India’s energy transition: Coal is down but not out

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First published 2020 by Notion Press and Brookings India, ISBN: 978-1-64828-845-6, © 2020

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A new book, Future of Coal in India: Smooth Transition or Bumpy Road Ahead?, edited by Rahul Tongia and Anurag Sehgal, with Puneet Kamboj, examines all aspects of coal’s future in India, covering the below questions (and more) in greater detail.

Why is India’s coal consumption rising while almost all countries are phasing out coal?

India’s coal consumption is the second largest in the world after China’s but when we normalize it per capita, India’s consumption in 2019 was measurably below the world average. This is if we measure in tons, and if we further normalize this by the quality of coal (calorific value) then Indian consumption is close to half the world average. In addition, given limited heating requirements and relatively low ownership of cars, coal use dominates overall energy. Thus, it is the low base of energy consumption per capita that drives rising coal consumption.

Global snapshot of coal, 2019: Top 10 Producers and Respective Consumption

(references and methodology for the table can be found at Table 1.1 –  Future of Coal in India: Smooth Transition or Bumpy Road Ahead?)

India has some of the world’s most ambitious renewable energy plans, but unlike many other countries such as the UK or the US, it hasn’t found too many traditional alternatives such as natural gas. It’s for these reasons that while other countries may be ready to phase out coal, India’s first target should be accelerating the plateau time period for coal.

The picture is starker when we consider cumulative carbon use or carbon dioxide (CO2) emissions. While India isn’t the main “culprit” for climate change, it does have high growth ahead, and thus is very serious about limiting its emissions. It also faces disproportional impacts of climate change, and needs to focus on both mitigation and adaptation.

Solar bids are down to Rs. 2.36/kWh, while coal-based power is much more expensive. Why are people still discussing coal if it’s being sunset?

Different countries have their own trajectories relating to choices of energy supply. Given coal dominates primary energy in India, and about three quarters of coal is used for electricity production, the rise of renewable energy such as wind and solar slows down any growth of coal. But these won’t be enough to eliminate coal.

Not all electricity is fungible. The location and especially time of day really matter. Inexpensive renewable energy (RE) is when we compare options based on the Levelized Cost of Energy (LCOE), which combines fixed and variable costs under assumptions over the lifespan, including discount rates. This is only for variable RE (VRE), which means the output depends on the available resource such as the wind or sunlight. Given the fact that the present peak demand in the Indian electricity grid occurs in the evening, it’s not an apples to apples comparison examining the price of VRE solar with coal or any other supply that is considered firm or despatchable.

Ladder of competitiveness for RE ‘versus’ coal

(references and methodology for the figure can be found at Figure 1.7 –  Future of Coal in India: Smooth Transition or Bumpy Road Ahead?)

In addition to such differences, a very key but subtle point is the difference between total costs and variable costs. On one hand, RE has no fuel costs. Thus, once built, it easily could be considered “must run”, subject to grid constraints. On the other hand, given we have a surplus of coal generation capacity, from a utility perspective the question becomes should we pay for the total costs of RE or the incremental (fuel) costs of coal, more so because the capital costs of the existing plant are already an ongoing obligation under a power purchase agreement?

Delivered coal costs vary heavily by location. Transport costs are amongst the highest in the world because the Indian Railways, India’s largest civilian employer, overcharges coal to offset under recovery of passenger fares.  This is seen in the very low passenger to freight pricing (fare-to-freight) ratio shown below.  This is one reason the Plant Load Factor (PLF) of pit head coal power plants is very high.

Fare-to-freight ratio (average passenger fares per km versus average freight per tonne-kilometre charges) for railways across countries

(references and methodology for the figure can be found at Figure 1.14 –  Future of Coal in India: Smooth Transition or Bumpy Road Ahead?)

In addition to overpaying for passengers, coal also pays to society through the Rs. 400/tonne “coal cess” as well as royalties, GST, etc. Plus a fraction of CIL profits combe back as dividends, plus income taxes, and many of these have grown markedly between 2005-06 and 2016-17.  On the other hand, coal also does have significant environmental and social externalities which aren’t properly priced in. Thus, it’s a very tricky calculation to only examine LCOE.

