When the two biggest coal-producers in the world complain of a supply crunch, it is time to brace for rough weather. China has been forced to cut electricity supply to industries and homes amid a big crunch in coal supplies. And, now, stocks in every three out of four coal-powered power plants in India have dipped to critical levels amid a failure to shore up supplies through imports. Here’s how we got here.
Why Is India Facing A Coal Crisis?
As the global economy emerges from the slowdown wrought by the Covid-19 pandemic, there is suddenly a hunger for energy that has pushed up prices even as major coal-producing countries have failed to ramp up supplies to keep up with the demand.
While India has the world’s fourth-largest coal reserves, it heavily relies on the international market for its coal needs and is globally the second-largest importer and consumer of the mineral.
Amid the rebound in economic activity, reports say that global coal prices have hit their highest level in years. According to a Bloomberg report, “European coal has risen to a 13-year high, and Australian Newcastle coal has surged by 250 per cent from last September to within range of the record set in 2008".
That’s not all. Price of a high-quality Indonesian coal type reportedly jumped by more than 125 per cent from USD 44.4/MT in January this year to a record-high of USD 100.05/MT in September.
The surging prices meant that China and India, which already have hefty coal production capacities, shied away from buying coal on the international market, hoping to wait it out till prices cooled, counting in the mean time on domestic output to keep going.
“Facing the hottest coal market on record, Indian buyers avoided importing it and relied on domestic stocks to such an extent that the domestic stocks have now fallen to the lowest levels seen in over three years," said a report on September 30 by S&P Global Platts.
How Bad Is It?
Data on coal stocks at thermal power plants maintained by the Central Electricity Authority (CEA) showed that as of September 29, as many as 16 coal-powered plants had ‘zero’ stocks while another 37 plants had stocks to last them between 1-2 days. Overall, 103 out of a total 135 such plants had stocks that would last no more than seven days.
Citing CEA data, the S&P Platt report said that India’s total coal stock went from a little over 37 million MTs at the beginning of 2021 to about 8.3 million MTs on September 27, “sufficient only for five days of coal burn". About three-fourths of India’s total coal production is utlised by thermal power plants, which supply over 70 per cent of India’s total electricity output.
The supply crunch comes amid a major uptick in power consumption with average demand rising by 23GW year on year to 186GW between August 1-23 this year.
Similar power consumption increases have been clocked across the world from China to Europe without any parallel growth in production even as the winter season, a period of higher energy use driven by domestic heating requirments, approaches. Bloomberg said that “coal use in Europe is expect to increase through winter amid lower renewable power output, record-high natural gas prices and planned closures of nuclear reactors".
Among the factors that have queered the pitch is China’s spat with Australia that has its roots in the call by Canberra for a probe into the lab leak origin theory of the novel coronavirus. Beijing slapped tariffs on Australian agricultural products and suspended import of coal from the country, which has been one of the biggest suppliers to China.
While thermal power generation in China this year till August was 14 per cent higher than last year, domestic coal production was up by less than 5 per cent. While expanding coal production overnight is not possible when it comes to coal, mining in China has been a subject of “safety crackdowns after a spate of high-profile deadly accidents".
Further, global coal supplies have fallen on the back of heavy rainfall experienced by the likes of Colombia and Indonesia even as other major producers have faced mine closures due to the pandemic.
What’s Being Done To Deal With The Situation?
The S&P Global Platt report says India finds itself “blindsided by both high prices and lack of supply" after it “waited for too long to start restocking, thinking that prices would soon correct". It now faces the prospect of seeking supplies amid a further surge in prices with Chinese authorities saying they will ramp up coal procurement at “any price to ensure heating and power generation in winter".
The country is already counting the cost of not restocking at the right time in power rationing for its industries that has led to a downward revision in its GDP growth forecasts.
As for India, a report by CRISIL said that power demand is expected to remain high in the coming months given the “increasing industrial productivity [and] impending festive season that boosts commercial demand".
To maintain adequate supplies and avoid a pressure on power generation, the Union power ministry is said to have asked thermal power plants to enhance imports even as the state-owned Coal India has stepped up on production. The CRISIL report noted that while the monsoon season normally marks a dip in coal production, “production in July and August 2021 remained high at 48MT on average compared with the historical 41MT, with domestic producers ensuring increased supply".
But given that the monsoons — which is the peak season for both hydro and wind power generation — are winding up, the dependence on coal-based generation is likely to continue, CRISIL said, noting that it means “coal inventory at thermal plants will improve only gradually by next March". Till then, thermal power plants will have to make do with stocks of 10 days “compared with the two-year average of around 18 days", it added.
Will Coal Shortage Lead To Higher Power Tariffs?
The S&P Platt report said that “market participants are now waiting to see whether India’s power demand will hold up and how the power companies will manage to pass on the costs of securing fuel". But analysis by Reuters noted how hike in power tariff is a politically charged issue in India. That is especially so when Assembly elections, including to India’s most populous state Uttar Pradesh, are due next year.
Domestic coal prices remained stable even as international rates zoomed. And, while it is reported that Coal India has said it will increase prices, there is no word on when thatwould happen. In any case, power tariffs in India continue to be among the lowest in the world “as state-run distribution companies have absorbed higher input costs to keep tariffs steady", even at the cost of cumulatively running up billions of dollars in debt.
The Reuters report noted that “Indian power producers locked in long-term agreements with distribution utilities often cannot pass on higher input costs unless clauses are included in their contracts".