Power to all, coal to none

To overcome the shortage of electricity and meet its goal of “power to all”, the Ministry of Power plans to add generating capacity of 100,000 MW by 2012. As part of this the ministry has conceptualized the development of ultra mega power projects (UMPPs) – approximately 4,000 MW each – at an estimated ₹160 billion (US$3.6 billion) per project. The UMPP scheme requires the ministry to ensure supplies of coal for each project. But the current shortage of coal is proving to be a critical stumbling block.

Existing gap

Seventy percent of the demand for coal in India comes from the power sector. Despite being the fourth largest coal producer in the world, the gap between demand and supply of domestic coal currently stands at 60 million tonnes and is set to rise to 85 million tonnes in 2011-12. This is inevitable given the 6-7% historic rate of increase in domestic coal production and the huge power generation capacities that are being added.

As a result, the government owned coal companies are unable to meet their supply obligations (called “coal linkages” granted by the Ministry of Coal). A 23 March 2011 report stated that the failure by Coal India (a government owned coal mining company) to meet supply targets could affect up to 17,000 MW of power generation.

Companies with their own captive coal blocks are slightly better off, as an operative block assures security of coal. The Ministry of Coal has however raised concerns about the delays caused in developing the mines and threatened to cancel allotments. These delays are caused by factors like environmental clearances, land acquisition, obtaining mining leases or what has been referred to as the relaxed attitude of the mine allottees.

A controversial issue hindering domestic coal production is the “no go” classification by Ministry for Environment and Forests (MoEF) for protection of Indian forests, wildlife and forest dependent communities. As a result, 30% of coal mining areas with the production potential of 660 million tonnes of coal per annum are currently unavailable for mining.

International supply source

This has forced the power generating companies to scout around for suppliers and blocks in countries such as Indonesia, Australia and South Africa. While this addresses their fuel supply risks, they have to deal with country specific risks like the recent move by Indonesia to ban exports of low-grade thermal coal (below 5,600 kcal) by 2014.

Indonesia is the preferred source of coal for Indian companies due to its proximity, which means lower freight charges and faster shipment. It satisfies 60% of India’s international coal demand.

Moreover, many Indian companies such as Tata Power and Adani Group have considerable interests in Indonesia’s coal sector. If the ban is implemented, Indian power producers would become coal deficient with almost 74,000 MW of thermal power capacity expected to be commissioned in India’s 12th five year plan (FY-13 to FY-17).

Filling the gap

Though investing in more reliable destinations can resolve country specific risks, it remains to be seen how the Indian government would deal with the impending domestic coal crisis. It has already led to a row between the Orissa government and the Ministry of Power after the MoEF cleared a coal block of a UMPP, to be set up in Orissa, on the condition that the blocks allotted for setting up other power projects in the state will have to be given up. The Orissa government refused to support a UMPP in the state which would affect the local power projects. The ministry had to consequently reject such conditional approvals and defer bidding for the UMPP.

Coal security is critical as fuel procured at higher prices can impact project returns and undermine the ability to service debt especially when the power purchase agreements do not allow “pass through” of fuel costs. To insulate Indian consumers from price volatility, the Indian government is making efforts to procure 10 year long thermal coal off-take arrangements with overseas producers. It is also seriously considering the issue of coal mines located in “no go” areas.

The current crisis in Japan has triggered concerns about the safety of India’s nuclear power plants and once again highlighted the need for producing more coal and more coal-based power. As such, it is vital that the government is able to craft a solution that balances issues of protecting forests while promoting large power projects without jeopardizing the interest of smaller projects.

Akshay Jaitly is a partner at Trilegal in Delhi where Rachika A Sahay is a senior associate. The firm has offices in Delhi, Mumbai, Bangalore and Hyderabad and has over 125 lawyers, some of whom have experience with law firms in the US, the UK and Japan.