Ensure Fuel Security for India

Energy powers the growth of a nation and has been universally recognised as one of the most important inputs for economic growth and GDP. To maintain this growth, it is imperative that energy is readily available and is affordable. The growth of an economy hinges on the availability of cost effective and environmentally benign energy sources, and the level of economic development has been observed to be reliant on the energy demand.
Sources of power must necessarily be reliable without being vulnerable to long- or short-term disruptions. Interruption of energy supplies can cause major financial losses and create havoc in economic centres, as well as potential damage to the health and well-being of the population.
Energy and GDP growthA few years back, “Dr. Kirit Parikh Committee” of the Planning Commission hadhighlighted projections of the energy requirements based on GDP growth rates of 7 per cent and 8 per cent at constant and falling energy elasticities. Energy elasticity, which is with reference to the GDP, is the percentage change in energy consumption for 1 per cent change in GDP. Currently, this elasticity is 0.80. The Committee considers lower elasticities of 0.75 to be attained by the decade beginning 2011-12 and 0.67 from the decade beginning 2021-22.
India is well-endowed with both exhaustible and renewable energy resources. Coal, oil, and natural gas are the three primary commercial energy sources. Historically, coal has been the largest source of energy. However, India’s primary energy mix has been changing over a period of time. But resource augmentation and growth in energy supply has not kept pace with increasing demand and, therefore, India continues to face serious energy shortages. Until renewable energy sources in one form or more becomes capable of providing 365 days x 24 hours continuous predictive power, irrespective of input similar to conventional power plants running on coal, nuclear, hydro etc., grid parity has little intrinsic value and can at best address grid power requirement for the time of day when either wind or solar energy can deliver associated output. Due to shortages and the inability of renewable energy resources to provide continuous power like oil and coal, there has been an increased reliance on imports to meet the energy demand and more imported sources will be needed in the years ahead.
The absence of new gas finds and declining production from Krishna-Godavari-D6 field is pushing the needs for enhanced gas imports. Petroleum ministry data suggests LNG imports in 2012-13 is expected to be at 69 million standard cubic metres per day, well over twice the quantity last year. From there on, the imports will increase over two and half times, to 184 MSCMD, in 2016-17, with total gas availability estimated at 197 MSCMD and 394 MSCMD, respectively. This will increase the LNG share in five years from 37 per cent to 46 per cent.
Coal has been the mainstay of the power production in India and would continue to have a loins share and thus, an important role to play in meeting the demand for a secure energy supply. Historically, coal prices have been lower and more stable than oil and gas prices, and coal has also been easily available for power producers across the country. However, things are no longer the same.
Power Developers and other Coal dependent Industries under PressureAccording to the Ministry of Coal, the gap in demand and domestic supply of coal has increased from about 50 million tonnes (MT) in 2007 – 08 to 83 MT in 2010 – 11. The projected coal demand in the terminal year 2016 – 17 of the 12th Five Year Plan is about 980 MT and the envisaged production to meet the projected demand is 795 MT leaving a gap of 185 MT. This demand includes 682 MT for power utilities. This domestic demand and supply gap is continuously widening with rising imports and its impact on the prices. High import levels are likely to destabilise the financial structure of the coal dependent sectors by exposing them to volatile international prices. Also, the availability of coal will be a critical constraint on the development of coal-based power plants in the 12th Plan when the projected gap between demand and supply is likely to go up by 200 MT.
While there are unexplored coal blocks that companies can apply for captive mining, the challenges are huge and can deter companies from applying for captive mining. There is a lack of assessment of India’s natural resources – a number of areas remain unexplored and the mineral resources in these areas are yet to be assessed. A TERI policy brief on coal concludes that India may have coal reserves in plenty but in reality, the coal that can be extracted is only a small fraction of our total coal inventories without taking into account areas where coal mining may not be permitted. The current economic mining practices are generally limited to a depth of 300 m, and about 40 per cent of the reserves of the country are beyond this depth. Coal production from underground mines has either stagnated or has declined, despite significant investments. Also, a large part of India’s coal reserves may not be extractable with current mining technologies.
Further, the distribution of minerals in the areas known is uneven and varies drastically from one region to another. There are delays in approval of investments in the mining sector that are dovetailed with infrastructure impediments. There is also the often contentious issue of large scale displacement of tribal population, resistance of locals and environment issues that need to be taken into account.
To import or notConsidering the burgeoning gap seen in domestic coal supplies; Public and private sector entities have embarked upon imported coal as a means to bridge the deficit. Some Indian entities have taken upon themselves the task of purchasing, developing and operating coal mines in international geographies. While this is expected to secure coal supplies, it has thrown open associated challenges and exposure to non-familiar geographies. For example, the key international sources of coal supply to India are Indonesia and Australia. Indonesia poses significant political and legal risks in the form of changing regulatory framework for coal to be sold not below Government’s declared prices, while the carbon tax in Australia of 30% has made coal exports unviable. Similarly, coal evacuation from mines in South Africa is constrained by their limited railway capacity and the capacity at ports, making it difficult for any additional coal cargos to evacuate reliably. However, of all these countries, Indian companies can buy mines and rights to off-take coal.
In recent years, Germany, UK and Poland have downgraded their coal reserves numbers, with overall world reserves of coal having reduced from 10,000 BT to 4,200 BT over 25 years. The ability to import large quantities of coal to India is therefore getting increasingly restricted. This is being mitigated to some extent by the acquisition of coal mines abroad. Nonetheless, coal security needs to be given the same importance as oil security, as the sources of imported coal, are limited to just three or four countries, unlike oil. Also, a large import by China is tightening supplies and prices.
It is also seen that countries such as China, Japan, Korea and several others use bilateral government to government relationships to get access to coal, oil and gas resources thus facilitating their own private sector companies to thereafter hold licenses and have the resource exploited. Such diplomatic advocacy has not yielded any results in reference to Indian acquisition of resources in countries with reserves.
Road AheadCoal is essential for meeting more than half of India’s commercial energy requirement. Today, coal production is in deficit and imports have been increasing each successive year. Similarly, gas supplies from domestic sources are dwindling and gap would have to be met from imported LNG, albeit expensive. Since, power is a concurrent subject, most of the states and associated regulatory commissions wish to avoid sourcing electricity based on imported fuels. However, avoidance is a temporary reprieve and can’t be sustained for long.
The Government of India should therefore evolve an Energy Security Policy, conveying use of portfolios, basket of fuels and must issue guidelines as to how regulators must ensure that at each state level they build the tariff using bulk sourcing of power based on prudent mix of portfolio of fuels comprising of both imported as well as domestic. This is akin to CERC using guideline of percentage share of bulk sourcing from renewable sources of generation. There should be rationalisation of existing coal linkages to optimise distances of rail movement, free up rake placements and enable liquidation of idle stock at coal pit-heads. The pending Fuel Supply Agreements need to be resolved for long term coal linkages. For these, institutional mechanisms need to be strengthened to facilitate fast track clearances for coal mining projects through a single window inter-ministerial body. The government also needs to take measures to develop a conducive and enabling policy framework by introducing an independent coal regulator to oversee mine planning and development, adherence to investment plans and a production schedule to build a road map for commercial mining.

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