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The G20 declaration has called for a reduction in the unchecked use of fossil fuels. The most recent Conference of Parties (COP) witnessed a heated debate between proponents of “phase-out” and “phase-down” approaches to fossil fuels. This ongoing debate may result in a prolonged period of scarcity until a definitive phase-down strategy is implemented. This might come as news to many. Doesn’t India have a shortage of coal already? Not in terms of reserves. However, in terms of continuous imports and advisories recommending imports for coastal plants, one can see that it is at least short-term. This article argues that India might not be able to exit this period of perpetual scarcity unless radical policy changes are made.
Is this scarcity solely a result of challenges in domestic coal production and distribution? While production and distribution hurdles persist, they do not account for the entire problem. There are, in fact, at least four policy-induced factors that contribute to this scarcity. These factors, while unintentional, have emerged as unintended consequences of our policies over the course of several years, if not decades.
The first reason for the taut coal demand-supply situation is the basic premise adopted in national planning. The basic premise is that the coal public sector undertakings (PSUs) are the suppliers of the residual demand or suppliers of the last resort. From the overall demand of primary energy or total power requirement of the country (which is a function of macro-economic, geo-political and environmental factors), first, all other energy sources are subtracted (such as renewables, oil and gas, nuclear, etc.) It is worth noting that strident targets are taken for production from renewables. This provides the demand for thermal power and coal requirements.
From this number, a very aggressive target for production from captive and commercial coal blocks is reduced, and the demand on the coal PSUs is arrived at. Accordingly, the coal PSUs plan their land acquisition, environmental clearances, evacuation etc. After all, their production is a function of these factors. If output from renewables and captive/commercial blocks fall short of their targets, which has been happening repetitively, the entire shortfall translates into imports. When the most prominent players, i.e., the coal PSUs, plan on a conservative basis, it is challenging to make up for the gap because the factors of production (such as land, evacuation infra, etc.) are inelastic.
What this also does is that it makes the coal PSUs weak marketers. They do not have to try to sell their coal as demand is generally plentiful. Private suppliers provide door-step delivery and a very high degree of contractual commitments, the coal PSUs can make do with a “take-it-or-leave-it” approach. In a shrinking market, it shall progressively weaken the market presence of the coal PSUs. There will come a time around peak coal in the late 2030s or 2040s when their lack of marketing heft will lead to a faster market collapse than that of other commercial players.
Central policymakers must weigh the impact on commercial coal block auctions if government-owned coal companies aggressively expand production and marketing efforts. If these PSUs attempt to meet the entire thermal coal demand rather than just the remaining portion, it could lead to a drop in coal prices, potentially discouraging private sector participation in coal block auctions. Consequently, the Indian coal sector may continue to be dominated by the public sector, creating a monopolistic market. Therefore, the attempt to address the monopolistic nature of the Indian coal market through progressive auctions and by leaving room for coal PSUs is the second reason for the tight demand-supply situation, which can escalate into scarcity based on environmental or economic factors.
Incidentally, the general policy in the country and that of the coal PSUs is to hold the price of coal at a certain level instead of letting the market forces bring it down. In a way, this promotes the evolution of clean energy in the country. Clean energy will find it difficult to compete with coal economically if the pricing floor is allowed to drop in the coal industry. This is the third reason for the tense demand-supply equation. As a result of this uncertainty, most significant industrial consumers of coal might move away from coal PSUs over the next 5-7 years to their captive mines. This may ease the position unless the coal PSUs continue their residual energy demand satisfaction policy.
Like most fossil fuel companies, coal PSUs want to diversify into other businesses. They are, therefore, unsure of how much to invest in current business vis-à-vis future businesses. This directly impacts the capacity they may want to create now, which might be unutilized in the future. Ultimately, the taxpayer must bear the cost of these decisions. This also prevents coal PSUs from going into a production and marketing overdrive. Policymakers also make a sane decision to distribute the risk of excess capacity between different private players so that the entire burden of potential future over-capacity does not sit on the coal PSUs.
However, in the medium term, or for production until 2035, coal PSUs should focus on eradicating the import burden. Policymakers should also not let go of this window of opportunity to reduce the cost of energy in the Indian market. Therefore, they must work with policymakers to switch from being residual supplier and find an acceptable middle path. The following actions are advised:
While the coal PSUs are owned predominantly by the Government, they also have other shareholders. Some of the production subsidiaries might even see more significant disinvestment going forward. Their accountability to the shareholders is not only till pre-peak years but throughout the life of their ongoing concerns. If they do not orient themselves towards customers now, they will be the first suppliers to be dumped in the post-peak-coal era. The collapse in their demand will be more spectacular than in the case of other commercial suppliers.
The policymakers, too, should prevent such a collapse as that might impede the ability of the sector to make a just transition. There is a window of opportunity available to ease the unnecessary burden of imports and to reduce the price of energy/ coal in the country until 24×7 renewable production takes off. That window must be taken. The G20 declaration provides the opportunity to get the albatross off our necks by abating coal-related emissions through mission-mode R&D. The focus should, therefore, be on carbon capture and utilization, cost optimization, and customer satisfaction – 3Cs of coal. This trinity is a promising way for the coal sector (and especially the coal PSUs) to remain relevant to India’s growth imperative without wrangling with global commitments.
This article first appeared in Financial Express on 6 November, 2023.