Power crisis: Solution still remains elusive

Last Updated: Thu, May 16, 2013 07:09 hrs

Constraints in the availability of coal and natural gas, coupled with poor financial health of distribution companies (discoms), continue to remain major concerns for the growth prospects of the power and coal sectors. Even as state-owned monopoly coal supplier Coal India Ltd (CIL) ramped up supplies to the power sector by a record 11 per cent in 2012-13 and discoms have raised rates in states, a sustainable solution for power companies' woes remains elusive.

This is because of three reasons: Captive coal miners have failed miserably to live up to their commitment of production from blocks allocated to them, increasing the domestic coal shortage by a mammoth 64 million tonnes (mt). The private power and steel companies sitting on captive blocks produce around 36 mt annually - against the planned 100 mt. Second, talks over fuel supply pacts for new stations continue to be bogged due to differences between CIL and power generator NTPC over quality issues. Lastly, the huge financial losses of discoms refuse to be eliminated even after the recent rate increases.

CIL blames environmental clearances norms for the lower-than-expected output, saying many of its mines have reached their environmental clearance (EC) limits. "So, we had to curtail production to avoid violating environmental norms. However, despite the lower output, we have managed to exceed the production target in March," a top CIL executive told Business Standard.

The company produced 452 mt coal last financial year. This was a four per cent increase over the 435 mt produced in 2011-12. This was despite the fact that, as on March 15, CIL's new mining capacity of around 40 mt was held up owing to delays in clearance by the environment ministry. An additional five mt was stuck due to pending forest clearances. With the Cabinet Committee on Investment (CCI) clearing mega mining projects in bulk, output is seen improving in the near future.

But domestic coal is only a part of the problem for power companies as CIL has committed to meet only 65 per cent of the demand from new stations commissioned after March 2009. The other 15 per cent, out of 80 per cent of annual contracted quantity (ACQ), will be supplied through imported coal on cost-plus basis. The proposal of providing coal at pooled prices to domestic companies, which could benefit new power stations by bringing down their cost of generation, has also been shelved by the government.

At least two mega projects based on imported coal, Adani Power Ltd's Mundra plant and Tata Power Co Ltd's Mundra ultra mega power project (UMPP), are facing doubts over their viability owing to regulatory changes in coal exporting countries. It is yet to be seen whether the recent "compensatory tariff", allowed by the Central Electricity regulatory Commission (CERC) for these plants, helps. This would also determine the future of the government's ambitious UMPP scheme as half of the 13 such projects being planned are imported coal-based.

The data show national coal production has improved consistently from a decline of 0.2 per cent in 2010-11 to a growth of 1.3 per cent in 2011-12, followed by a rise of 3.3 per cent last financial year. However, the 100 mt gap in demand and supply, along with lack of gas for firing power plants, has become a concern. India's power generation grew four per cent during 2012-13, compared with 8.1 per cent in 2011-12. Fuel supply issues pulled down generation as over 68 per cent of India's 223,000 Megawatt (Mw) power generation capacity is coal and gas-based.

What accentuates the crisis is the idle power capacity of roughly 25,000 Mw, which was commissioned without assured fuel tie-ups. The idle capacity is explained by the widening gap between generation and capacity addition. Consider the fact that in March this year, power generation grew three per cent in stark contrast to the 28 per cent jump in capacity addition. According to the Central Electricity Authority, the power ministry's technical and planning unit added an unprecedented 7,028 Mw capacity in March alone, compared with 5,482 Mw in March 2012.

The government, having realised the problems posed by this overcapacity and the lack of fuel for plants, pulled down power capacity addition target for the current Plan period from 100,000 Mw planned initially to 88,000 Mw in the 12th Plan document. This, along with constraints in other major infrastructure sectors, impacted the gross domestic product growth target originally set for the five-year period ending March 2017.

While the fuel supply agreement (FSA) issue between CIL and power companies has been resolved to a large extent, experts say it may still be some time before the gap between demand and supply is completely eliminated. "FSAs are only binding documents. Ultimately, coal output has to increase to match the level of demand from independent power producers. While CIL is trying to increase production, it will not happen overnight," said Salil Garg, director, corporates at India Ratings. He added the situation was seen improving, but in case CIL was unable to pull up output, meeting even 65 per cent of supply commitment under FSAs domestically might become a challenge in the short term.

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