Economy

The Confusion Over Coal, Power Tells Us India Hasn’t Outgrown the Need For Planning

While international commitments to clean energy have been made, in the absence of a clear energy policy, estimates for increasing power capacity from coal continue to grow.

Workers unload coal from a supply truck at a yard on the outskirts of the western Indian city of Ahmedabad April 15, 2015. REUTERS/Amit Dave/Files

Workers unload coal from a supply truck at a yard on the outskirts of the western Indian city of Ahmedabad April 15, 2015. Credit: Amit Dave/Reuters/Files

As India moves from a planned to a market-driven economy, the energy industry faces several challenges. Our study of these challenges suggests that the biggest hurdle is the old bureaucratic mindset of running a socialist economy.

Today, 42% of India’s total power generating capacity is privately owned – and this is rising. The erstwhile Planning Commission has been replaced by Niti Aayog, which works like a think tank, and does not do the old job of allocating resources and coordinating between ministries. Niti Aayog needs to lay down policy prerogatives and general directions for the ministries of power, coal, renewables as well as oil and natural gas. So far there has been no such direction. A national electricity plan has been drafted by the Central Electricity Authority since it is required to be made every five years under the Electricity Act of 2003. It draws its priorities from the outdated 2005 energy policy.

India generates over 60% of its total energy from coal and another 8% using gas and diesel. In view of the climate commitments made by India at Paris, it needs to bring non-fossil fuels up to 40% of its energy mix and the carbon intensity of its GDP down to 33% by 2020.

The national electricity plan states that the government will limit fresh coal power generating plants to about 50 GW of capacity already under construction. Four coal power plants with super critical technology would only be set up to offset the capacity from some old plants that will be closed. That is, more efficient plants might be set up to replace old ones, but no further generation capacity will be added.

Hidden demand

The plan projects peak demand in 2022 at 235 GW – which is 17% lower than previous estimates – and that for 2027 at 317 GW at about 20% lower than previous estimates, thereby revealing the imminent slowdown in industrial growth. India already has an energy supply of 310 GW, counting the 50 GW of thermal power already under construction. With the bold renewable target of 175 GW and additional balancing capacities in gas power and a minor addition in hydro, India’s energy supply is roughly equal to its energy demand.

Thus, India seems close to self-sufficiency in meeting its power needs. However, India’s growth trajectory could take a marked upturn at any time and demand for more power is currently concealed by inefficiencies of distribution companies (discoms). Many parts of India still get power for just a few hours each day and spot power – easily available now but at higher rates – is not purchased by stressed discoms. They prefer to leave their consumers in the dark rather than incur further losses. The unrevealed demand for power might therefore turn out to be much more than the above energy supply estimates.

The move to limit India’s coal power seems to be a method to stay in line with the nation’s international commitments. The problem is that it is too ambitious to plan such a move in a market-driven economy – these estimates might not hold if the demand for power were suddenly to rise. The Draft National Electricity Plan, of December, 2016 says,

“It is expected that the share of non-fossil based installed capacity (Nuclear + Hydro + Renewable Sources) will increase to 46.8 % by the end of 2021-22 and will further increase to 56.5 % by the end of 2026-27 considering capacity addition of 50,025 MW coal based capacity already under construction and likely to yield benefits during 2017-22 and no coal based capacity addition during 2022-27.”

It is the planned economy mindset that leads to this wishful conclusion. Planners have not revealed their overall energy policy, and the confusion that prevails is a fallout of India’s difficult transition from being a socialist economy to becoming a market driven economy.

No clear policy

The plan recognises the need to augment gas power generation to balance the new but uncertain supply from renewables. It seeks an outlay of Rs 10 lakh crores for augmenting generation capacities of gas and renewables. The budget for 2016-17, however, has granted only Rs 20,000 crores for renewables. In the absence of a comprehensive energy policy, such plans made by the power ministry will prove futile if other ministries don’t toe the same line. The ministry of finance evidently expects that all this investment will need to come from private enterprise, but provides a surprising capital outlay of Rs 8,000 crores for coal.

