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IEEFA Update: India’s coal crisis produced twin glaring conclusions – coal is expensive and unreliable

November 30, 2021
Vibhuti Garg

A key takeaway from India’s coal crisis is the urgent need for the country to accelerate its transition to a secure, reliable and low-emissions electricity system.

India faced huge coal shortages from mid-August to October 2021. Monsoons impact Coal India Ltd. (CIL) production every year, but this year was different – India witnessed an extended monsoon season, which exacerbated the coal shortage crisis. Further, transportation logistics led to lower offtake of coal.

Analysis of the coal stock position reveals that there was enough coal at CIL’s end. However the company has been regulating the despatch of supplies to coal power producers with outstanding dues on account of discom payment delays. This meant that the supply curtailment was worse in states where coal power producers have large outstanding dues.

The extended monsoon season exacerbated the coal shortage crisis

The situation deteriorated as more plants reported their supplies were reaching critical levels. The government sprang into action, ramping up domestic coal production and offtake to reduce the energy shortages and avert blackouts.

The coal shortage led to a surge in prices at the power exchange, which hit a ceiling of Rs20/kWh during most of the time intervals on high coal shortage days. The average market clearing price increased from Rs3/kWh in June-July to Rs5/kWh in August-September, then Rs8/kWh in October. Prices have now started to stabilise, hovering around Rs3-3.5/kWh.

The price of imported coal has never been higher. Imported Indonesian coal rose from US$60/tonne in March 2021 to US$200/tonne in September/October for 5,000 Kcal/kg GAR (Gross As Received) coal.

The crisis has shown that coal is an expensive source of electricity generation and, further, it is inflationary. It has also revealed that coal is an unreliable source of generation because it depends heavily on a long supply chain.

Coal is inflationary and depends heavily on a long supply chain

Renewable energy prices have gone down over the years and wind and solar are highly deflationary. With zero indexation contracts extending for 25-year terms, year one solar energy tariffs consistently below Rs2.5/kWh are now the low-cost source of electricity supply in India. The economics of low-cost renewables are threatening the viability of proposed new coal-fired power plants.

More importantly, there is little or no capital available to finance such plants. It is necessary now to direct R&D and finance to emerging technologies such as battery storage and green hydrogen, to better integrate renewable energy into the system.

At COP26, India pledged to increase the share of electricity generation from renewable sources to 50% by 2030 and to reach net-zero emissions by 2070. In order to achieve these ambitious goals, India must ensure a policy environment that is conducive to accelerating the offtake of renewable energy. With cost economics favouring renewable energy, it’s clear that sustainable energy choices can and should lead on the path to economic growth.

Vibhuti Garg is an Energy Economist and Lead India, Institute for Energy Economics and Financial Analysis (IEEFA).

This article first appeared in SolarQuarter India

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Vibhuti Garg

Vibhuti Garg is Director, South Asia, at IEEFA. Vibhuti’s focus is on promoting sustainable development through influencing policy intervention on energy pricing, adoption of new technologies, subsidy reforms, enhancing clean energy access, access to capital and private participation in various areas of the energy sector.

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