Another coal domino falls as India revises billion tonnes a year target

Another domino in India’s coal-centric energy policy has toppled, with the Indian Government conceding its oft-stated aim of producing a billion tonnes a year of coal by 2020 is meaningless and unnecessary.

With about 72 million tonnes of coal stockpiled at mines and power stations – enough fuel for over 50 days operation – and power demand growth running lower than forecast, the day of reckoning was inevitable.

When the Modi Government came to office in late May 2014 coal power plants had enough fuel for just 12 days. At that time 19 plants had enough coal for just four days or less operation and another 32 plants had less than a week’s supply. With well over a hundred more coal generating units already under construction and a further 200 plus proposed, the government took it as a given that coal production would need to expand as rapidly as it had in the preceding decade.

By early 2015 the figure of one billion tonnes a year of domestic coal production by 2020 was being bandied about as a serious target.

To have any chance of reaching such a target the government embraced the coal lobby’s agenda with zeal. It weakened environmental laws, sought to stifle the anti-coal activism of groups such as Greenpeace and authorised massive mine expansions with minimal review. It also sought to gut tribal land rights, albeit largely unsuccessfully to date.

There were other elements to the Modi Government’s plan too: cutting coal imports to staunch the growing outflow of money spent on expensive global coal and a plan to restructure the finances of the debt-laden state-based distribution utilities.

Not everything went to plan though. In August 2014 the Supreme Court deemed over 200 coal block allocations made by previous government’s had been illegally made and cancelled all but a handful of them.

Even so, coal production grew and dozens of new coal units were commissioned.

However, the financial costs alone of new coal generation are high. In the space of just nine years the cost of power sold by state-based utilities – which is predominantly based on coal – almost doubled. [p. 31] Plants based on imported coal are tied to a global coal price that remains higher than India’s domestic coal. New coal plants are also groaning under huge and expensive debt loads.

If the narrow financial costs of burning more coal were climbing, the price tag on building more mining capacity is even more formidable. One analysis suggests the billion tonnes of coal a year by 2020 target would cost India US$149 billion, four times the annual defence budget.

Even so, under pressure from the government, Coal India pressed ahead with plans to reach to billion tonnes of coal a year target. By the end of March 2016 the company had cranked production up to 536 million tonnes of coal compared to the 462 million tonnes produced in the 2014 fiscal year, just before the Modi Government took charge.

Having increased coal production the government has discovered demand is lacking.

Where power demand had been expected to climb at between seven and eight per cent a year, it was a more modest average of 4.5 per cent from 2012 to 2015. Some coal plants faced prolonged closures due to the recent drought which starved them of cooling water.

Other coal plants have to still to secure supplies from Coal India and long term purchase agreements from state governments. State governments in turn are reluctant to enter into new purchase agreements given the stressed finances of their distribution companies. Better than average monsoonal rains these years have boosted hydro generation, crimping both thermal generation as well as coal production.

With each passing month the chasm between the rhetorical target and real world widened.

Stockpiles at power stations ballooned to bursting point ahead of the monsoon. Then stockpiles at railheads and mine sites grew until – with the increasing risk of spontaneous combustion – Coal India conceded it needed to wind production back.

“Coal India has now been asked to produce as much as the market can consume,” an anonymous coal industry official recently told the Economic Times.

Coal India’s previous target was to produce over 598 million tonnes by the end of March 2017, a 12 per cent increase on last year’s production.

With Coal India’s sales having increased by just 0.2 per cent in the five months to the end of August, how much the market can consume is anyone’s guess.

Some commentators have surmised coal demand will rebound as the restructuring of the distribution utilities finances makes wholesale power purchase more viable later this year. Or maybe, some think, this won’t kick in until next year. Others opine coal demand will spike soon as coal plants restock after the monsoon.

Despite the optimism, coal’s cheerleaders fear more dominos may yet fall.

Private power’s panic grows

Just days after the government dropped its billion tonne target private power producers were bemoaning the reluctance of major banks to finance up to 25,000 MW of partly-built fossil fuel plants, most of which are coal units.

The Association of Power Producers, which represents major private power companies such as Adani Power, Reliance, GVK, Lanco and Essar, has revealed that it is lobbying the Reserve Bank of India to help ease the plight of power projects at risk of becoming stranded assets.

In particular, the lobby group wants lending consortiums to “be made to comply with [the] majority decision” rather than allow some participating lenders insist on additional loan conditions.

Back in June the Governor of the Reserve Bank of India (RBI), Raghuram Rajan, resigned after increasing opposition to his insistence state banks take action on bad loans to major companies.

Early on in his three-year term as Governor Rajan had decried India’s “riskless capitalism” where major companies ignored loan-repayment obligations to state banks. Central to the controversy were companies with a heavy involvement in the power sector.

With Rajan gone, major private power producers are seeking the RBI ensure a financial lifeline is thrown to help get their floundering projects back on track.

If the private power developers can’t persuade the RBI or the banks to help resuscitate their stranded plants, another potential driver for India’s increased coal mine capacity may well evaporate.

Bob Burton is the Editor of CoalWire, a weekly bulletin on global coal industry developments. (You can sign up for it here.) His Twitter feed is here. Ashish Fernandes is Senior Campaigner at Greenpeace. His Twitter feed is here.