Sorting out India’s coal problem

Authors: Yogesh Upadhyaya and Manish Agarwal

The one who sorts out India’s coal problems would deserve Bharat Ratna. Yes, we think that the country should confer the highest civilian honor for tackling this challenge! Coal is that important.

Image by Анатолий Стафичук from Pixabay

What do we mean by ‘sorting out’ the country’s coal problems? We mean answering the following questions and implementing solutions for them

This khichdi of challenges cuts across governments, technologies and public and private sector. The consequences of not getting this right are enormous. We hope to describe all of it in this article.

This is a very long piece. If you are short of time, you could read our core arguments and skip to the last section.

Our core arguments

We begin with why we are even talking about coal. Is it not the fuel of the past? Haven’t green technologies removed the need for coal? Isn’t coal dead?

The short answer is “No.”

Reports of coal’s demise are greatly exaggerated

India is importing coal to meet growing demand

Coal based thermal plants generated approximately 70% percent of utility electricity in India in 2020–21. Additionally, coal is used in production of cement and steel. These are crucial ingredients in India’s building its infrastructure and providing its citizens with affordable housing. India imports a lot of this coal. This is in spite of having nearly five hundred years of reserves at the current level of production.

In 2020–21, India imported 215 Million Tonnes of coal worth Rs. 1,16,024 Crores. Domestic dispatch of coal in the same year was 691 Million Tonnes. In terms of weight, imported coal was 24% of total. As a comparison, China imported 232 Million Tonnes of coal. However, it produced 3902 MT of coal. So it imported only 6% of its requirements by weight. Note that the 24% figure underestimates imports as the calorific value of imported coal is generally higher than that of domestic coal. That is, each tonne of imported coal has a higher energy content than each tonne of domestic coal.

We would all agree that if the country is using coal, it should be domestic coal. We should not be paying foreign companies, workers and governments money that could have been paid to their Indian counterparts.

With renewables coming in, wouldn’t this coal usage stop soon? Nope. India’s use of coal will increase in the coming decades.

Continuing growth in imports over next twenty years is not desirable

The International Energy Agency (IEA) has made energy projections for India. IEA says that India would need to add a power system the size of the European Union, to meet growth in electricity demand. This would be because of increasing urbanization and increased manufacturing. Both are needed to increase employment and to improve the economic situation of the citizens of the country. As IEA says,

“More than that of any other major economy, India’s energy future depends on buildings and factories yet to be built, and vehicles and appliances yet to be bought.”

The IEA projections assume a significant renewable capacity addition also but still say that in 2040, the share of coal in the overall energy mix would be 34% (down from 44% in 2019). We are sure the reader would agree that it makes sense for India to use its own coal rather than import from far flung countries.

There is a third argument. What if the IEA projections are too optimistic about renewables?

Energy security requires India to be prepared for the scenario in which Variable Renewable Energy integration remains expensive

Variable Renewable Energy sources — solar and wind power plants — have a huge flaw. They generate electricity only when the sun is shining and the wind is blowing. Not when electricity is needed. The modern world requires on demand electricity. Storing electricity and using it later is costly. Modern world requires cheap and reliable electricity. VRE is not reliable and when stored, is not cheap.

Now, efforts are on to reduce the cost of storage of electricity. But no one can say for sure if these efforts would succeed at the scale needed for India. IEA assumes storage will become affordable by 2030; CEA’s coal capacity addition calculations assume halving of battery costs. (We would be doing a deep dive into renewables and storage soon). In addition to the cost of storage, uncertainties are introduced in any energy projections for India because of factors such as

Given these complexities, we should keep Yogi Bera’s admonishment in mind

Indeed, it is tough to make predictions. What is not as tough is to see the cost to a society when predictions about something as critical as energy fail. The Russia Ukraine war has taken the energy prices up and economies across the world are struggling. The industrial powerhouse Germany may need to close many of its factories. The United Kingdom may spend huge amounts of money to subsidize its citizen’s electricity and energy bills. In our neighborhood, Sri Lanka and Pakistan are struggling to provide energy to their citizens. The lessons of the last few months are clear: Energy independence is crucial.

