Why surging coal prices are pushing India to accelerate domestic production

Despite its reputation as one of the world’s most polluted countries, India hopes to reduce its exposure to the fossil fuel’s volatile prices as demand for power rises

As the world’s third-largest consumer of energy, India is feeling the heat from surging coal prices.

To meet the country’s growing demand for power and reduce its exposure to the economic impact of volatile prices, New Delhi is working to boost domestic production of coal, despite India’s reputation as one of the world’s most polluted places.

“Higher international coal prices will impact India by increasing import bills and it will also impact inflation,” says Yash Gupta, equity research analyst at stockbroking company Angel One.

“The increase in import bills will widen the trade deficit of India.”

Coal prices globally have surged since Russia invaded Ukraine, with buyers looking for an alternative to expensive natural gas and to avoid Russian shipments.

This month, international coal prices hit a record high of more than $400 per tonne and analysts forecast it could cross the $500 level.

“International coal prices are trading at near all-time highs, along with all the other commodities in the international market,” says Mr Gupta. “Coal prices are almost trading at three times of the last 10-year average price.”

Despite having the fourth-largest coal reserves in the world, India is heavily dependent on imports. The fossil fuel is used for almost 70 per cent of the country’s electricity generation, according to the International Energy Agency.

Factors including environmental clearances, land acquisition and transport infrastructure have held back domestic coal extraction.

But on Saturday, India’s Ministry of Power issued a notice to power manufacturers urging them to take steps to boost supplies, including increasing “production in captive coal mines allotted to power plants” to the maximum amount permitted.

The ministry also said it had urged power-generating companies to pay money owed to coal companies amounting to billions of rupees.

“Not maintaining adequate fuel stocks or not giving availability on any pretext (such as high price of imported coal, etc) is inexcusable,” it said.

To increase mining, the Ministry of Coal wants environmental regulations to be relaxed. It is also working on improving transport.

The ministry “is likely to approach the Ministry of Environment for certain relaxations in norms so that overall coal production can be further increased”, it said in a statement on Tuesday.

Pralhad Joshi, Minister of Parliamentary Affairs, Coal and Mines, is also urging state-run Coal India, which dominates the industry, to work with the government “to deliberate upon immediate measures required to enhance coal production”.

But while securing coal is critical to India's power generation, there are growing concerns about the fossil fuel's contribution to alarming levels of pollution across the country.

“Coal power plants in India still contribute a staggering 50 per cent plus of total sulphur dioxide emissions,” says Abhishek Talwar, a certified environmentalist in Mumbai.

“To compound this fact, the coal ministry has now asked for further easing of environmental norms,” said Mr Talwar. He co-founded Biplob World, which creates educational content about climate change.

“At a macroeconomic level, this is understandable since our renewable energy sources are still at least three decades away from meeting 100 per cent of our energy needs. However, at an environmental level, this spells disaster for the planet.”

India is grappling with severe air pollution despite the government’s commitment to the Paris Agreement. The accord, adopted in 2015, seeks to reduce carbon emissions as a percentage of gross domestic product by 33 per cent to 35 per cent by 2030, from 2005 levels.

India is the third-largest emitter of greenhouse gases in the world and coal is a major contributor to its carbon footprint. It has also set a net-zero carbon emissions target for 2070.

But there is a long way to go. A World Air Quality report released by Swiss company IQAir last Tuesday found that 63 Indian cities were in the top 100 polluted places globally, and that New Delhi was the world’s most polluted city.

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Pollution was responsible for 1.67 million premature deaths in India in 2019 and has led to an increase in heart disease, lung cancer, diabetes and respiratory conditions, according to a report published by medical journal The Lancet.

Despite efforts to boost the role of renewable energy and diversify the country’s energy mix, the demand for power is surging and coal cannot be phased out in the short to medium term, analysts said.

At Cop26 in Glasgow last year, India, along with China, was understood to have been instrumental in the decision to water down goals. The UN’s climate change conference ended with a commitment to “phase down” coal use rather than phase it out.

The International Energy Agency projects that India will account for the largest share of energy demand growth of any country over the next two decades. It forecast that India’s energy consumption will almost double to meet the demands of an expanding economy and urbanisation.

Demand for power is already rising in India as its economy has largely reopened on the back of easing Covid-19 restrictions.

But analysts see the latest geopolitical developments as a setback to India’s renewable energy ambitions, along with those of many other countries.

“With the ongoing war, governments around the world are looking at ‘dirty’ fuels once again as they scramble to meet their burgeoning needs amid the energy crisis,” said a report published by research company Equitymaster this month.

While coal is “enjoying its great comeback, renewables have been struggling”, it said.

“The gap between India’s ambition to get rid of coal and the reality of its energy system hasn’t been wider.”

Workers unload coal from a supply truck at a yard on the outskirts of Ahmedabad. Demand for the fossil fuel is rising as covid-19 restrictions continue to ease. Reuters

At the same time, the Indian government is trying to balance the challenges its economy and population will face if it does not secure enough coal.

Last year, stocks ran precariously low because of disruptions to international supplies amid high demand and rising prices, resulting in power cuts in parts of the country.

But figures indicate that India’s domestic reserves of the fossil fuel are on the rise.

Coal production has increased 9.92 per cent to 681.5 million tonnes from April 2021 to February 2022 but falls short of its target of 848 million tonnes, according to data from the Ministry of Coal.

“The acute coal shortage faced by the country last year is unlikely to recur in the coming fiscal year primarily because the stock level with the power plants is on the rise,” says Vinaya Varma, managing director of Mjunction Services, an e-commerce platform that provides coal sales services in India.

Figures released on Saturday by the Ministry of Coal indicate that imports of non-coking coal used for power generation dropped 60 per cent to 58 million tonnes between April 2021 and January 2022, from 22.73 million tonnes a year earlier.

This “has resulted in significant savings of forex reserves this year, especially when the coal prices are at a high level in the international market”, the ministry said. “All efforts are on to further enhance domestic coal production as availability of additional coal will aid in import-substitution.”

The ministry expects there will be adequate coal supply in the coming financial year, which begins in April, despite electricity demand growing at 4.7 per cent a year.

“With the government emphasising reducing thermal coal imports, the country’s exposure to the volatility in the [international] market is being mitigated significantly,” said Mr Varma.

Updated: March 28, 2022, 6:51 AM
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