India may soon be on the brink of a power crisis

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On Wednesday, October 6, 2021, the electrical towers and chimneys of the Tata Power Company’s Trombay Thermal Power Station in Mumbai, India.

Diraj Singh | Bloomberg | Getty Images

China is not the only major Asian country to deal with energy austerity-India is also on the verge of a power crisis.

At a time when the economy is recovering and power demand is increasing, most of India’s coal-fired power plants have extremely low coal inventory levels.

Coal accounts for approximately 70% of India’s electricity generation.

Kunar Kundu, an Indian economist at Societe Generale, said that the potential power crisis may have a direct impact on India’s emerging economic recovery, which is driven by industrial activities rather than services.

Government data shows that as of October 6, 80% of India’s 135 coal-fired power plants had a supply of less than eight days—more than half of which had inventory values ​​of two days or less.

In contrast, according to Hetal Gandhi, head of research at Standard & Poor’s global subsidiary CRISIL Ratings, the average coal inventory at power plants has been approximately 18 days of supply over the past four years.

Read more about clean energy from CNBC Pro

How did we get here?

Commentators told CNBC that supply factors and declining coal imports have combined to cause the current crisis.

India’s electricity demand surged from April to August. After the devastating second wave of Covid-19, the economy has regained momentum.

Gandhi said that the economic recovery was faster than many people expected.

Gandhi explained that thermal power companies have insufficient coal inventories and he did not anticipate a surge in electricity demand this year.

Other sources of power generation—such as hydropower, natural gas, and nuclear power—have also declined.

Gandhi said that uneven distribution of monsoon season is one of the reasons. The decrease in rainfall in some areas has adversely affected hydroelectric power generation or hydroelectric power generation.

She said other factors include the sharp rise in natural gas prices and the shutdown of nuclear power plant maintenance. All of this has led to an increase in coal-fired power generation.

Sandeep Kalia, chief analyst at Wood Mackenzie, told CNBC that although the Indian Coal Company has sufficient pithead inventories, logistics problems caused by the monsoon season also limit coal supply.

Pithead refers to the top of the mine where most of the mined coal is stored before being transported to the power company. The rainy season usually makes transportation more difficult because many routes tend to be flooded.

Why is the coal supply depleted?

Despite having large coal reserves, India is still the world’s third largest coal importer. However, due to the widening gap between international coal prices and domestic coal prices, imports have fallen sharply in recent months.

As supply drops, so does demand.

Kalia said that compared with the same period last year, coal imports from power plants fell by 45% in July and August, and India’s non-electricity sector is increasingly dependent on domestic coal. Non-electric industries such as aluminum, steel, cement, and paper usually burn large amounts of coal to generate heat.

He added that the decline in power generation from coastal power plants that rely on imported coal has put pressure on domestic coal-fired power plants to increase production.

According to CRISIL’s Gandhi, even so, coal imports are hindered due to supply disruptions due to the pandemic and logistics issues.For example, transportation costs are rising because of increased demand As the world economy slowly recovers from the pandemic, shipping and ports are congested.

She said that India’s domestic coal has a low calorific value-which means that more coal is needed to replace imported coal, which further increases the pressure on domestic power plants.

The price of coal in India is mainly determined by the state-owned Coal India Company. Therefore, when international prices rise, domestic prices will not rise sharply, because this will affect electricity prices and inflation-utility companies cannot pass on higher costs to most consumers.

Gandhi said that since most farmers and many households in India receive electricity subsidies, the burden of rising coal prices will mainly fall on industrial consumers who only account for 25% to 30% of electricity consumption.

“Whenever import prices rise sharply, domestic manufacturers have low incentives to import coal and power generation,” she said.

What will happen next?

According to reports, Indian Electricity Minister Raj Kumar Singh warned that the energy supply contraction could last as long as six months.

As the Indian holiday season begins this month, consumption tends to peak, and electricity demand may rise further-if global demand for Indian exports increases significantly, the situation may worsen. According to reports, the Indian Coal Company has increased its supply in an attempt to offset some of the shortage.

Gandhi said: “If demand rises sharply, I don’t know what measures will be taken, but you can see if these measures may curb exports from power-intensive industries.”

The Indian authorities are trying to alleviate concerns about supply austerity.

The Ministry of Coal said on Sunday that the country has enough coal to meet the demand for power plants and that fears about power supply interruptions are “unfounded” and “wrong.”

“The coal available for power plants is a type of rolling stock, which is replenished daily by the supply of coal companies,” the ministry said. “Therefore, any worry about the exhaustion of coal stocks at the end of the power plant is wrong. In fact, domestic coal supply has substantially replaced imports this year.”

“Given India’s heavy dependence on thermal power, we may see domestic coal suppliers shift their supply from industries such as steel and cement to thermal power plants,” Kundu of Societe Generale told CNBC via email. “Either way, activities will be affected in the short term.”

“Because of the need to import higher-priced coal, electricity prices are likely to rise, which may increase inflationary pressures,” Kundu added.

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