India has been battling a severe coal supply shortage for the past few months. The situation was critical when India saw a massive power supply shortage in October’21. It was due to a scarcity of coal, which had reached the point where 135 thermal plants in the country didn’t even have a four-day supply.

So what is fuelling this coal shortage?

Let us first understand the source of India’s coal supply. India is the second-largest consumer of coal after China. Coal accounts for 70% of India’s electricity generation. Though India is the fifth-largest holder of coal reserves which is close to 10% of the world’s share, it still imports 25% of its coal consumption. India imports 80% of its import coal requirement from Indonesia, Australia, and South-Africa. Coal India Ltd. (CIL) and Singareni Collieries Company Ltd. (SCCL), both being government-owned corporations are the major contributors to the production and dispatch of coal in India.

Causes of the Coal crisis

Global factors

Prices of coal are rising globally, seeing a gain of 160% in the last few months. This could be attributed to the reviving economy and increasing demand for electricity. The year 2020 experienced a sharp decline in demand for coal as production was halted in various industries because of the pandemic. But the reviving economy is demanding both, an increase in production as well as consumption of coal. Therefore, the imports had to be substantially curbed due to the rise in global rates building a gap between the demand and supply and leading to the supply crunch. High imports of coal by China is one of the reasons inflating the coal prices.

High imports of coal by China is one of the reasons inflating the coal prices. Along with India, China has also been facing a energy crisis due to flooding in one of its key sources of coal. Also, it has been taking steps to reduce coal consumption to reach its carbon neutrality goals, which is not practical currently as its economy is reviving and the industries are heavily reliant on coal-sourced power.

Indonesia, being one of biggest exporters of coal has currently announced a ban on coal exports for a month due to not meeting domestic production targets. This has led to a disruption in market causing rise in price.

Rising demand for electricity

As the economy revived in 2021, India saw a 13.2% increase in demand for power and reached its all-time peak in the month of July.  As the electricity generation increased rapidly, energy crisis was unfolding as most of the thermal plants were running out of coal stock reaching critical and semi-critical inventory levels. According to Central Electricity authority, power demand in April-August 2021 was 203014 MW which was significantly higher compared to 171510 MW in the same period last year. The mismatch of demand and supply has created a disequilibrium in the market leading to increase in price of coal.

Domestic Coal production

Domestic coal production has been stagnated since 2018. Due to water logging in coal-bearing areas caused by severe rains in September and early October’21, dispatches from coal mines were hampered, resulting in lower-than-normal stock accumulation by thermal power plants in October.

Coal India Ltd. has monopoly over the coal supply as it supplies over 80% of the total supply. As per the data below, CIL has been failing to expand and instead the production is seeing a decline since 2018. Though India has the fifth-largest share of coal reserves, it is yet to ramp up its coal production.

Following data shows the production of coal during the last 10 years. The data points out the decline in production in 2020-21 which is also the first ever decline in production in the span of last 10 years.

Let us now examine the causes for India’s failure to increase coal production.

Delayed payments to coal miners and distributors

One of the major reasons for the slowing down production and supply of coal, is the high amount of dues which are yet to received by the coal mining and producing companies like CIL and SCCL

De-allocation decision in 2014

In 2014, government after being blamed for illegal allocation of mines, had to re-allocate as per the decision of Supreme court.  The government took this opportunity to bring in new players and actively promoted by introducing stimulus packages to attract new players in this market. It failed to work as it is a tough industry and it is very difficult to compete against an established corporation like CIL. Also CIL’s prices have always been significantly lower than the global prices and majority of thermal plants rely on CIL. Not only competing with prices would be an entry barrier, but the bureaucratic and political hurdles to pass through would be very difficult compared to CIL. Therefore, CIL continued to have the monopoly but has been the backbone of the entire coal industry.

I would like to talk about the criticality of this crisis on our economic recovery. If we think about it, Indian sources 70% of its electricity through coal, therefore it is an extremely critical issue to look into as it hampers the recovery as well as the future growth of the economy.

As we saw, there are multiple reasons why this industry has stagnated in the last few years. But one of the reasons which surprised me the most is the fact that though CIL has been always given the complete monopoly over mining and distribution, it has not improved its production. Majority of its shares is owned by the government, and it also receives tariff support from the government which allows them to keep the prices low. It was predictable that the power demand and consumption is going to rise as government designed many booster packages for the economy for its post-covid revival but government owned CIL did not prepare well for the upcoming demand. Government had also decided to curb imports, but it was practically not possible when the domestic production could not keep up with the rising demand.

The issue of delayed payments by DISCOMS might not be highlighted as much as the other causes, but it is one of the major reasons behind delayed production of coal. Operating inefficiency on part of DISCOMS leading to higher costs have delayed payments, especially state-owned DISCOMs.

As many other government-owned and controlled industries are now permitting private entrants, could coal industry too benefit from this trend? But this could only be possible if government gives them a fair chance by supporting these companies. It needs to provide support if they have to compete against prices of CIL. These new enterprises would also require significant capital, and if they are unable to attract coal consumers owing to price disparities, they will be unable to survive.

Therefore, the coal crisis being a substantial obstacle to our economic prosperity, it must be addressed at all levels.