Unlike the United States, India does not have large reserves of Natural Gas. For India to be even at least a little independent, it would need to rely on coal and nuclear power. Our record of putting up nuclear power plants suggests that coal will be the main plank of energy independence.

To summarize, India imports a lot of coal currently and everyone would agree that it makes sense for the country to use domestic coal instead. Even in a future where renewables are successfully and cheaply integrated in the India grid, we will see an increased need for coal. It makes sense for India not to import this coal. Finally, predictions have a way of going wrong and being wrong about energy can be catastrophic. Coal provides the only insurance for India against such a catastrophe.

If we have convinced you even a little bit about the importance of coal for India, we are sure you must be asking yourself why is our coal policy such a mess? Let us answer that question.

Our coal sector is not healthy because of rent seeking monopolies

With approximately one fifth of the consumption of China, we import nearly as much as them. Coal consumers pay more than double of what they could be paying. The mining, transport and use of coal is more polluting than it should be. The primary reason is that coal mining and transport is a natural monopoly. Players in this supply chain — government and private -display rent seeking behavior. Why do such monopolies form?

The energy density of coal is much lower than the other prominent fossil fuel — petroleum. That is, coal has much less useful energy per kilogram than Petroleum. This means that the fuel cannot be transported economically for long distances because the cost of transport becomes a very large portion of the end price for the user. Once a coal using plant is put up, there may be very few mines it can take coal from. The mine owner thus has natural monopoly power on users around it, at least to the extent of cost of transport from an alternate mine. For example, take a power plant that was set up near a coal mine. If the coal mine increases its prices, the power plant cannot do much. The cost of transporting coal from an alternate supplier could be prohibitive. The challenge in India is made tougher as Indian coal has a very high ash content and hence low Calorific Value (useful heat per kg of coal).

Even the coal transporter can have a natural monopoly. The cost of transporting coal by rail or by shipping is much lower than transportation by road. If a railway company has put up infrastructure for transport of coal, it is difficult for road transport to compete with it. The rail company can now increase its tariff significantly as long as it keeps it below what it would cost to transport by road.

Finally, the natural monopoly power can be exploited by the government too. Just as a miner or a transporter can increase its prices, a government can increase the duties and taxes it charges on coal use.

The monopoly powers of miners, transporters and the government do not just reflect in prices. They affect the reliability of supply too. A miner who has a natural monopoly may refuse to enter into contracts that have meaningful penalties for not delivering on promises of quality and quantity. A transporter may do the same. A government may get more interested in its own revenues than it is in low prices and reliable supply. Unfortunately, all of this has happened in India.

Performance of public sector miners

Coal production in India has increased significantly over the last few decades. As Coal India Limited (CIL) likes to remind us, it increased its production from 79 tonnes at nationalization to 622 Tonnes in 2021–22. A near 8 fold increase.

Impressive as this achievement is, as late as last year, power plants were urged by the government to use at least some imported coal. This was because CIL was unable to meet the demand. This inability of CIL is reflected in the contracts it signs with power producers. There is hardly any penalty if it does not deliver the promised quantities. There are regular disputes about the quality that it delivers. Consumers of coal suffer when CIL does not deliver as promised. Power, steel and cement are capital intensive industries. Their profitability suffers every time their capacity utilization falls because of lack of coal. Investors — both debt and equity — do not want to invest in projects that do not have assured supplies of coal.

CIL (and SCCL, the other public sector coal miner) have not been able to fulfill the country’s energy needs. They are not the only ones to blame. Logistics has played a significant part too.

