Will coal remain king?

At the time of India?s independence in 1947, the total power generating capacity in the country stood at 1300MW; enough to meet just one third of Delhi?s power requirement today. Over the last five and a half decades, this capacity has grown to over 100,000 MW and is projected to increase at 5-6 per cent per annum in the foreseeable future. India is currently the 8th largest producer of electricity in the world. Per capita consumption however still remains very low by world standards, at around 360 KW per annum. Domestic coal, mined mainly in eastern and central India, has largely sustained this growth and accounts for 59 per cent of the total installed power generating capacity. The share of hydropower which was 50 per cent four decades back, has dropped to 25 per cent. Gas, a late entrant in the 1980s after the discovery of western offshore gas fields, accounts for 12 per cent, while nuclear and wind energy contribute a minuscule 4 per cent. Electricity generation through hydropower has grown slowly over the past 10 years and its contribution in the total mix has fallen. Problems with regard to land acquisition and submergence, fear of geological instability, displacement and resettlement of affected people and the large gestation period for construction, are largely responsible. In the Asia Pacific region India ranks third after China and Japan in hydropower generation. Though Japan is largely a mountainous country, its land area is only 11 per cent that of India and has been able to tap its hydropower potential far better than India with its vast Himalayan range and a number of rivers. India currently generates 25,000 MW through hydropower against an assessed potential of 84,000 MW. New policy initiatives have lately been put in place to increase the contribution of hydropower both domestically and by imports from Bhutan and Nepal. In the Asia Pacific region India ranks third after China and Australia in coal production and second in consumption as Australia exports 70 per cent of its output. Though the current level of coal production in India of 328 million tonnes per annum is impressive, the coal industry faces several problems which, if not tackled expeditiously, will only worsen in the years to come. First, for many years opencast mining has been favoured over underground mining. This has led to severe land degradation on a large scale, environmental pollution and reduced quality of coal due to it getting mixed with non-mineral matter. The ash content of domestic coal ranges from 30 per cent to 50 per cent as compared to imported coal which, though high in sulphur, has an ash content of 8 per cent to 17 per cent and therefore a higher calorific value. Second, unconstrained demand according to one estimate is projected to rise to 620 million tonnes by 2011/12. Based on current production India has enough reserves to last 235 years, but economic mining practices are generally limited to depths of 300 meters and 25 per cent of the reserves are beyond this depth. Further, extractable reserves in opencast mines are rated at 63 per cent of proven reserves. If production is to be doubled, the extractable reserves to production ratio will drop to 50 years or even less, if land acquisition for new mining is not possible. Third, around 90 to 100 million tonnes of ash are generated each year at power stations. Though fly ash can be used in the cement and other industries, India is able to absorb only 11 per cent of this ash compared to 25 per cent by China. Installation of washeries at pitheads can reduce to some extent the ash content, but progress has been slow. Legislation is now in place requiring power stations more than 1000 km from pitheads to use coal with an ash content of upto 34 per cent. Blending of imported and domestic coal has been recommended, but of the 9 million tonnes of non-coking coal that is currently imported, only 2 million tonnes is for power plants on the southern and western coastal areas while the bulk is used by the cement industry. Clean coal technologies, such as Integrated Gassification Combined Cycle (IGCC), where the coal is converted to gas which is then burnt, are available, but plants based on these technologies are more expensive than the conventional plants and need to be modified to suit Indian coal specifications. NTPC is planning to set up a 100 MW demonstration plant at Dadri in collaboration with BHEL. Fourth, is the high cost of transportation of coal by rail. At a distance of 750 km the transport component in the coal price is more than 50 per cent and increases for extended distances. Carrying capacity of the railways can at times be a constraint, if there are competing demands from other sectors e.g. movement of iron ore. The issue of transportation costs has been partially addressed by setting up pithead power stations and transmission lines for dispatch of power to the load centres. However, this does not solve the problem of ash generation. The combined effect on the environment of opencast mines and power stations in close proximity, sets a limit to the extent to which pitheads power stations can be set up. Finally, Coal India is the second biggest employer in the world with 5,00,000 employees after General Motors which ranks second in the Fortune 500 list. The comparison ends here. The output per miner per annum in Coal India varies from 152 to 2621 tonnes compared to 12,000 tonnes in the USA and Australia. Further, in three of its subsidiaries 200,000 employees are engaged in underground mining of just 23 million tonnes of coal per annum and cannot be made redundant or the mines closed. Further, Coal India is required to absorb about 4000 persons every year who are displaced from their land due to coal mining activities. Despite these factors Coal India has been able to make some reduction in total staff but obviously, in terms of increasing productivity, has a long way to go. The gas era began with the discovery of the western offshore gasfields and the laying of the Hazira-Bijapur-Jagdishpur (HBJ) pipeline to feed the gas to western and northern India. Power plants with an aggregate capacity of 6,000 MW and fertilizer plants were set up along the HBJ pipeline. A plan to supply the four southern states with gas, through a pipeline similar to the HBJ, did not take off because of restricted gas availability. In the meantime gas demand continues to grow and currently is projected at double the present availability. Combined cycle gas fired power plants have a shorter gestation period for construction and higher thermal efficiencies than coal based plants and do not generate any ash. Also transport of gas by pipeline is safer and more convenient than movement of coal by road or rail