4 Coal Insights, December 2015

COnTEnTs

6 “Future power sector growth hinges on discoms’ turnaround”

14 Steam coal prices crash 19-23% in 2015

18 Coking coal offers decline 32% in 2015 20 India’s coal output at 47% of annual

target 24 CMPDI hopes to achieve 25% growth in

drilling in FY16 25 Industry seeks inclusion of cement in

FPS 27 Cement industry seeks scrapping of

customs duty on coal 28 India’s Oct power generation capacity

addition down 26% m-o-m 30 India’s Oct cement production up after

4 months 34 2015: A busy year for Ministry of Coal 37 India needs to open new coal mine

every month to meet 2020 target 38 Domestic coal availability may not cut

power gen costs: Adani 41 US power sector coal consumption

estimated to fall 10% 43 Paris climate deal: Wake-up call for

India 46 Could India help re-ignite US coal

industry? 56 Coal futures hit 12-year lows 58 Railways’ October coal handling up 9%

m-o-m 60 Thermal coal handling by major ports

up 11.75% in Apr-Nov 62 E-auction data 64 Port data

43 | INtERNAtIoNAlParis climate deal: Wake-up call for IndiaDerided and challenged, India must ride on coal express, also create a huge market for renewables.

34 | GoVERNMENt2015: A busy year for Ministry of CoalThe government auctioned 31 mines and allotted 42 blocks to PSUs, must do a lot more in 2016.

38 | CoRPoRAtEDomestic coal availability may not cut power gen costs: AdaniStopping import is good for the country and is not an impossible target, says Vinay Prakash, CEO.

20 | FEAtuREIndia’s coal output at 47% of annual targetThe country’s coal production reached 328 million tons till October, 39 mt below target.

6 | CoVER StoRY“Future power sector growth hinges on discoms’ turnaround”PLF has hit record lows, may improve if discoms regain health, says Ashok Khurana, DG, Association of Power Producers.

6 Coal Insights, December 2015

COvER sTORy

Poor health of the power distribution companies, uncertainty of coal supplies

to power plants whose blocks were cancelled by the Supreme Court order and doubts over meeting India’s renewable targets by 2030 are worrying issues in the power sector at present. Indeed, financial health of the power distribution companies is a key weak link in the value chain, as proven by the numbers - accumulated losses of `3.5 lakh crore with an annual addition of about `70,000 crore and regulatory assets of around `80,000 crore. The need of the hour is evolving a credible alternative to ensure sustainability of investments in the supply side by bringing down the difference between the cost of service and ‘cash collected’ for every unit. Upstream efficiency improvement can make a difference of about 40 to 50 p/kwh, thereby reducing the burden of projected tariff increases, Ashok Khurana, Director General, Association Of Power Producers, tells Arindam Bandhopadhyaya of Coal Insights in a free-wheeling interview.

“Future power sector growth hinges on discoms’ turnaround”

Coal Insights, December 2015 7

COvER sTORy

Excerpts:

It seems all is not well on the power front. Recently, Moody’s has assigned a ‘negative’ outlook on the Indian power sector, citing ‘structural challenges’. What are your observations on the power utilities’ current performance and future growth possibilities?

Moody’s assigned a negative outlook considering persisting legacy issues of stressed and stranded generating assets due to cost under-recovery, fuel supply risks, lack of demand and viability of distribution, which are among the key challenges to be addressed on a priority basis.

Power distribution remains a weak spot in the value chain in the sector, a bane amply evident in the numbers - accumulated losses of `350,000 crore with annual addition of about `70,000 crore and regulatory assets of around `80,000 crore. This position is unsustainable and threatens the viability of the upstream segment (fuel, generation and transmission) of the value chain. Future growth of the sector depends on the turnaround of the distribution segment. There have been two bailouts of distribution companies in the recent past and both did not yield any sustainable results except for providing headroom for a limited period!

We need to evolve a credible alternative to ensure sustainability of investments in the supply side. We need to bring down the difference between the cost of service and ‘cash collected’ for every unit and that is only possible if we remove inefficiencies in the entire value chain, starting with coal production, coal transportation, generation

and procurement of power, inter- and intra-state transmission and distribution losses. The upstream efficiency improvement can make a difference of about 40 to 50 p/kwh, thereby reducing the burden of projected tariff increases.

Any tariff rationalisation without bringing in efficiency will only add to the consumer’s burden. Consumers may accept tariff rationalisation once they realise that it is ‘cost reflective’ and not ‘in-efficiency reflective’. Efficiency improvement measures, along with loss reduction strategies, have to move in tandem to help bring the state electricity boards (SEBs) out of the current distress situation. The Ujjwal Discom Assurance Yojna (UDAY) attempts to do that. Till the SEBs reach the break-even point, we need to provide them with transition financing linked with realistic measurable milestones.