In the absence of a clear energy policy, Coal India Ltd. continues to plan to raise its annual coal output up from 560 million tonnes to 905 million in 2020. Private coal mines allotted by the ministry of coal as recently as early 2015 to private producers for captive power generation are expected to mine 500 million tonnes of coal by 2020. This would take India’s total coal output up to 1.5 billion tonnes by 2020, whereas the National Electricity Plan reveals that the nation would need no more than 727 million by 2022.

Low prices for spot power in the power market show that such huge capacities are not required now, as power demand is subdued. The plan fails to consider the plight of private power producers suffering under this jolt, and of coal mine owners who have paid hefty premiums to book these mines as recently as early 2015. If this situation continues, it would belie the much touted benefits of over Rs 350 lakh crores in revenues from state and central cesses, which have been estimated to accrue from e-auctions of coal mines.

Should the government restrict private miners from mining coal and producing more power, it would be against the norms of the recent auctions. The bidders might have been led up the garden path to bid aggressively for coal mines. Those that have not framed their generation plans might wait out the slow market and raise their coal power outputs whenever the market turns.

The government has recently announced its plans to e-auction four large coking coal mines that would be allowed to sell their coal to steel and cement plants and other coke users. Another 23 coal mines for coking coal for captive consumption have also been announced. It is rumoured that non-coking coal mines will be granted permission to trade their coal in the market if they can’t use it for their own power consumption.

Public sector coal

The stress is not limited to the private sector. Public sector enterprises own 58% of the nation’s power generating capacities, of which the National Thermal Power Corporation (NTPC) is the largest. NTPC has announced that it will add 26 GW of coal based power generating capacity this year, which is already under construction, and will continue to add further capacity in the next five years. Only 11 GW would be allowed under the replacement norm. It might be forced to close down more old plants if it needs to augment its capacity further.

There is also the question of plant load factors. The nation is running at under 60% of its planned capacity today. In the face of subdued demand for power, the highest it touched in 2016 was 67% in April. It had dipped to as low as 52% in August. Manufacturing industry which carries the bulk of this demand is showing no sign of sustained growth – in fact, it consistently declined for fourteen straight months before showing a slight uptrend in the past two months.

Meeting a growing energy demand

Indian coal power plants have never consistently generated much more than around 70% of their rated capacities. In the absence of new capacity addition, the only way a sudden surge in demand could be taken care of is by running the generating plants at higher capacity utilisation. Changing over from old plants to new ultra mega power projects in fact provide scope for at least a 30% extra generation output.

This seems to be the loophole the government is counting on. Renewable solar and wind power do not fill this huge gap for two reasons – first, the planned capacity of 175 GW actually translates to a power output of only about a fifth of this capacity, as due to vagaries of weather and fluctuations in output these rarely operate at plant load factors greater than 20%. Second, it is questionable whether all this planned capacity would be built as per schedule and integrated successfully into the grid. If it does get built, the grid would need to be strengthened to take in these fluctuating and erratic loads. Gas is often used to balance out solar and wind fluctuations. Capacity additions in gas, which is also a fossil fuel, would naturally keep the nation from achieving its bold climate commitments.

It is crucial for the government to come out in the open with policy prerogatives and constraints, and to make the best possible choices boldly after debate. Though the National Electricity Plan was put up for public comments for a limited period in January, few people have the data and nationwide information to be able to counter it. What was required was debate and discussion with the coal and power industry, as well as with concerned think tanks, NGOs and individuals. The way this is going, however, choices are camouflaged and the industry as well as the consumer is left confused.

Investment decisions require consistency and transparency in policy. Nurturing private enterprise is a whole different ball game than centralised planning. So far, the accent is on appearances; that needs to give way to a maturity to announce the hard choices facing the nation. This is a critical phase in the nation’s development. It will be interesting to see whether the nation’s policymakers rise up to these challenges.

Armin Rosencranz is professor of law at Jindal Global University, Sonipat (JGU). Rajnish Wadehra is in JGU’s master’s program in Government and Public Policy.