Why are India's power plants facing severe coal shortage?

Coal stocks at India's power plants, on 31 Aug'21, fell to a critically new low of 12.76 million tonnes (mn t), sufficient for a mere seven days of power generation. So much so that the Core Management Team (CMT), the committee constituted to regulate coal supply to plants facing acute shortage of the fuel, proposed that power producers should explore the import market in order to meet their requirements.

Power demand-supply mismatch?

But why did this situation arise, especially when Coal India Ltd (CIL) reported a remarkable growth in its production in Aug'21?

In fact, CIL's production increased 15% y-o-y to 42.6 mn t in Aug'21 against 37.17 mn t in Aug'20, recording the highest y-o-y growth for a particular month in this fiscal.

Interestingly, this is also the first time when production crossed the 40-mn t-mark over the past seven fiscals, indicating concentrated efforts of the company to meet rising demand despite the challenges posed due to the monsoons.

CIL also recorded a 10% y-o-y increase in dispatches to 48.73 mn t in Aug'21 against 44.34 mn t in Aug'20, although this marked a 4% m-o-m drop compared to 50.59 mn t in Jul'21.

But still, the question arises as to why the power utilities suddenly found themselves in a tight spot?

It may be mentioned that CIL had commenced the fiscal with a surplus inventory of 99 mn t while power plants around Apr'21 too were comfortably placed with an opening stock of around 28.66 mn t, sufficient for 15 days of power generation.

But, meanwhile, demand for power rose as Covid restrictions started easing in India from July onwards.

Encouraged by improved economic activities, power generation by conventional sources was increased 14% y-o-y to 441.36 billion units (BU) during the first four months of FY'22 (Apr-Jul'21) compared to 385.96 BU in Apr-Jul'20.

In order to meet this rising demand, coal-fired generation too rose 23% y-o-y to 342 BU, but output from hydro-power fell by 7% y-o-y to 54.82 BU in the same time-frame.

Source-wise Power Generation

Quantity in Billion Units

However, power outage initiated by a couple of factors including retirement of power plants, payment issues related to power purchase agreements and scheduled maintenance at several utilities has led to a demand mismatch as the remaining plants had to raise their generation schedule to meet the shortfall.

What went wrong?

Power producers took it easy. Instead of restocking their inventories with the available coal, they preferred the keep a bare minimum volume available to run their plants in the current fiscal at a time when electricity demand started rising.

CIL, on its part, did offer, during the first five months of FY'22 (Apr-Aug'21), a bulk of 98.7 mn t coal on sale via various auction schemes. However utilities were slack in procuring from the e-auctions.

Notably, the special forward auctions specially earmarked for power producers had seen sales of only 43% of the offered material, accounting for 17.34 mn t.

Scheme-wise Coal Allocation

Quantity in mn t

Lately, power plants have shown little appetite for imported coal because of soaring prices. Moreover, supply disruptions in Indonesia due to heavy rains, fulfillment of domestic obligations and strict quarantine rules on rising Covid cases led to tight supply.

Indian power ministry data reveals coal imports by power plants rose a marginal 3% y-o-y to 11.23 mn t in Apr-Jun'21 compared to 10.86 mn t in Apr-Jun'20.

Another reason for the abysmal coal stock scenario is that CIL had blocked supplies to those plants which had not cleared their dues. At the end of Jul'21, outstanding dues payable by the power sector to CIL were INR 19,112.94 crore.

Consequently, when there was a sudden rise in power demand, utilities found themselves with critically low inventory of 12.76 mn t.

Outlook

Could the situation have been avoided, especially since CIL began the fiscal with a surplus inventory?

With an excess stock of 49.65 mn t reported at the end of Aug'21, CIL is expected to pull the power plants out of the crisis.

However, in the short-term, the supply crunch is expected to persist with the non-power sector facing the heat since it always gets a step-motherly treatment when it comes to coal supplies, compared to the power sector.

At the same time, the prospect of rising imports cannot be ruled out as end-users, especially non-power (cement, steel, glass, fertiliser etc.), would seek alternative fuel source to run their plants.