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India runs short on coal, despite global price slump

India's reliance on domestic coal has left many of its power stations starved for fuel, forcing electricity cuts throughout the country, even as the price of imported coal slumps.

Despite having the world's third-largest coal reserves, according to the International Energy Agency, a quarter of India's 100 coal-fired power stations have enough fuel for four days or less, and stockpiles at some are even lower, figures from the government and trade groups show. A prolonged summer and below-normal monsoon rains have exacerbated the situation by raising electricity demand.

At the same time, global coal prices have fallen to their lowest levels in years. Last week, Australia & New Zealand Banking Group Ltd. ANZ.AU -0.67% predicted that prices will drop 10% more over the next two to three years as China slows spending. Moody's Investors Service echoed that assessment in a report Monday, saying that the combination of slowing demand growth in China and increased production by Indonesia and Australia "will keep prices suppressed into 2015."

But India's coal imports aren't rising enough to plug domestic shortages, despite the cheap prices.

Domestic coal is priced at around $50 a ton, after accounting for transport costs. Coal imported from Indonesia, meanwhile, is at about $60 per ton, said Abhishek Rohatgi, a Singapore-based analyst at consulting firm Enerdata, while Australian coal is even costlier. The Newcastle benchmark for thermal coal was at around $70 a ton in July.

The price gap between domestic and imported coal is problematic because electricity prices are heavily regulated. Rates are generally based on domestic coal prices, and the industry is prevented from passing on the higher cost of imported fuel to consumers, though the federal electricity regulator recently allowed two companies that run power stations entirely on imported coal to raise tariffs.

Another problem is that India's power grid is designed to operate on domestic coal. Most of its power plants are inland, with little or no infrastructure to allow them to shift to imported fuel if domestic coal supplies fail. The bulk of the country's electricity turbines are also designed to burn local grades of coal.

India's total coal imports climbed to 168.5 million tons in the year ended March 31, according to provisional data from the Ministry of Coal. That was up from 145.78 million tons the previous year. Domestic production was 565.64 million tons, up from 556.4 million tons in the previous year.

The IEA forecasts that in terms of coal imports, India will overtake Japan, the European Union and China by 2020, making it the world's largest coal importer, but only if pricing-policy changes are introduced.

Mr. Rohatgi expects power plants in India will continue to face shortages because lower prices in the global market need to be supplemented with local overhauls. "Low prices will not solve the situation," Mr. Rohatgi said.

India's new government, led by Prime Minister Narendra Modi, has promised some changes in the sector, saying among other things that it will build rail lines in key coal-mining regions to improve the flow of coal to power stations and fast-track environmental clearance for coal projects.

Kalpana Jain, senior director at consultancy Deloitte Touche Tohmatsu India Ltd. said that if India's power sector gets the right boost from the government and new import-based power plants are built, coal imports will also go up.

"Coal imports are a short-to-medium-term answer to India's problems. But imports would only rise when there is a broader reform," she said.

Source: The Wall Street Journal