it will require at least a year to disburse all 204 mines under the new law. While this enabling legislature may be enacted by the end of March, it will take time before the world’s large coal miners will seriously consider mining in India. They may also wait to see how a proposed industry watchdog will handle oversight.
Can India’s Coal Giant Stand Again?
Even as other options to fix India’s coal industry and ramp up production are being pursued, the main challenge and reform focus will likely remain on improving the functionality of CIL—the world’s largest coal producer with roughly 338,000 employees. The company currently holds 81% of Indian market share. Modi has pushed through changes at the top, putting individuals into leadership positions with a history of advancing projects that had previously stalled.
Although there were some calls to break up CIL, it quickly became clear this was unpalatable for Goyal. Perhaps this was based on the conclusion that keeping CIL intact may be necessary for it to compete with international mining companies at a time when India is opening up for commercial mining. Instead of splintering CIL, on 28 January the Modi government successfully offloaded 10% of its ownership of CIL to domestic and international investors. Although CIL will not be broken up, it must find a way to improve efficiency despite its size. In 2011, CIL’s production averaged 4.92 tonnes of coal per man-shift hour, whereas other players in India are producing at roughly 6.9 tonnes of coal per man-shift hour. Both figures are much less than the global average, which is more than 15 tonnes per man-shift hour. The first step in improving efficiency is CIL’s deployment of modern equipment and evacuation vehicles.
The ability to reliably meet demand and actively increase production has not been demonstrated by CIL to date. Throughout most of 2014 more than half of India’s thermal power plants, which source most of their coal from CIL, could not operate for a full week relying only on their coal stockpiles. In FY14, India imported 168 MT of coal from countries such as Indonesia, South Africa, and Australia. The dipping price of coal on the international market and the lower output of CIL led India to import 210.6 MT of coal during the 2014 calendar year, an increase of roughly 19%. Similarly, India imported more than 110 MT from April to September, compared to 92.98 MT during the same time period in FY14. It remains too early to make judgments on the impact of national-level policies on CIL, but to date imports have slipped in the wrong direction. Meanwhile, the government is busy resolving problems that continue to derail production and could scare off potential new producers. For example, a new national coal dispatch monitoring centre has become operational. India has never seen such a control room, where real-time surveillance at all major sensitive zones is possible. The movement of trucks can be monitored through a global positioning system (GPS). The intent behind this is to curb coal theft at major mines.
Potentially the most important challenge facing Goyal, and critically important to improving production, is determining how best to work with CIL’s historically strong union, an endeavor in which the previous UPA government was generally unsuccessful. On 9 December, Goyal flew to Kolkata before proposing the coal mines bill in Parliament, seemingly to discuss this action with the union a priority.
The union knows its own power; if CIL workers strike and refrain from coal production for one day, 30,000 MW of electricity generation capacity could be immediately affected. On 5 January, CIL workers went on a five-day strike that captured global headlines to protest changes, including the opening up of the coal sector beyond CIL. In response, Goyal quickly flew again to Kolkata; after hours of discussions the union members returned to work. During the negotiations, Goyal maintained the government’s ability to sell 10% equity in CIL and commitment to bringing in private players. To date, it appears that the Modi government, despite proposed reforms to the coal sector, is faring better with the union than its predecessors. One potentially positive development for improving Indian coal production is the recent election in Jharkhand where the BJP party won the state assembly with a clear majority. As successfully reforming India’s coal industry will rely on political victories, the success of the BJP party in Jharkhand is a critical development—the state sits on 27% of India’s coal reserves and is home to 11–12% of CIL’s production. CIL intends to increase coal production by 20% in the state over FY14–19. The new BJP government is likely to assist the Modi government in the execution of key mining and rail projects that have been on hold for years.