and the capacity of a gas pipeline can be increased relatively easily by installing additional compressors. To meet the gap between gas demand and indigenous availability the options are a) import of gas by pipeline from neighbouring countries b) import of gas in the form of LNG and c) increased E&P activity within the country. Although India is well located with respect to gas rich countries e.g. Bangladesh, Oman, Iran, Qatar and the Central Asian countries, for various political and technical reasons no pipeline proposal has materialized though some preliminary surveys have been carried out. After the initial euphoria that give rise to as many as 9 LNG import proposals, only two have made progress and are due to be commissioned in the next one year - Petronet LNG?s 5.0 million tonnes per annum plant at Dahej and Shell?s 2.5 million tonnes per annum plant at Hazira. The only other LNG constructed terminal at Dabhol is a stranded asset. As regards domestic gas, Reliance?s find of 7 TCF of reserves in the KG basin has been ranked as the biggest gas find in the world in 2002/03. Together with imminent LNG supplies, it has dramatically changed the forward picture on gas availability to the power, fertilizer and other industrial sectors. These developments will impact the fuel mix of power stations particularly in the Northern, Western and Southern regions of the country and the switch to gas will be governed by issues of pricing, nature of contracts and security of supplies. Currently the price of domestic gas is fixed by government lower than what its calorific value demands. LNG will be priced at international costs of production, liquefaction, transportation and regassification and subject to some hard negotiations between buyer and seller. Domestic coal prices were administered till 2001 and are now set by the coal companies. The fob price of imported coal does not fluctuate widely as in the case of oil but ocean freight costs are more variable. Expensive naphtha has been used in power plants as a transition fuel before switching to gas. The relative economics of using various fuels will depend on the load centre location. According to a recent study, at a distance of 800 km between the source and the load centre, the cost of delivered energy is cheapest with domestic gas supplied by pipeline, followed by pithead power stations supplying ?coal by wire? and then by coal fired power stations at the load centre. At port locations far away from the pithead, LNG scores over domestic as well as imported coal. Internationally, financial closure to a LNG project is normally applied when all the contracts for the entire value chain are in place and for a period of around 20-25 years with '?take or pay? clauses incorporated. This is because of the very heavy investments required along the value chain and the relative inflexibility of switching to an alternate buyer. Petronet LNG and Shell have gone ahead with putting up regassification plants and provided for fuel supply without cast iron ?take or pay? contracts along the downstream chain. It is to be hoped that these ?acts of faith? are not misplaced. As regards security of supplies, LNG is a well-established international business with strong and secure linkages and, unlike domestic natural gas, has the added advantage of being held as inventory at the regassification plant. In the short term, gas from the two LNG plants will essentially go to meet the current gap between supply and demand on the HBJ pipeline, allow for expansion of gas markets in Maharashtra and displace high cost naphtha being used in power plants and at fertilizer and petrochemical plants where technically feasible. In the medium-term, Reliance plan to move gas from the KG basin across peninsular India to meet demand in Maharashtra and Gujarat, again initially displacing naphtha consumed in their own petrochemical plants. They have also reportedly made overtures to NTPC to sell gas to them and buy power for distribution on a quid pro quo basis. With the laying of this pipeline, it would be both economic and feasible to set up gas based power plants in Andhra Pradesh and northern Karnataka along the route of the pipeline. These new sources of supply will enable India to leapfrog over China, to become the second largest gas user in the Asia Pacific region after Japan. Meanwhile, planned expansion of existing coal based plants and those already approved are unlikely to be dropped, nor it is possible to convert coal based power plants to gas. This will give some breathing space to the coal industry. In the longer term, however, the picture will change. It is more than likely that new discoveries will take place both in the KG basin and in the western deepwaters where in 2003 ONGC launched one of the world?s biggest exploration efforts. Once the plants of Petronet LNG and Shell are up and running, other LNG suppliers will find it attractive to set up LNG terminals. The Dhabol plant could be revived in the medium to long term. GAIL has expressed its desire to build an all-India gas grid to connect various sources and load centres and also integrate with any natural gas pipeline supply from neighbouring countries. These developments will definitely shrink the market for domestic coal in the northern, western and southern regions, unless some of the major problems facing the coal industry, that have been outlined earlier, are resolved. Gas could even enter the heartland of the coal industry if supplies from Bangladesh materialise. But there is little doubt that domestic coal will remain a major, if not the largest, energy source over the next 15 years for the power sector. The role of domestic coal in providing energy security to the country is also vital. Japan, which imports virtually all its energy supply, has a very diversified portfolio of oil, gas and coal, apart from hydropower. The coal consumption level is 60 per cent that of India, on a calorific value basis, despite its adverse environmental impacts. Finally, what is of considerable interest, and something that TERI has been advocating for a long time, are the reported plans of government to set up a National Energy Board to evolve a national integrated energy policy. As stated by Mr N K Singh, Member, Planning Commission at the India Economic Summit held in New Delhi in November 2003 ?We have to deal with issues in the energy sector with an integrated approach. The proposed energy board will coordinate with all the Ministries and will look into issues relating to costs, fuel, demand, supply etc.? Considering India?s growing energy requirements, increased gas availability and heightened energy security issues, the need for an integrated energy framework for India cannot be overemphasized.