Importantly, even if we have only RE growing in the power sector, we will still have lots of coal in operation in 2030.  India’s growing energy demand means that the unprecedented targets for RE growth are unlikely to meet all demand by 2030.  This is simply based on energy balancing, before we tackle the much more vexing challenge of meeting all demand at each hour of the day – solar at some point needs a battery.

The translation between energy and capacity isn’t linear.  Even if we stopped building more coal power plants, except, perhaps, ones under construction, the coal-based electricity output could still grow measurably because the utilization of existing plants is low enough to leave lots of headroom for growth. There are plans to improve the efficiency of the coal fleet, which should slightly offset this possible growth.

Isn’t it the case India has cheap coal because the government subsidizes it? Isn’t the true cost much higher?

It is misleading to say coal is subsidized. It may not be charged equal to its externalities, but it doesn’t receive any net subsidy. In fact, it pays in to the exchequer or society in cash terms as discussed above, and also shown below (levies, portion of railways, and taxes/dividends from CIL).

Components of prototypical delivered coal prices – miner, levies, and railways transportation

(references and methodology for the figure can be found at Figure 1.13 –  Future of Coal in India: Smooth Transition or Bumpy Road Ahead?)

Prices are low compared to much of the world but on a per unit energy basis (instead of per tonne) they’re not as low. And these mostly cover the costs –after all, CIL is, in aggregate, profitable, even though specific subsidiaries sometimes lose money.  This is one reason that coal pricing has numerous cross-subsidies and distortions that need to be addressed.  Otherwise, distortions will propagate through the chain to electricity producers and eventually consumers.  For example, the winning power plant isn’t necessarily one that’s more efficient – it just has contracts (and/or a favorable location, avoiding transport costs) that get it cheaper coal at a notified price (under a Fuel Supply Agreement). The figure below shows such a distorted chain for electricity, with green nodes representing low cost pathways, and red nodes showing example expensive pathways.

Differentiations and distortions in coal flows for the power sector

(references and methodology for the figure can be found at Figure 1.19 –  Future of Coal in India: Smooth Transition or Bumpy Road Ahead?)

What would happen if the government decreed they are phasing out coal in, say, 5 years? Maybe combined with breakthroughs in clean energy (RE, batteries, etc.)

While availability of alternatives and energy security is a global phenomenon, this often manifests itself in terms of pricing. If alternatives to coal were cheaper, these would accelerate rapidly, and to some extent they are, especially for VRE. But phasing out coal either means an alternative has become more cost-effective or society is willing to pay the premium for phasing out coal. This is a larger policy debate both within and across countries.

It may be more important to not focus on absolutes but the trajectory and pathway. This helps us recognize that a complete shutdown of coal, if that were the goal, would start with a slowdown of growth (which was already happening even before COVID), followed by a plateau. However, these transitions usually take multiple years if not decades.

On the other hand, policy and operational focus should be on better utilizing existing resources in a cost-effective and cleaner manner. It’s important to note that coal is India’s swing producer. When you switch on a fan or plug in an electric vehicle, it’s coal generation that, on average, increases to meet demand. Renewable energy is never waiting for demand – it’s use it or lose it. While hydropower can easily go up and down in output, the aggregate annual output is monsoon dependent. Given India lacks inexpensive natural gas, this doesn’t appear to be short-term answer, and nuclear power has struggled to grow capacity in a cost-effective manner. This is one reason such a decree is unlikely but what the government can do is sharpen frameworks to accelerate cleaner options within a portfolio approach.

The main challenge is that coal operates in an entrenched ecosystem. Managing winners and losers, who face direct financial implications, is a challenge for any future energy policy. In some cases, one may have to revisit or enhance financial support for regions, states, or subsets of society.

By when would battery prices fall enough to displace coal for electricity?

