Fuel for thought
Coal-hungry India needs to consider new import sources as well as a new fuel mix for its power plants.
India is trying to reduce its reliance on coal imports from Indonesia as it foresees that the world’s largest coal exporter will reduce shipment volumes in order to support increasing domestic demand.
Coal availability from Indonesia is going to become a concern over the next five to 10 years, according to Vivan Sharan, chief executive of the Global Governance Initiative of the Observer Research Foundation, a multidisciplinary public policy think-tank in India. Because Indonesia is also developing its economy at a rapid pace, so policies are likely to shift to support domestic demand instead of export markets. Hence, India has to prepare itself to decelerate coal imports from Indonesia.
“Around 60% of the energy consumption in India relies on coal,” said Mr Sharan. “And this energy mix structure is not going to change significantly over the next 20 years. So, coal will remain a dominant fuel in our energy mix. This has become our concern.”
The solution that India is looking at is more gas-fired power plants, although the country is not rich in natural gas. As a result, India has become one of the world’s largest liquefied natural gas (LNG) importers.
“We have to look for long-term contracts for importing LNG,” Mr Sharan said.
To secure its gas imports, India has had to spend billions to increase the capacity of its LNG terminals to 26 million tonnes per year. Recently, the government ordered the state-run gas distribution company Gail India to import gas worth US$2.5 billion annually from the United States.
The company will require at least five ships to transport 5.8 million tonnes of gas per year to India, starting from September 2017. Gail India in January this year announced that it would import 1.5 million tonnes of LNG for the 2014-15 fiscal year ending on March 31, 2015.
Mr Sharan said renewable energy and nuclear power were also options for India.
Power generated from nuclear plants in India has more than doubled in the past five years as generating capacity increased by 4,780 megawatts from 4,120 MW in 2009. However, new capacity added to the market rose by only 16% in the same period.
He said there was also a fuel mismatch problem as most coal shipments are concentrated in the eastern part of the country, while the energy demand and most of the coal-fired power plants are in the West. The major coal exporters to India are Australia and Indonesia to the East. Eventually, increasing imports of coal will affect the profitability of power plant operators who face the cost of transporting the fuel overland to their sites.
India in fact is the world’s fifth largest source of coal with estimated reserves of 100 billion tonnes; however, the huge imports it seeks to supply power plants, roughly 70 million tonnes a year, make it the world’s third largest coal importer. The cost is a big factor in the country’s current account deficit.
In February this year, coal imports jumped 20% from the same period last year to 11.6 million tonnes as prices dipped and the rupee strengthened, according to data from OreTeam. During the first 11 months of fiscal 2014, coal imports increased by 15% from the same period last year to 143.5 million tonnes.
One of the reasons India relies so heavily on coal imports is the inadequate output from local coal miners despite the huge amount of reserves. West Bengal-based Coal India Ltd (CIL), which is 90% state-owned, accounts for around 80% of all coal production in the country. Over the past few years, the company’s coal output has fallen short of its targets because of difficulties obtaining environmental approvals, lack of railway access, and other issues including employee strikes.
Complicating the picture further is the fact that private companies are not allowed to supply coal to coal-fired power plants, Mr Sharan pointed out.
According to a Greenpeace India report released in September last year, CIL’s coal production was less than 35% of its target. CIL’s current coal reserves are estimated to be able to supply Indian power plants recently constructed for the remainder of their service lives, and those under construction or pending approval.
But if all miners were operating at maximum capacity, an unlikely scenario at present, the country’s coal reserves could be exhausted within 17 years, making India more heavily reliant on imports.
India has 90,000 megawatts (MW) of power generating capacity under development, predominantly coal-fired plants. The country aims to add another 69,000 MW of coal-fired power by 2017.
A continued coal shortage could lead to increased dependence on imports, even higher than current levels, with fuel price volatility affecting generators, distributors and consumers.
Higher import levels of coal and other fossil fuels will only undermine India’s fiscal position and the recovery of the rupee.