Coal logistics

The landed cost of domestic coal at Mettur Thermal Power plant in Tamil Nadu is Rs. 5,457.58 / MT. The notified price at the ECL mine where the coal comes from is Rs. 955 / MT. The costs associated with logistics are nearly Rs. 3,500 / Tonne! Logistics costs comprise approximately two thirds of the landed cost of coal! This data is from the draft Logistics Coal Policy submitted by SBI Capital / Primus and tells us how important logistics is in using coal.

India’s coal reserves are concentrated in Jharkhand, Chhattisgarh, Odisha and Madhya Pradesh. These are not the most industrially developed states. So, a significant part of the coal mined in these states is transported long distances as these maps (from SBI Capital / Primus) show.

SBI / Primus report has the following table as an estimate of the relative transportation cost of different modes.

Railways charge a tariff lower than the cost of transport by road. Yet, their coal transport tariff is higher than the average for all other commodities. It seems that they are able to use their monopoly power to get a significant surplus from coal transportation. That is not all. In spite of this high tariff charged, railways are tardy in putting up infrastructure between mines and users. Railways also routinely blame shortage of rakes for not transporting adequate quantities to users. This is when it has been transporting the quantity for decades and has good information on how the demand is likely to change year on year. This inefficiency of railways is reflected in road transport commanding a 51% share!

One reason for dominance of road transport is that the initial capital cost of constructing roads is the least. Additionally, roads can be made in all kinds of terrain and you can get away with minimum maintenance. In contrast, constructing railway and waterway infrastructure requires a lot of investment. However, there is no doubt that the monopoly transporter, railways, has not done a great job.

If transport of coal is so costly, wouldn’t it have made sense to set up power plants close to the mines? We increasingly do that but did not do it in the past.

Paying for historical decisions

it makes sense to generate electricity and transport it instead of transporting coal and generating electricity in far away places. And yet, we have done a lot of latter in the past. Distant Punjab has thermal power plants. Like in the example of the Mettur power plant given above, we can be sure that the cost of transport is much more than the notified price and taxes put together! There are many such examples. So why did states build power plants so far away from mines?

This was done in the name of ‘energy security’. Punjab decision makers could trust a power plant to reliably supply power to their citizens only if it was completely within their control. There is some validity to this argument. States have been known to overdraw from central power plants and given the nature of electricity, it is difficult to technically stop a geographically intermediate state, say Uttar Pradesh, to take away electricity generated in Bihar and meant for Punjab. Additionally, India did not have adequate transmission infrastructure to transport electricity from the East, where the coal is found, to the rest of the country. In reality, not only is the electricity generated in far away power plants more expensive, but also it can be much less reliable. This is because transporting coal over rail or road is much more prone to interruptions than transporting electricity over wires.

‘Energy security’ was not the only reason for taking such uneconomical decisions. All of us understand the incentives for a state government to build and operate a power plant within its own borders rather than buying electricity, even if the purchased electricity is much cheaper.

Not only does the country suffer from power plants that are far away from mines, but also it suffers from inefficient linkages. Most of the existing mines are linked to users. These linkages developed over a long time. Hence, there are many instances where mines are transporting coal to far off users when both the users and mines have closer options. Rationalization of linkages would mean lower cost for both sets of users. One challenge in such rationalization is that the quality of coal should be similar.

There is no one solution to the above challenges. For example, new rail lines and conveyor belts need to be built. Wagons procured. Infrastructure needed for sea routes built. Linkages rationalized. A regulator to be put in place for railway tariffs. Indeed, the Ravana of mining has another many headed brother — the Ravana of logistics..

We have seen how the natural monopolies in mining and transport have contributed to the ill health of the coal sector. There is another natural monopolist that has done as badly. Governments. Let us look at that next.

Rent seeking by governments

As we saw earlier, the landed cost of coal at a plant in Tamil Nadu was nearly Five and a half thousand /MT. The notified price at the mine was less than a Thousand and the logistics costs were Three and Half Thousand. Where did the remaining more than One Thousand / Tonne go? It went to the State and Central government as taxes and cesses! Governments in India are addicted to the revenue.

