9. COAL

Assessment

An efficient coal sector – from mining, through cleaning and conversion, to utilisation and waste product management – is critical not only for electricity generation, but also for industrial development (steel, cement, fertilisers and others). This requires proper market functioning and clean production and use of coal. The government has to balance the significant employment and societal benefits of coal with environmental concerns and other challenges. India is working towards these goals with a number of important reforms in recent years. The GoI should foster the implementation, enforcement of, and compliance with, high safety and environmental protection standards across the entire coal chain.

India’s coal supply has increased rapidly since the early 2000s and coal continues to be the largest domestic source of energy and electricity generation. Between 2003 and 2014 total coal supply grew by 8.5% per year on average. In 2016 domestic coal production (hard coal and lignite) accounted for 71% of total coal supply. The remaining 29% was imported, as India’s thermal coal is generally not of high quality nor is there a large quantity of coking coal.

In 2017 the upward trend for India’s coal production continued. However, the growth in domestic production was not enough to meet the increased demand for both thermal coal and metallurgical coal. Coal imports therefore rebounded in 2017, and India became the world’s second-largest coal importer. Indonesia, South Africa (thermal coal) and Australia (metallurgical coal) are the largest sources of India’s coal imports.

India’s coal market is going through important changes. In February 2018 the GoI approved the methodology to allocate coal blocks for commercial mining, which will end the monopoly held by state-owned CIL on coal production and sales. The start of commercial mining generates great hopes, including among the energy-intensive industries, but also resistance by others, mainly the trade unions. More than one year after the 2018 decision, a number of open issues remain unresolved, delaying the implementation of the decision. The GoI is expected to issue bidding rules for commercial coal mine auctions of around 200 mines for the next five years.

The profitability of the blocks to be auctioned is one of the major issues. A point of attention is the size of the blocks on offer; if they are too large, some potential bidders will be deterred. The size of the reserves, their quality and geological conditions, which might allow a cost-competitive exploitation of the blocks, are key parameters that investors need to know and assess. However, the delays and complexities related to land, forest and environmental permissions and dominance of long-term FSAs do not encourage private players to commit to the large investments required to develop a coal block.

Although commercial mining and the opening up to foreign investors have the potential to bring competitiveness, investment and new technologies to the coal mining sector in India, the main issues that CIL faces to expand production (i.e. land access, forest clearance or permit approval) will also be there for private producers. It is therefore critical that India continues its efforts to identify and properly assess coal reserves in its geography and streamline the permitting, land acquisition and environmental rules, for instance by creating a one-stop-shop.

Coal transport by rail from the mines to consumption centres has traditionally been a major challenge for coal producers in India. The level of coal freight charges is high and revenues

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are used to subsidise passenger transport. Reforms are needed to gradually phase out the cross-subsidy, while at the same time solidifying Indian Railways’ role as an affordable transport service provider. There are several ways in which the GoI could promote a process of rationalisation, which would be beneficial for both the rail system and the coal sector. One action would be to complete the construction of the two dedicated freight corridors, with the eastern one being mainly dedicated to coal haulage. This completion of the corridors would have two beneficial effects on the overall Indian rail network. First, it would relieve traffic and reduce bottlenecks on existing lines, making way for new intercity passenger rail traffic. At the same time, it would increase the speed of coal haulage by rail and the overall efficiency of the coal supply chain, possibly leading to an increased share of coal haulage by rail.

Given that cross-subsidy leads to market distortions and unfair distribution of cost burdens, the government should target its phase-out. This could be supported by generating additional revenue by simultaneously increasing the attractiveness of passenger services and reducing the dependence of passenger rail services on cross-subsidy from freight rail. This can be achieved in a variety of ways, but the balance of operational costs and revenues needs to improve by diversifying the offer of intercity rail services (such as offering overnight connections). Another way to proceed could be to set differentiated fares and services, accounting for the prices of competing modes at different times of the day and for the origin and the destination of trips. A more creative way to proceed would be to increase non-fare revenue from rail stations and neighbouring areas through real estate development and land value capture, both for new stations (which should be large enough to be able to host commercial activities) and existing stations (through refurbishment and renovation).

Generally, Indian coal is of low CV as it contains a high percentage of ash. To improve coal quality and reduce transport costs, coal can be washed. Indeed the government requires coal to be washed if it is transported over more than 500 kilometres and contains more than 34% of ash. Due to current coal pricing system and lack of incentives, coal washing and technological development has not advanced as desired. Despite the progress in recent years to set up new washeries, there is room for further improvement in both washing capacity and technology.