THE TROUBLE WITH TRANSPORTATION
Transportation of coal in India presents its own set of problems. The railways are one of the biggest carriers of natural resources in India. The Modi establishment is working to unlock more than 300 MT of coal annually by 2017 through collaboration between the Transportation and Coal Ministries. As per Coal Ministry estimates, three railway lines connecting Tori-Shivpur-Kathautia (in North Karanpura, Jharkhand), Jharsuguda-Barpalli-Sardega (in Ib Valley, Odisha), and Bhupdeopur-Raigarh-Mand (in Chhattisgarh) could help transport an additional 150–200 MT annually by 2021. The work on some of these lines started nearly a decade ago, but delays with land acquisition, environmental clearances, and complex relations between the regional and the central governments have hampered progress. Although the construction of these railways is a priority in Delhi, the states of Jharkhand, Odisha, and Chhattisgarh have yet to start the process of handing over land, despite obtaining necessary clearances. Jharkhand was the major remaining stumbling block; with the BJP now in control, these important rail projects may begin to move forward. In anticipation of the successful completion of the new rail lines, Goyal asked CIL to buy 250 additional coal trains— doubling the existing capacity—to make full use of these tracks when they become operational.
In addition to building more rail capacity, there is also a grand plan to rationalise coal linkages so that power plants are linked to the nearest mines or ports. This reform would likely require alteration in existing railway routes and schedules; at least one example exists of successfully changing (i.e., rationalising) the source of coal for a power plant. Such changes may lead to savings on transportation costs for some power plants, but given the lack in uniformity of coal quality, it could also lead to challenges.
India is a power-starved nation and coal-based power will undoubtedly continue to be its principal electricity source. The main challenge facing the electricity sector is that there simply is not enough electricity or coal. The situation becomes more critical as India looks to provide complete energy access by 2019. Out of a total installed power capacity of 255 GW, 153.5 GW of India’s capacity are fuelled by coal. On any given day, this 60% of the installed capacity generates more than 75% of electricity consumed in the country. The impact of insufficient coal for these plants is evident. No coal means no power for many Indian people. Although coal will remain the predominant energy source, India, like many countries, is looking to diversify its power sector. For example, the country has announced plans to shift a sizable portion (40 GW) of baseload power generation to nuclear power plants, but the domestic laws defining liability in case of any accident keeps investors away. India’s plans to boost solar- and wind-based power generation are perhaps more likely to be implemented. Currently, India has 23.7 GW of capacity based on these two energy sources, most of which are fed by wind. The plan is to increase solar-based generation capacity from the existing 2.6 GW to 100 GW by 2022. However, it is still India’s coal plants that will continue to feed the majority of the power demand in the country.
Increasing, or even maintaining, coal utilisation rates faces both domestic and international environmentally based opposition. Recently, the Indian national government took a stand on greenhouse gas emissions, saying that India will not sacrifice the country’s development imperatives for climate-related reasons. Still, pressure to limit emissions remains strong. The recent agreement between the US and China, whereby the US has agreed to emit 26–28% less carbon in 2025 than it did in 2005 and China has agreed to stop increasing its coal use by 2020, has led some to ask if and when India will curb emissions. While India’s emissions are growing, it produces annually only two tonnes of CO2 per capita—a fraction of the 20 tonnes in the US or even the eight tonnes in China. The current priority for India is development, although there are some steps that could decrease the carbon intensity of electricity. One important step supported by Goyal is to modernise India’s aging power plants. In addition to reducing carbon intensity, this will reduce criteria emissions, which is an important near-term objective. He has identified 32 GW of capacity and hopes to replace these with ultra-mega supercritical plants. Goyal’s main challenge in advancing this objective is to motivate banks to lend more toward the construction of new plants. Another major environmental hurdle for India remains coal quality. Most of what is used is low in quality and high in ash (4500 kcal/kg). The modern plants must be capable of handling lower coal grades. On the production side, 90% of India’s coal is from open cast mines on lands that are often not reclaimed. Eventually India must improve its mining practices and bring them to the international standards. After the G20 summit in Brisbane, India and Australia agreed to share knowledge around coal mining, especially underground.
India’s coal industry may have a tortuous path to modernisation and a production rate of one billion tonnes per year seems elusive. However, there are actions in progress that will ensure that India’s energy sector will continue to be a developing story.
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