In 2020–21, Coal India Limited contributed nearly 42,000 Crores by way of duties, Royalty, GST and other taxes and levies. These were paid to the central government and to governments of coal producing states. Additionally, the company paid Rs. 5,300 Crores of Income Tax and made dividend payments of Rs. 7,700 Crores. Note that the price of coal is fixed by the government at a high level so that Coal India Limited is in a financial position to pay the Income Tax and the Dividend. As the private sector production ramps up, the royalty and other payments from those to governments will increase sharply. As we have argued, this is a serious Real Ease of Doing Business issue. Incidentally, the high level of taxation acts as a Carbon Tax on coal even though it is not called that.

The governments use their monopoly power to extract surplus from the coal industry. Do they provide services in return? No. Clearances needed take a lot of time.

Regulatory suffocation and center state relationship

Coal exploration and production rights are given by the central government. State governments issue the mining licenses. Both state and central governments are involved in many other aspects of coal mining. For example, the central government controls the dominant player — Coal India limited. The prices notified by CIL and its subsidiaries limit what other players can charge. This is because CIL mines are everywhere and even with its poor service, these mines can provide some competition. The environmental clearance is from the center but the state pollution control board monitors the day to day performance. The dominant user of coal for electricity generation — National Thermal Power Corporation (NTPC) is a central Public Sector Unit (PSU). The state government is of course intimately involved with the working of a coal mine. For example, land acquisition and rehabilitation would be implemented by the state government. The day to day monitoring of compliance with both coal production and transport would be done by state government agencies. This is just a brief description of the spaghetti of regulatory challenges that a coal miner has to overcome.

There have been improvements in the transparency and speed of clearances but much more can be done. Governments have a monopoly on regulation and they charge a huge premium for providing this service. One place where governments have been especially bad is in environmental regulation. We will cover it slightly later in this piece.

The reader must have realized that there is no single reason for the Indian coal sector not meeting demand. Hence, there is no single solution. As Ravana could not be killed by a single arrow, the problems of coal mining also need multiple solutions. Could privatization of coal mining have alleviated some of the problems discussed? Let us look at that next.

Why privatization hasn’t helped much. Yet.

Could the inefficiency of coal miners have been reduced if they had some competition from private sector players? We believe the answer is a qualified yes. Private sector can improve efficiencies if the policy is good. Unfortunately, it is not so easy to come up with good policies for natural monopolies. To understand the challenges in policy making, let us look at the history.

The government of India allocated more than 200 coal blocks to the private sector and public sector non coal producing companies between 1993 and 2010. The Supreme Court of India, canceled most of these allocations in 2014. This cancellation of allocation led to an interruption of coal production from non-public sector coal companies. This not only led to reduction in mining of coal overall, but also removed the pressure that CIL might have faced from the competition.

At the heart of the problem was methodology of allocation. The allocation to private companies was done by a screening committee. The SC determined that there was no transparent and objective criterion for this allocation. Any company, getting the right to mine and use coal would get a huge advantage in its business. For example, if a cement company gets the right to mine coal from a good block, its profits would increase. In other words, the cement company would enjoy the benefit of the mine being a natural monopoly. Why should any private company get to make extraordinary profits? Also, the extraordinary profits would lead to corruption and favoritism in granting of the mining rights.

A policy of auction on upfront lump sum has the opposite effect. Such an auction may allow the government to escape the charge of favoritism, but it would increase the costs of the bidder. Higher costs would mean higher prices. That is not in the interest of the wider society. Remember, low price is a goal of energy policy.

The current privatization policy allocates mines to the bidder that promises to give the governments the highest share of revenue. This approach clearly prioritizes revenue for the Govt over minimizing cost of coal for users. The private operator is anyway interested in as high prices as possible. The only, and imperfect, check on prices would be the notified price from PSU miners. It is an imperfect check because though mines can dictate prices, the notified prices of CIL mines act as a cap, depending on their distance from the consumer. The notified prices for CIL have not changed significantly in the last four years. Who knows what will happen in the future? A cash strapped central government could significantly increase the notified price of PSUs and they would be cheered by the equity holders of these companies. The private miners would also benefit from an increase in PSU prices. Given the large sums involved, the private miners would also have a lot of influence on governments. Keeping a check on rise in prices is perhaps the most important part of ‘sorting out coal’.

