With the sharp improvement in the economic activity post the second wave of Covid-19, the demand for power among the industries have shot up. And since coal is the primary fuel that’s powering the country’s 70% energy generation and consumption, Indian utilities are facing a severe shortage of coal.
Is India producing less coal now? Is the country’s dependence on imported coal a cause of concern? Is there a solution to this shortage? We explore the reasons and answers to the coal and power crisis looming over India.
Coal, the black diamond
With an almost 100% jump in the international markets, coal has now become a priceless commodity. This price rise is led by two of the largest consumers of thermal coal globally, India and China. As reported on October 1, the prices of high-quality Australian thermal coal had peaked at a record $203.20. This is a 4-fold spike from August 2020.
As of now, India’s many coal-fired power plants have stocks to survive only a few days. This deficit cannot be met unless the country imports coal. But, India isn’t the only country experiencing a surge in thermal coal consumption. With Covid-19 immunisation in full swing in many nations, economies around the world are ramping up output to match the pre-pandemic levels.
Why is the coal supply running out?
Coal India Limited, a state-owned company, maintains a virtual monopoly on coal mines in India, producing roughly 75% of the coal used in India’s coal-fired power plants. However, production at Coal India Limited remained flat in the five months to August this year, despite a 16% jump in energy demand. Between April and August, the company’s mines extracted the same amount of coal as they did the year before, when India was in the midst of a COVID downturn.
Normally, coal supplies drop during the monsoon season, but due to the extended rainy season this year, the situation has gotten out of hand. Heavy rains make it more difficult for miners to retrieve the rock from underground shafts and open pits during the monsoon season, which delays coal production. Monsoon rains typically begin in late May or early June and run until September, but this year’s rainfall lasted until early October.
Nonetheless, the coal scarcity could have been predicted before it became a national crisis. Normally, coal companies make up for production deficits by importing more coal, but global coal prices have risen sharply.
Despite having a significant coal reserve, India is the world’s third-largest coal importer. Imports have dropped substantially in recent months due to a widening gulf between surging international coal prices and domestic coal prices.
In July and August, Indian power plant coal imports plummeted by 45% compared to the same period last year, while India’s non-power industries became more reliant on domestic coal. Non-power sectors like aluminium, steel, cement, and paper often use a lot of coal to generate heat.
The decline in electricity generation by coastal power plants that rely on imported coal increased the pressure on domestic coal-fired power plants to increase output.
What could happen next?
The energy shortage might last for up to six months. With India’s festive season commencing this month, when consumption peaks, power demand might grow even more — and the problem could be aggravated if worldwide demand for Indian goods rises significantly. Coal India, for its part, is said to have increased supply to try to alleviate some of the deficit.
How will India meet the coal demand?
Importing coal will cost the exchequer heavily, hence the ideal solution is to improve the domestic production of coal.
This is an opportunity for Coal India to increase output from the 158 underground, 174 opencast and 20 mixed mines it controls across the 8 states of India.
Yes, the elongated monsoons are hampering the logistics, but reports suggest that despite the drop in demand in 2020, India’s coal production will peak in the running year. India’s coal production is expected to grow from 777 mt in 2020 to 827.8 mt in 2021, representing a 6.4% increase, says this report from GlobalData.
After the centre stated that it planned to minimise India’s reliance on imported coal, Coal India has been growing its resources for the past two years in order to produce coal at this level and the outlook is very positive despite all the challenges around the sector.
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