The main hurdles to the power sector’s growth are well known, but there seems to be no remedies that actually work! For instance, the massive T&D losses have become a chronic disorder. Why could this menace not be fixed in the last so many years? Is there a pragmatic and implementable way out?

Restoring viability of the distribution segment is of utmost

importance as it is a key determinant of sustainable flow of investments in the power sector value chain.

All that is to be done for reforming distribution utilities is well documented and known to all. Adequate financing for undertaking reform measures should be made available, including the need for transition financing, so that the ‘tariff shocks’ could be softened. Now the question that we need to answer is, what holds back the utilities?

The answer is evident. The experience of earlier reform processes suggests that distribution reforms is a function of “state’s resolve and sustainable political commitment” and unless that is available, reforms of utilities cannot succeed.

The scope of central intervention is only limited to persuasion and providing necessary financial support if the programme is on track.

What is the current scenario in fuel supply? What are the causes of the sudden increase

It may be kept in mind that the quantum of coal imports is a function of power demand and if demand picks up and the under-utilised and stranded generating capacities come on stream, then the appetite for coal will increase significantly, leading to the possibility of higher imports. Looking at the

low price of imported coal, it may be commercially beneficial to import coal for coastal plants and supply the full annual

contracted quantity (ACQ) quantity to the inland plants and do away with the restrictive supply framework.

20 Coal Insights, December 2015

fEATuREfEATuREfEATuRE

India’s coal output at 47% of annual target

Sanjoy Bag

India’s coal production crossed 328 million tons (mt) in the April-October period of the current financial year. The

production level in these first seven months was just 47 percent of the annual targeted volume of 700 mt.

The first seven months’ target in 2015 was 367 mt.

Going by the current trend, industry sources feel, it would be hard to achieve the targeted production volume of 700 mt in fiscal 2015-16. Seven months had passed by but the targeted production volume had failed to cross the “halfway” mark.

The country failed to achieve the April-October target of 367 mt. However, to meet the annual output target of 700 mt, it has to be on course to meet the shortfall in April-

October in the coming months. It would be a herculean task to meet the shortfall of 39 mt to be achieved during the rest of the financial year of 2015-16.

Of the total targeted production of 700 mt, 550 mt is to be produced by Coal India (CIL), 56 mt by Singareni Collieries Company (SCCL) and 94 mt by captive coal mines, according to provisional data available with Coal Insights.

India’s coal production during October 2015 stood at 52.85 mt, up 6.28 percent from 49.73 mt in October 2014, the data showed. CIL’s output in October 2015 was 44.37 mt but failed to achieve the targeted 46.84 mt though it was able to beat the September production figure of 37.17 mt.

SCCL, on its part, produced 5.02 mt and the captive coal mines 3.46 mt in October, 2015.

Captive coal output falls 35% y-o-y

Coal production from the captive blocks in India fell 34.55 percent to 3.46 mt in October 2015, compared to 5.28 mt produced in the corresponding month of 2014. A volume of 3.34 mt was produced by captive blocks in September 2015.

However, coal output from the captive blocks went past the September production figure of 3.34 mt and also the August production figure of 2.86 mt, while in July 2015, captive output stood at 2.88 mt.

A volume of 22.09 mt was produced in

0

10

20

30

40

50

60

70

Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar

2013-14 2014-15 2015-16

India's coal production, April-March (in mt)

38 Coal Insights, December 2015

CORPORATE

Domestic coal availability may not cut power gen costs: Adani

Rakesh Dubey

There has been a lot of

buzz with regard to increased coal production within India, and the government expects the power sector, so far starved of the fuel, to feel

upbeat in the present scenario. However, price parity between domestic

and imported coal still seems to be an issue in coal purchase decisions.

The recent increase in India’s domestic coal production augurs well for the country as far as availability of the fuel is concerned. But higher availability of domestic coal may

not directly impact the demand of imported coal in India as we need to see the price parity between imported and domestic coal. For that, a consumer also needs to take into account the losses on account of auxiliary consumption, efficiency, ash disposal and environmental factors in domestic coal, said a senior official from Adani Enterprises.

“I have confidence in whatever is being highlighted by the government and by Coal Minister Shri. Piyush Goyal, that India would reach a position where it may not require imported coal. It is good for the country and I agree with those suggestions. The focussed approach of the government seems to have paved way to achieve targets which at one point of time appeared impossible with respect to the coal sector and that is good for the Indian economy,” Adani Enterprises CEO Vinay Prakash told Coal Insights.

“We don’t see this to be a very difficult or impossible target, but the important point is

availability of coal and the price per GCV of coal,” Prakash said on being asked whether, in future, Indian power plants will only use domestic coal.

“Ultimately, these players need to run power plants and the country needs to give low-priced electricity to consumers. For that, if I get imported coal at a price cheaper compared to Indian coal, I will go for the former,” he added.

Asked if, according to him, Indian power sector consumers are conscious about the price of coal on per Kcal/kg basis, Prakash said, “It depends on who the customer is. If you talk about some sectors, they may not be conscious in that sense. However, many consumers which do not operate on pass-through basis, and who are actually working towards reducing their costs, would definitely go for imported coal.”