The cost paid per tonne of coal is not the only cost paid by the society. There is also an environmental cost. Let us look at that next.

Coal and environment

There is no doubt about the negative impact of coal on the environment. This impact happens in mining, transportation and in end use. Additionally, burning of coal also leads to release of Carbon DiOxide: a gas implicated in Climate Change. Let us look at each of these briefly and discuss what India could do.

Coal mining and transportation

Most of the mines in India are open cast mines. One big challenge in open cast mining is the removal and dumping of the overburden (OB) layer. Additionally, a lot of dust is released in the air severely impacting the air quality. The OB removed as well as coal can runoff into water sources and pollute it. If the mining is carried out below the water table, underground stores of water may get severely polluted. The drilling and blasting of OB can be very noisy. Coal mines in forest areas can devastate wildlife habitat. The list of harms to the environment from coal mining is long. What needs to be done to minimize this harm is an equally long list. Pollution mitigation measures include

A lot of coal dust is released when coal is transported and when it is loaded and unloaded. The problem of release of dust is especially high when coal is being transported by road. In addition to the coal dust escaping from trucks, there is the problem of trucks churning up the dust on roads. The problem becomes worse when the roads are not well maintained. In fact, the roads can break many times because the trucks are being loaded beyond their capacity.

Mitigation of this pollution requires many measures. The best one is not to use roads at all and use conveyor belts and / or railways instead. If roads have to be used, then they should be well constructed and well maintained. Additionally, norms such as covering the trucks with tarpaulin should be strictly enforced. We understand that most measures for reducing pollution in mining and transport are not very expensive. It is not about money but about governments implementing the law honestly and competently.

Coal use in power

Coal based power plants are polluting. Especially the older ones. India has periodically attempted to reduce emissions from existing plants. For example, in 2015, the Central Electricity Authority (CEA) identified upgrades in existing power plants to considerably reduce their pollution levels. One of the primary recommendations was to install Flue Gas Desulphurisation (FGD). When coal is burnt, Sulfur DiOxide is produced. This gas is a harmful pollutant by itself and is also a significant contributor to Particulate Matter 2.5 (PM) levels. PM2.5 are very fine particles in the atmosphere that are particularly harmful for human beings and many many Indian cities have a very high level of PM 2.5 pollution.

Unfortunately, the deadlines imposed by CEA and monitored by the Supreme Court have come and gone a few times. There are many reasons for this. Many plants are state owned and know that cash strapped state distribution companies will not increase their tariff. Other plant owners are also not sure if they will get increases in tariff for investing in pollution control equipment. There are technical and practical challenges to retrofitting new pollution control equipment to old plants. It is also not clear how effective some of this pollution control equipment would be. A 2021 review report of the Ministry of Environment Forest and Climate Change noted that “470 running units of 180 GW capacity have to implement the FGD system in one go”, which is unrealistic. The MoEF&CC review report recommended pushing the deadline to 2035, and setting up of a multi-department committee to evaluate these challenges, including the impact on electricity prices.

“Sorting out coal” would mean making sure that the pollution from coal mining, transport and use reduces significantly. As in mining and logistics, many different measures need to be taken. Discussing all of them is beyond the scope of this article. We must mention here again that many of the measures are not necessarily very expensive. Especially when compared to the revenues earned by miners, transporters, users and governments from coal. Reducing coal pollution is not all about money but about increasing capabilities.

Air pollution is not the only concern from the use of coal. The release of Carbon DiOxide from burning coal is also a challenge. Let us look at that next.

