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A murky business (Part 2)

World Cement,

The people of India are increasingly coming to the view that their country’s economic problems are linked to muddled energy policies set by a prime minister who has lost his reformist credentials.

Coal India Ltd struggles

CIL has struggled to increase supplies as it is forced to sell its production at 45% – 70% below international prices, thus effectively subsidising domestic power rates.

Many of the country’s coal reserves are owned by companies controlled by powerful business groups and politicians or are located in rural areas inhabited by large populations. Neither will yield to the miners, unless they receive generous compensation to leave.

For H1 of FY 2013, CIL said its coal production of 200 million t was about 3% short of target, but 4.7% higher compared with the same period a year previously. The company blamed labour strife, weather conditions, theft and protests by local groups for disrupting operations at some of its mines. CIL is aiming to produce 482 million t for FY 2013, up from 452 million t in FY 2011. For FY 2012, CIL produced 465.2 million t against a target of 470 million t.

In the latest proposal to reduce the country’s import expenses and current account deficit, which now stands at a record US$ 70 billion, Indian state planners are considering letting local miners deposit their surplus coal with CIL for later use.

Under India’s heavily regulated coal supply system, owners and operators of domestic mines apart from CIL are not allowed to sell their surplus production. A committee within the powerful Planning Commission is weighing the proposal for the miners to bank their surplus coal with CIL for later use.

The committee is expected to make a recommendation in the coming months on how India can free up its domestic coal supplies and improve distribution flows. However, power companies remain skeptical that the committee will provide real solutions, as numerous parties have vested interest in the current coal mining and supply system.

Businesses remain worried over the number of times CIL has failed to meet deadlines to conclude supply agreements with the owners of India’s 173 coal-fired power plants. These power plants produce over 70% of the country’s electricity. With coal supply to many of these plants still not guaranteed, CIL will be blamed again if India suffers another power blackout in the coming year.

CIL was expected to conclude its supply agreements with the power companies at the start of FY 2013 on 1 April; however, disputes over pricing, volume, fuel quality and environmental clearance will drag negotiations into 2014. Neither CIL nor the power companies are worried about the government’s warnings against further delays, as they are unlikely to be punished.

On top of the corruption investigation and mounting criticism, CIL will likely end the year on a miserable note as more than 500,000 of its unionised and contract workers had threatened nationwide industrial action around mid-December.

Five unions, representing 350,000 unionised and 200,000 contract workers, said they would stage a three day strike in to demand better benefits and work conditions, as well as protest against the government’s proposed sale of a small portion of its 90% stake in the company.

Jaiswal said the government plans to pare down its stake in CIL to 85% by the end of 2013 to raise Rupees 4 billion to help slash the national deficit.

Greenpeace says CIL has overstated coal reserves

CIL’s latest critic, Greenpeace, has warned that India’s energy supply shortages will worsen, as the company has overstated the size of its deposits by around 16%, while failing to replenish its extractable coal reserves.

The environmental group said the company has only 18.2 billion t of extractable reserves, instead of the 21.7 billion t it claims. This further undermines the government’s plan to add nearly 100 GW of coal-fired power capacity by 2017.

Ashish Fernandes, a Greenpeace activist, said that if the company meets its targeted production growth of 8%/year, its entire extractable reserve would be completely exhausted in less than 17 years: “Any power plant under construction, constructed in the last five years, or planned to be constructed in the future, will face the very real risk of not having a secure coal supply for all or part of its 25 year lifetime,” said Fernandes.

In FY 2012, India spent US$ 16 billion on coal imports, more than double the amount two years previously, as domestic demand reached 772.84 million t, thereby exceeding production by more than 215 million t, said Greenpeace. By 2017, the country’s coal import bill could reach 23% of the current account deficit.

CIL rejected the Greenpeace report. The company said it has been adding more than 2 billion tpa of coal reserves as part of a long-term plan to boost production and reduce India’s dependence on energy imports.

The Planning Commission said it expects CIL to lead the country’s efforts to raise coal production by 42% from 558 million t in FY 2012 to 795 million t in 2017. Domestic consumption is seen rising 26.8% from 773 million t to 980 million t over the same five-year period. However, CIL may be quietly doubting its own production capabilities amid reports that the company is planning to issue a first international tender to import coal.

NTPC, India’s largest power company, has refused to sign a long-delayed agreement to purchase coal from CIL. Over the past year, NTPC has led a rebellion among power companies to hold-off on committing their term coal purchases through CIL, claiming the company is charging high prices and delivering poor quality products.

NTPC, which owns and operates 18.4% of the nation’s total 227,356 MW of power-generating capacity, is looking for alternative sources of supply, including increasing imports.

Coal to continue as India’s main fuel source

India will account for 23% of more than US$ 10 trillion in investment required to meet the energy needs of Asia’s developing countries from 2010 to 2035, said the Asian Development Bank (ADB). In its Energy Outlook for Asia and the Pacific report, the bank said India’s energy investment requirement would be the region’s second largest after China’s US$ 5.28 trillion.

As with most Asian countries, India’s policy agenda is to “ensure a reliable supply of energy at affordable prices” to sustain a GDP growth rate of 5.7%/year over the 25 year period. With the GDP per capita rising from US$ 787 in 2010 to US$ 2454 in 2035, India’s energy demand is projected to grow at a rate of 2.7%/year, said the ADB.

By 2035, India’s economy will have grown almost four times the 2010 level to US$ 3877 billion, while the population – growing at 1%/year – will reach 1.58 billion to overtake China as the world’s most populous country.

Driven by industrialisation and rising living standards, India’s electricity demand has grown by an average of 6.8%/year over the first decade of this century. The power supply system and infrastructure, however, have not kept pace.

India’s coal-fired power plants, which supply 68% of its electricity, are aging and inefficient, while a host of problems contribute to the high losses along its creaking transmission and distribution infrastructure.

The bank said these problems, along with low electricity tariffs, have discouraged investors from building or upgrading India’s power plants and infrastructure, adding to the country’s worsening power supply crisis.

The bank expects India’s electricity demand to continue growing at a rapid rate, by an average rate of 5.2%/year. Electricity will account for 31% of India’s energy consumption in 2035, almost double that in 2010.

India’s power output will rise from 959.9 TWh in 2010 to 1855.3 TWh in 2020 and 3437.3 TWh, said the ADB.Domestic coal production will reach 412.3 million toe in 2035, while oil production will begin to decline before 2015.

In the business-as-usual case, the ADB expects India’s primary energy demand to grow by an average 3% from 692.7 million toe in 2010 to 1441.6 million toe in 2035. “With this growth, India’s per capita energy demand will reach 0.91 toe per person, compared with 0.57 toe per person in 2010.”

“By energy type, coal will maintain the largest share, reaching 42.8% in 2035, followed by oil at 24.4% and others (including noncommercial biomass and new and renewable energy) at 15.6%,” said the bank.

Written by Ng Weng Hoong.

This article first appeared in the January 2014 issue of World Cement's sister publication World Coal. To read Part 1 of the article, please click here.

Edited by Sam Dodson

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