Most coal in India is used for power generation. In 2017 power generation accounted for two-thirds of total coal demand, followed by industry, accounting for 24%, and small shares in the service sector (2%) and residential sector (1%). Among industries, the iron and steel industry is the largest coal-consuming sector, and increased cement production also contributes to the growth in industrial coal consumption. Coal dominates electricity generation in India, and has increased at a very high rate for several decades to reach 74% in 2017. Coal power generation has more than doubled over the past ten years, with an average annual growth rate of 8%, driving the increase in total electricity generation. Coal used in power generation has increased rapidly alongside the growth in electricity demand. India’s coal-fired power plants have mostly been built since the opening up of the electricity market over the past 15 years and are thus relatively new.

Coal-fired power plants and industrial users have been traditionally supplied through longterm contracts, the so-called FSAs, with the mining companies. Recent policies – including e-auctions by CIL, and the auctioning of linkages and coal – aim to increase supply flexibility and reduce the tenure of FSAs. Irrespective of the benefits of the measures introduced to give more flexibility and solve issues through market-oriented mechanisms,

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when the underlying problem is lack of coal, only increasing coal supply can give relief to the market, and this requires the ramping up of coal production and/or improvement in logistics.

With another 50 GW of coal capacity under construction (mainly supercritical and ultrasupercritical), overcapacity is not going to solve itself in the coming years, and it will have implications for the profitability of existing plants. New, modern, efficient, low-emission, flexible coal plants are best positioned for being used in the future. By contrast, old inefficient plants, which require expensive retrofits to comply with environmental standards, are in a difficult position. The GoI is identifying the plants that can and will need to run more flexibly in the system and is looking at market design reforms to improve the remuneration of the system services they can provide.

India continues its efforts to foster efficiency and ensure the implementation of emissions performance standards aimed at reducing air pollutants and emissions from coal power plants. For example, the Perform, Achieve and Trade (PAT) scheme supports energy efficiency upgrades through the market-based trading programme for efficiency certificates under National Mission for Enhanced Energy Efficiency (NMEEE), one of the eight missions of National Action Plan on Climate Change (NAPCC).

While the IEA acknowledges the efforts made by the GoI to promote stringent standards and efficiency programmes, pollution control remains a burning issue. A total of 170 old thermal generation units with a cumulative capacity of 10.64 GW had been retired by March 2018. The most acute air pollution problems are caused by the oldest plants with a total capacity of around 23 GW, which have already exceeded their design life, are working at low load factors, and are both inefficient and polluting. Unless supported by subsidies or tariff increases, any investment to improve efficiency or reduce emissions is difficult to recover. Provided that energy security is not compromised, those coal plants should be closed down. Real progress on the ground has been very limited since the 2017 deadline for compliance was pushed to 2021/22. As much as 23 GW of old, inefficient subcritical power plants could be retired by 2022 (2021 for certain plants) and the government should ensure this will be implemented for the plants that cannot be retrofitted. A two-year compliance period was too short compared to other jurisdictions, where it took on the average 10-20 years.

International experience (in Japan, Europe, North America and China) suggests it is possible to reduce emissions from coal power plants dramatically based on a mix of “sticks and carrots”, i.e. regulation with some incentives for compliance combined with a long transitional period to avoid energy security issues. In 2019 the government has announced it is to allocate public subsidies to assist with compliance (as international finance is not available for coal-fired power plants and electricity price increases are difficult to implement). GoI is now focusing on the implementation of the current NOX standards and is no longer pursuing the tightening of the standards after 2022, following the Supreme Court ruling of August 2019. With proper maintenance and refurbishment or upgrades, the units could be operated in a satisfactory manner with significant benefits from reduced air pollution.

The greenhouse gas emission footprint of coal-fired power generation could be reduced by carbon capture, utilisation, and storage (CCUS). India has created a programme for CCS and is interested in promoting it through Mission Innovation. Several oil and gas companies, including ONGC, are investigating the potential for CO2-based enhanced oil

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recovery and NTPC is interested in CCS. However, a stronger push is needed to promote the development of CCUS and an embryonic CCUS industry. To pursue this, India will need to conduct an appraisal of suitable storage sites, which could be started drawing on international expertise, to fully understand the potential for CCUS.

Recommendations

The Government of India should:

Improve the design of the auctions for new commercial coal mines and ensure a one- stop-shop for permitting of new mines.

Ensure that coal allocation and pricing formulas incentivise companies to direct coal to its most efficient use.

Further improve railway logistics for coal supply, for example by allowing dedicated lines to be built in areas where future mining capacity will increase and by reducing cross-subsidy.

Focus on rapidly retrofitting and upgrading the current coal generation fleet to:

>continue to improve coal power generation efficiency through low-cost measures, including wider adoption of best practices, which will reduce coal consumption and emissions both of pollutants and CO2

>support investment in the flexibilisation of coal plants with new state-of-the art technologies

>continue to reduce air pollution from coal power generation by fostering compliance with enacted emission standards and closing down the oldest plants, if they cannot be refurbished, in line with National Electricity Plan proposals to close 22.7 GW by 2022.

Assess the wider potential role of CCUS in India, including a thorough survey of CO2 storage potential.

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