Carbon release and coal

Burning of fossil fuels releases Carbon DiOxide (CO2) in the atmosphere. Increased concentration of CO2 in the atmosphere is expected to lead to climate change. There is an international campaign to decrease use of fossil fuels, especially coal. The situation India finds itself in is unique. The following facts make its situation very different from United States and Europe

Given the stage of development of India and the criticality of reliable and affordable energy, use of coal in India is set to increase. The world would do well to recognise this reality and help India mitigate the climate impact. This mitigation could be in the form of subsidies for technologies that burn coal more cleanly, for more efficient transport and for deployment of carbon capture technologies. One of the reasons that all this does not happen is the stigma around coal.

Investor behavior — stigma

When was the last time you saw news on coal mining on the first page? News about a new mine commissioned? Or a coal mine to power plant linkage rationalized leading to lower transportation costs and lower carbon released? Or a more efficient plant being commissioned leading to lower costs, pollution and lower CarbonDiOxide emission? In contrast, the front page of newspapers would have news about solar plants or manufacturing of hydrogen electrolysers often from the same group that has made investments in coal mines and power plants. Unfortunately, it is not just in newspapers.

In our deep dive into this topic, we saw too many analytical pieces on decarbonising energy that totally ignored the fact that the goals of energy policy have to be reliable, cheap and clean (with decarbonisation being a subset). And that there is a tradeoff between the three goals. Ironically, many of these ‘analysts’ on LinkedIn have articles on Work-Life balance but never try to balance decarbonisation with reliability and cheapness. We recommend that readers ignore any analysis that focuses on only one goal. Unfortunately, it is not just analysts that are wearing blinders. Investors are in the same category.

Many investors are shunning the entire coal value chain because it makes them look bad in the ESG mirror. The fact that efficiencies in coal mining, transport and generation lead to a cleaner route to affordable electricity, does not seem to be appreciated.

Sorting out coal would mean creating investor interest in coal. Especially in projects that lead to the win-win-win of cheaper, more reliable and cleaner!

As we have discussed, sorting our coal means doing hundreds of things. From making mine operations more efficient to optimizing logistics to tackling pollution to getting privatization and pricing right. How is India doing on all these fronts?

Is India sorting out coal?

In a recent conference, both the coal minister and the coal secretary mentioned that the Prime Minister of the country considers the import of coal paap (a sin). The government has declared a target of production of 1.5 Billion Tonnes by 2026–27. We believe that this is a significant declaration of intent and we couldn’t agree more with Shri Narendra Modi. But how do we know if this intent is being backed by action on ground?

For sector-outsiders like us, the only way to know if the 100s of actions that need to be taken are indeed being taken is to look at the overall production, dispatch and price figures. As mentioned earlier, till last year, India was asking power plants to import coal and blend it with domestic coal because we could not mine and transport enough.

It seems that in the current year, till August ’22 the production has increased over the last year. The production in this year was 324 tonnes, a 23% growth over last year. Does this show that we are likely to meet our target for 2026–27? How would we know if we are meeting the many challenges in logistics and pollution control? How would we know if we are meeting the challenges of making our coal sector reliable, cheap and clean?

As outsiders to the sector, we can track progress on some of these dimensions.

If we manage to show improvement in all the measures given above, it would be a tremendous achievement. An achievement worthy of the Bharat Ratna.

We owe Pukhraj a huge thank you for helping us understand this complex sector. Errors are all ours.

Thanks to Rajani for proofreading.

This is the second of our deep dives into the complex topic of energy. The first piece, on challenges in creating markets in electricity, can be found here. We will be working on green technologies and storage next.

You can follow AskHow India (@AskHowIndia) or Yogesh Upadhyaya (@YogeshUpadh) on twitter or LinkedIn or on https://t.me/YogeshUpadhyaya

Follow Manish Agarwal (@manishbgagarwal) or find him on LinkedIn

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Yogesh Upadhyaya

Entrepreneur. Economist. Investor. Actor. Technophile. Policy wonk. Comedian. I love to explore places where these worlds intersect.