India heat wave: Axing coal imports proving to be a costly affair

The Indian government's latest decision to penalize power plants for not importing coal is a stark contrast to the stance it took a couple of years ago, when it was brewing an ambition to axe coal imports by financial year 2023-24 (April-March).

In the wake of a heat wave that has depleted India's coal reserves, the government asked power plants on April 28 to use 10% imported coal for their power generation requirements. The federal power ministry followed through with another notice on May 18, saying domestic coal allocations to power companies will be reduced from July if they do not start using 10% imported coal by June 15. Moreover, power plants that do not place orders to import coal by May 31 will have to import around 15% of their fuel requirements until Oct. 31, the ministry said.

Flashback to February 2020, the government had issued a statement citing Coal Minister Pralhad Joshi on the country's intention to halt thermal coal imports from financial year 2023-24. In a letter dated April 28, 2020, the federal power ministry directed all generating companies to replace imported coal with domestic coal for blending purposes.

Out of the 204.9 GW of installed coal-fired power generation capacity in India, around 17.6 GW or 8.6%, is designed specifically to run on imported coal. Other power plants import the fuel for blending with domestic coal.

Imported coal comprised about 4% of total fuel consumption by Indian utilities in FY 2021-22, according to data from Central Electricity Authority.

Utility stockpiles vs consumption

India had large coal stocks at the pit-heads and power plants in April 2020 amid lower electricity usage during the lockdowns aimed at curbing the spread of COVID-19. State-owned Coal India Ltd's pit-head stock stood at 75.06 million mt while stock at power plants stood at 44.95 million mt, sufficient for 28 days of coal burn.

These factors helped the government build a convincing case for cutting thermal coal imports. With a robust inventory, the country felt no need to look at the import market where coal was trading at ultra-low rates amid the demand destruction caused by COVID-19.

India's coal imports (including coking coal used at steel plants) fell 7.36% on the year to 230.24 million mt in FY 2020-21. The Indonesian 4,200 kcal/kg GAR price averaged $31.36/mt FOB in this period, according to data from S&P Global Commodity Insights.

Through a sustained period of low power consumption, CIL's pit-head stocks grew to more than 99 million mt by April 2021 while power plant stocks were around 29 million mt, according to data from coal ministry. The power plant inventories were sufficient to sustain 15 days.

With power demand resuming with the gradual lifting of the lockdown across the country, coal stocks at CIL pit-heads fell to 60 million mt and power plants' inventory dropped to 25.43 million mt by April this year. The utility stockpiles were sufficient for a little over nine days of coal burn.

At the same time, global thermal coal prices have been on the rise, with Indonesian 4,200 kcal/kg GAR coal averaging $78.62/mt FOB in the FY 2021-22.

Northwest and central India experienced the hottest April in 122 years, coinciding with rising economic activities, to result in increased power demand. The current coal inventory in power plants is adequate for fewer than eight days. This is almost déjà vu for market participants who witnessed a similar situation in October 2021, when stockpiles fell to only four days' worth coal burn.

It may be recalled that India buyers stepped up imports temporarily to avert a crisis in October, but the subsequent winter months helped in controlling the surge in demand in the tropical country, and consequently, coal imports.

Power demand growth outpace production

National power demand in April grew 15% year on year to 134.7 TWh, while power generation from coal-based power plants increased 8.9% to 108.9 TWh.

With the scarcity of coal in many plants, the power supply shortage in April alone was 2.59 TWh, which was 45% of the supply shortage recorded in FY 2021-22. As a quick fix, New Delhi directed all imported coal-based projects to generate at full capacity.

The country's raw coal production touched 730.87 million mt in FY 2019-20, according to data from the federal coal ministry's website. The output then sank to 716.08 million mt in 2020-21 during the low-demand phase during COVID-19, and then increased to 777.31 million mt in 2021-22 with the gradual resurgence of economic activities and electricity requirement.

With the surge in the country's power demand outpacing the growth in domestic coal output, India's ambition to axe coal imports now seems to be a bane for the energy sector.

As India hugged sidelines of the global market while awaiting a coal price correction, stockpiles dwindled triggering fears of a blackout. In the meantime, driven by sanctions against major coal exporter Russia, Indonesian 4,200 kcal/kg GAR coal averaged $91.57/mt FOB from April 1 to May 19.

India's coal import expense jumped 95.41% in FY 2021-2022 to $30.62 billion despite a 9.26% drop in imports to 208.93 million mt in the same period.

It remains to be seen how expensive it will be for the country to avert a severe coal shortage situation at current elevated global prices.