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Power Shortage: Obstructing India's Growth

India’s high 8% GDP growth is threatened by insufficient supply of electricity that is pre-dominantly coal-fired, a recent report by Deutsche Bank has warned, writes Siddharth Srivastava.

Congress Party general secretary Rahul Gandhi

A study by Deutsche Bank says that India needs to address its coal supply and distribution issues or else power shortages could deduct as much as 0.5% of India’s GDP growth.

Touching on the same issue earlier this month, Indian Prime Minister Manmohan Singh emphasized the growth-energy linkage. “We have set for ourselves an ambitious target of 9% annual growth in GDP in the 12th Five Year Plan (2012-17). This high rate of economic growth would require our energy consumption also to increase rapidly.”

Given India’s power needs, Singh said the country is pushing for every form of energy source — gas, coal, nuclear and renewable. However, he reiterated that coal-fired plants will continue to be the primary source of electricity in the country for some time to come.

Power Bottlenecks. While the Deutsche report has highlighted positive reforms in power generation that is bringing in massive new investments, fuel supply, linkage, transmission and distribution are areas that need attention.

The report emphasizes that India’s power sector can be financially stable only if power producers are ensured a steady supply of coal at fair prices, which is not happening due to rising reliance on expensive imports.

Imported coal costs at least 60% more than the domestically mined fuel. Reasonable coal price enables profitable sale of power to distribution companies, which in turn can efficiently sell electricity to end-consumers.

Presently, distribution companies are being forced to pay higher rates than they are able to sell consumers as tariffs are statutorily fixed low. The losses have accumulated to billions of rupees.

“The government will be compelled to allow market-based pricing (or at least higher rates to make investment returns more attractive). This would have temporary inflationary implications,” the report says.

In this context, a panel appointed by the power ministry has recommended last week that power consumers should gear up for “tariff shocks” to rid the massive Rs. 820 billion losses of distribution utilities.

The panel has suggested passing on the entire cost to retail and industrial users to reform the power sector.

Insufficient Coal. Indications are that India’s domestic coal supply situation is not going to change in a hurry. Indian firms NTPC, JSW Steel and MMTC have recently issued tenders to import coal from South Africa and Indonesia.

Reuters recently quoted a large Indian trade importer to say: “There are several quite large (Indian) tenders in the market now, seeking coal for the next fiscal year until March 2013.”

In order to protect against price volatility, India has recently sought co-operation from Indonesia to grant blocks to Indian firms under a “special status.”

Indonesia recently raised its coal supply prices that have impacted several Indian projects, including Tata Power’s Mundra Ultra Mega Power Project (UMPP) in Gujarat.

This is even as India’s coal ministry recently projected that India’s annual coal demand could rise 41% in the year ending March 2017 from the current financial year. The coal requirement is estimated to surge to over 980 million tons from the current 700 million tons.

Domestic output of coal, meanwhile, is estimated to rise only 28% in the period, widening the domestic demand-supply gap to over 265 million tons that can create inflationary pressures.

Ironically, even as such a situation emerges, the state-owned Coal India (CIL), that produces more than 80% of India’s coal output, has sought to lower its production target his financial year to 440 million tons from 452 million tons in its annual plan.

The reasons cited include lack of environment clearances in previously demarcated mining areas, law and order issues in eastern India due to Maoist rebels and land acquisition problems.

The Future. The positive development in India’s power sector is the creation of new private sector equipment manufacturing capacities beyond the abilities of state-owned BHEL. With estimated $600 billion expected to be invested in power generation in India over the next five years, this is important.

On the flip side, the financial stability of India’s electricity generation sector, both power producers and distribution companies, is compromised, essentially due to supply side issues.

Thus, protecting the consumer, both industrial and retail, from electricity price hikes is no longer sustainable. Incremental rise in tariffs will need to reflect the new paradigm of higher costs and adequate return to power generating firms.

This will need to happen unless CIL is able to get its act right to raise domestic coal output. This does not look a likely proposition in the foreseeable future. The reliance on imported coal will only deepen.

Siddharth Srivastava is India correspondent for Siliconeer. He lives in New Delhi.


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