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India’s Coal Shortage Highlights Energy Nation’s Security Challenges

In October 2021, India experienced its first energy crisis since the pandemic, with the second following just eight months after. The country recorded a power supply shortage of 1,201 million units in that month of October – the highest in five and a half years. In a nation that relies on coal for 70% of its power generation, acute coal shortages are driving the bulk of the crisis. 

Coal shortage causing power crisis 

In April, it was reported that as many as 85 out of 150 thermal power plants in India were facing critical coal levels, with national coal inventories dipping to its lowest since 2014. At the same time, the prices of imported coal saw some of its highest levels in years, worsened by the fuel restrictions caused by the on-going Russia-Ukraine tension. 

Severe coal deficits have also prompted authorities to increase thermal coal import targets in the hopes of encouraging local companies to bulk up supply. On May 28 2022, state-run Coal India Limited (CIL) stated that it will import coal for the first time since 2015.  

The grim forecast continues: analysts expect domestic coal supply to fall 42.5 million tonnes short of demand in the September quarter, 15% higher than previously projected, due to higher growth in energy demand and lower output from some mines. 

Domestic power sector affected 

Rolling blackouts cut across the nation in the months ahead, as demand for electricity surged for the first time since the pandemic. Karnataka, Maharashtra, Punjab, Uttar Pradesh and Andhra Pradesh are some of the states hard hit. In some areas, local businesses tired of blackouts have turned toward diesel-powered generators instead to keep operations running.  

Now, the shortage has reached India’s capital Delhi. Just two weeks ago, an explosion of angry residents took to social media to report dire blackouts across Delhi amidst an intense heatwave with temperatures crossing 44 degrees Celsius at most places. Power usage in India on average spikes between May and August, as citizens turn up air-conditionings to face sweltering summers. 

The prices of traded electricity have also gone up as a result. In India, the majority of electricity is transacted through long-term fixed contracts between power generators and distribution companies before being distributed to consumers. 

Presently, India does not have an automatic cost pass-through mechanism in place

In April 2022, the average price of power traded on the India Energy Exchange (IEX) hit Rs 13.76 per unit (kilowatt-hour), up from Rs 3.7 in the same period the year before. Today, those prices hover around Rs 6.66 – still double what it was mid-2021. As a result, rising prices could affect the already-weak financial profiles of India’s distribution companies, which have not been able to pass on the increase in costs to customers on a timely basis.  

Presently, India does not have an automatic cost pass-through mechanism in place. Tariff revisions require approval of state commissions, which result in delays. However, recent fuel price hikes have prompted the Central government to instruct states to allow distribution companies to pass on increased costs to power tariffs, which can later be vetted by regulatory commissions.  

Non-power industries suffering

The energy sector is not the only industry affected by the coal shortage. In the past year, the non-power sectors witnessed a decline of 33% in coal dispatches; during the shortage’s peak last October, India’s sole coal producer, Coal India Ltd (CIL), was forced to cut down coal deliveries to non-power industries to prioritise its reserves for the nation’s power sector. 

Aluminium, cement, iron, and steel are some of the major industries most reliant on coal. Coal is used not only to generate heat and power these sectors, but in some areas, such as steelmaking, form an essential chemical ingredient in the material’s production. 

With material output restricted and prices increasing, the shortage is set to impact the construction and real estate industry as well. Trickling costs could further impact consumers, in a delicate post-pandemic recovery stage. 

While bigger companies manage to sail through the rising costs, smaller companies, especially Medium to Small Enterprises (MSMEs) are exceptionally at risk of shutting down. In Surat, Gujarat’s textile hub, workshops are struggling due to inconsistent power supply. At a time when production is meant to be at its peak, many small businesses are failing to meet passable production levels. 

Power cuts in another city, Kanpur from central-western Uttar Pradesh, are also affecting businesses like leather manufacturers, who rely on continuous chemical processes in their production. Unscheduled interruptions caused by power cuts delay the operations and cause significant waste of materials. Similarly, many other MSMEs heavily reliant on machinery face significant downtime and turn unsustainable. 

No near end in sight for India’s coal troubles  

In 2016, India’s government publicly proclaimed grand plans to eliminate coal imports in the coming decade by boosting domestic production under Coal India Ltd (CIL). The country was facing a surplus in coal, and then Coal Minister Piyush Goyal had said the government was “worried about how to sell the surplus.” 

The situation today is starkly different. Some analysts accuse corruption and inefficient implementation of national roadmaps as the main factors behind the crisis. Others cite mismanagement of coal stockpiles at thermal power stations and outdated logistics as driving factors. Whatever the source and reason, one thing is clear: India’s energy crisis is affecting those that are in most need of help in a post-pandemic world, and it doesn’t look to be ending any time soon. 

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