Wednesday, October 19, 2011

Coal shortage and Power crisis

Many parts of western & southern India were plunged into darkness over the last couple of weeks which resulted on account of lower generation at the power stations. By far the reason for lower generation has been attributed to a drastic shortfall of coal –primary fuel used by thermal power plants.

So who is at fault – the power generation company, which didn’t stock enough coal so as to tide over exigencies, OR the coal production companies, which failed to produce enough coal, OR may be the Indian Railways, who provide the necessary backbone for transportation of coal from mines to power stations. Let us try to understand and tick cross each of these possibilities.

Majority of power plants in India operate on a cost-plus basis, which means that the power companies detail out their expenditures and get the same approved from the Electricity Regulatory Commissions. The ERCs do so based on Terms & Conditions of Tariff Regulations, which provide a detailed account of expenditure limits. Under the said regulations, a generation company is allowed to include the costs for two months of coal stock under its working capital calculation. What this means is that, if a generation company stocks coal required for running its plants for two months, then the expenditure incurred in maintaining this stock is pass-through to the buyers, which is the Distribution companies.

However, in reality generation companies do not maintain this quantum of stock, for various reasons. Primarily the reason is attributed to delays in supply by the coal companies. Another reason is to lower the chances of coal wastage – either through theft, or poor maintenance, while the coal is sitting at the power plants.

This brings us to the next problem possibility, which is reduced production by the coal companies. A quick look at CIL production statistics reveal that the company has missed on three dimensions – (a) ability to ramp up coal production in-line with the growing demand, (b) ability to maintain production levels at the existing mines and secure them from factors such as flooding etc., and (c) ability to beneficiate low quality coal. While coal consumption has increased from 504 MT in FY 08 to 611 MT in FY 11 which is a 21% increase, the supply of coal has increased by only 16% over this period.

The third possibility which is reduced transportation by Indian Railways could be ruled out for the present crisis, based on its public information disclosure. The IR has maintained that there has been neither shortage of wagons nor any issues regarding derailment of tracks. In fact according to the IR their open wagons have been lying idle in the absence of any coal loading.

The problem therefore squarely lays on account of default by coal production companies. Government officials, industry experts and academia have talked a lot about solutions to this problem, including reforms in the coal sector. It is high time these words get converted into actions which could lead to tangible results. Till that time, it’s a wait and watch for consumers – in darkness.

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