India Can’t Afford Its Coal Addiction
(Bloomberg Opinion) -- Nothing makes you appreciate air-conditioning like high summer in India. Here in Delhi, temperatures are running over 100 degrees for much of the day, with two full months still to go before the cooling monsoon rains arrive. Unfortunately, just as everyone decided to crank up their ACs or at least their ceiling fans, electricity supply collapsed under the strain in large parts of the country.
This is not, sadly, a rare occurrence. It happens almost every summer and on other occasions when power demand spikes. There’s no clearer evidence that India’s electricity sector, dominated by coal-guzzling power plants and state-run utilities, simply isn’t up to the job. And the problem is only going to get worse: India has rapidly electrified in recent years and peak power demand has been growing between 8% and 10% a year.
The reasons for these successive power crises are almost always the same. Thermal power plants produce three-fourths of India’s electricity. But they can never seem to get their hands on enough coal.
Sometimes the generation companies can’t pay for coal shipments because they, in turn, have not been paid by India’s improvident electricity distribution companies. Sometimes Coal India Ltd., the state-run behemoth that produces 80% of India’s coal supply, doesn’t produce as much as promised, whether because its miners are on strike or for other reasons. Sometimes the coal has been dug out of the ground but left at the pithead because Indian Railways can’t organize enough wagons or locomotives. Sometimes protesters disrupt the long national coal supply chain. Sometimes the imported coal some plants prefer isn’t available or shipments are late.
Whatever the reason, the result is that India, famously dependent on coal, has coal-fired plants that run at between 50% and 70% capacity even at times of peak demand. Combined with the low tariffs set by long-term power purchase agreements, as well as chronically delayed payments, this means the entire business is unremunerative. Unsurprisingly, nobody wants to invest in the sector.
Ordinary Indians are paying the price. Last month, utilities in the industrial state of Gujarat were forced to buy electricity from the spot market at three or four times the usual price, even as thermal power plants locally were operating at only 45% capacity.
It has long been conventional wisdom in India that the country must continue to depend on coal because — unlike, say, crude oil — we are sitting on huge reserves. Understandably, we don’t want to be entirely dependent upon imported energy. Energy security means macroeconomic stability.
Yet the fact is that India’s coal-fired fleet hasn’t been designed to take advantage of domestic coal. Back when many of these plants were planned a decade or more ago, they were expected to use Indonesian or even Australian coal because those supplies were available quickly, while India’s coal resources were difficult to exploit.
Imported coal is now much more expensive and supply is no longer reliable. But cheaper domestic coal often isn’t of the quality many plants are designed to handle; in 2017, the federal minister in charge complained that a third of India’s coal-based capacity depended on imported coal. According to research in 2020 from Stanford University economist Gireesh Shrimali, about the same proportion of these plants cost more to run than the levelized cost of solar power in India.
As many analysts have since pointed out, the situation cries out for more global investment in India to retire coal, buy out existing contracts, compensate affected communities and switch to renewables. After all, power crises hit India when temperatures are at their highest and the sun is shining. (Admittedly, current solar power cells tend to work less efficiently at high temperatures.)
India cannot keep relying on its hopelessly inefficient thermal power plant network. The government’s own energy maps make clear how unfit for purpose it is. While efficient modern plants are located along the coasts and near ports, domestic coal reserves are far inland. Geography means that getting domestic coal to newer power plants will always be a problem.
Unlike China, India has significantly scaled back its plans to expand its coal fleet. There are worries that the current crisis will cause a minor reversal in these plans and lead to new plants being commissioned. But that’s obviously not going to solve what is a structural problem.
Indians need to look at our dependence on coal-fired electricity with an objective eye. Far from being cheap and reliable, it too often winds up being pricier than it should be and absent when we need it most. Whatever else coal might provide India, it isn’t energy security.
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Mihir Sharma is a Bloomberg Opinion columnist. He is a senior fellow at the Observer Research Foundation in New Delhi and head of its Economy and Growth Programme. He is the author of "Restart: The Last Chance for the Indian Economy," and co-editor of "What the Economy Needs Now."
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