Prakash, however, said it augurs well for the country that the price of coal in

Vinay Prakash, CEO, Adani Enterprises Ltd.

Coal Insights, December 2015 43

Kingshuk Banerjee

While nations assembled in Paris to discuss to evolve a common strategy to deal with the thorny

problem of climate change, the western media has already started lampooning India. The New York Times published a cartoon of an elephant labelled “India” blocking a train called “Paris Climate Summit”.

If that’s not enough, then came another from The Australian. Mocking India’s position at the Paris Climate Summit, the Aussie daily published a cartoon entitled “Aid a la mode”, showing a poor family chopping solar panels in aid from the United Nations, and “trying it with mango chutney”.

Though criticised worldwide for this kind open tirade against India, nevertheless, the western media had opened its barrage of accusations against New Delhi.

What was it?It is simple. Despite being rich in coal resources, despite coal being the cheapest fuel available, despite the crying need to bring at least 300 million people under the ambit of electrification, New Delhi should abandon the coal path and follow blindly the paths taken by the West. Otherwise, India would be seen as a “stumbling block” to the climate deal.

The critics argue that while India’s stand on coal is unacceptable to the developed world, at the same time, they cannot afford to ignore one of the world’s largest economies and this kind of open hostility is, in fact, a manifestation of that dormant anger.

But before delving into the eco-political aspects, let us analyse India’s position after the Paris Climate Deal.

First, the temperature goal to pre-industrial levels is set for end of the century and will mean that the world will have zero emission

economies. The 2 degree goals will mean the shift will happen by end of the century but the ambitious 1.5 goal will push countries to decarbonise between 2060 and 2080.

The 2 degree goal means that India will have to dramatically slow down its emissions with no new coal-fired power plants in the near future. India will have to draw a coal roadmap for the 2 degree scenario to reduce its dependence on coal for electricity generation. Around 60 percent of India’s electricity comes from coal-fired power plants. However, the 1.5 degree scenario could have been scary for India as it would have had shut down its coal-fired plants within a few years, with a quicker shift to renewable energy. But India has avoided this scenario as the goal is only aspirational.

Secondly, the 1992 firewall between the rich and the developing world has largely been broken in the Paris summit. The agreement has responsibilities for every nation, with a higher burden on rich economies and a lower burden on developing economies. The Paris agreement created a third layer of the most vulnerable countries, least developed countries and island nations and discussions will start in Morocco next year to include Africa into it.

New Delhi wanted Common But Differentiated Responsibilities with Respective Capabilities (CBDR-RC) in all elements of the Paris agreement. Was able to get it in four aspects only — finance, technology transfer, capacity building and adaptation. On emission reduction, the danger is that the already diluted CBDR will further vanish in the future. As a whole, differentiation has gotten diluted further but, for the time being, India has protected its interests.

Thirdly, although the floor is $100 billion per year by 2020, the obligation of the rich countries to ratchet up the commitment has

ended. Post-2020, rich nations will commit depending on their national circumstances and money from all sources — public and private — will be counted as climate finance.

Here New Delhi will not get much, as least developed and island nations have been identified as benefactors. But critics argue that India may need more funds to buy clean technologies as copyright has not been addressed in the agreement. After the next review in 2023, emerging economies like India may have to become donors, which it managed to avert this time.

Here is one twist too. New Delhi has put a big question mark on the Organization for Economic Cooperation and Development (OECD) sponsored report which has said that developed countries had mobilised $57 billion of climate aid in 2013-14. But a paper published by the Indian Ministry of Economic Affairs said the OECD was “deeply flawed” and only “partially correct at best”.

India said the OECD research showing nearly two-thirds of that $100bn target had been already met was “questionable”.

“Methodologies used were inconsistent with the literature and best practices and even ‘bent’ in ways to find more flaws than reality. Meaningful, independent verification was impossible since only aggregate numbers were reported – with lack of transparency. No serious consultations were done with developing countries themselves,” New Delhi said.

India suggested that the true amount mobilised by rich countries may only be $2.2 billion (bn), not $57 bn. “This is far from the $100-bn-a-year-goal,” India said. The report included a disclaimer that “the views and analysis contained in this discussion paper do not necessarily reflect the views of the Government of India”.

The paper, which Indian officials in Paris have referred to, concluded: “The Paris conference and negotiators will unfortunately need to worry about the credibility of the new OECD report.” The OECD strongly rejected charges that it had not been transparent.

Fourthly, all nations will have to submit Intended Nationally Determined Contributions (INDC) once in five years and would have to enhance their commitments — emission reduction for rich and mitigation action for developing countries.

Paris climate deal: Wake-up call for India

InTERnATIOnAL

Tear

alo

ng th

e do

tted

line

Tear

alo

ng th

e do

tted

line

Coal Insights, December 201566