Even at the oft-discussed $100/kWh cost for a battery, there remains a non-trivial impact for electricity, heavily dependent on duty cycle and O&M costs (for example, do these need air-conditioning for Indian conditions?). A sample calculation is shown in the figure.

Battery cost with a solar panel

(references and methodology for the figure can be found at Figure 11.4 –  Future of Coal in India: Smooth Transition or Bumpy Road Ahead?)

An easier hurdle for batteries is to become cost-effective for mobility applications like electric vehicles, where the competition is with imported petroleum.  Even this is a few years away for certain applications (especially individual four wheelers). In contrast batteries are already viable for public transport, fleets, and other niches today. Cost-effective batteries for doing bulk timeshifting of renewable energy isn’t the short-term expectation but the good news is it doesn’t have to be. First, there are already enough niches in which batteries can be viable today and gradually scale. Second, there are immediate value-adding scenarios for batteries that aren’t focused on bulk commodity electricity time-shifting but rather specialized applications such as ancillary services (services that keep the grid stable).

Without trying to pick a specific number, it’s probably in the mid-2020s that battery prices, coupled with RE, would likely fall enough to become a meaningful option to compete with firm power from coal. What’s more important is the possibility that any surplus coal capacity in India may be exhausted by then and thus India would have to figure out what type of new power plants makes sense to invest in – would it be only RE or possibly something else?

What are alternatives to coal for non-electricity use?

While electricity dominates coal use, coal is a vital input for multiple industries including steel, cement, bricks, etc. Alternatives to coal depend heavily on the sector and what coal offers. If it’s only process heat, there are alternatives such as natural gas that could provide energy (we assume we’re talking about high temperatures which cannot be obtained from electricity which could be more easily produced from renewables). In the longer term, hydrogen is another option, especially if it’s created using renewable energy.

On the other hand, coal provides more than just energy in the cement and steel sectors. Thus, any transition away from coal may take time and instead a short-term focus should be on improving the efficiency of the processes. Instead of just thinking about the energy, the entire process, including final product, should be re-examined. For example, instead of considering what fuel to fire brick kilns with, a superior alternative is to move away from clay bricks to ash-based bricks, which can also utilize waste ash from coal combustion. There is already about a billion tonnes of waste ash lying in ash ponds at coal power plants.

Can’t we use clean coal?

While “clean coal” is an oxymoron to some, a better phrase is cleaner coal. “Cleaner” recognizes that there is a spectrum along which coal-based processes can reduce their impacts and externalities. Clean isn’t just about visible pollution but also about water and, of course, greenhouse gas emissions (especially carbon dioxide). One of the best options is improving the efficiency of coal utilization which reduces all forms of externalities.

The holy grail of clean coal has been carbon capture and sequestration, or CSS (alternatively, carbon capture, utilization, and sequestration). However, CCS economics appear challenging not only because of the capital cost requirements or oversight challenges because of the energy efficiency penalties.

How do we clean up our power plants?

The government has issued world-class emission standards for coal power plants but India is far behind schedule in implementation. The technologies are available, especially for particulate matter and sulfur (SOx) emissions, and even NOx emissions have several choices that should be compatible with Indian high ash coal. The real challenge is one of economics and aligning regulations. The total cost is estimated in the order of Rs. 0.30-0.50/kWh, depending heavily on expectations of usage (high utilization plants will find lower costs). Regulators have clarified that these would be treated as a change in law and thus passed on to consumers.

We don’t need to just clean up our power plants, but the entire energy system – see below for more on this.

What innovation is missing to make the sector sustainable?

While battery technologies are critical to scaling renewable energy beyond the VRE stage, there are a vast range of innovations that impact utilization efficiency, transportation (including loading and unloading rail wagons), etc. Instead of just thinking of innovations in one aspect, we need innovations not just across the entire chain but at a systems level that improve interactions between components and stakeholders. Importantly, this means not just technology-based innovations but also innovations in market design, business models, and regulations.

“If you can’t solve a problem, make it larger” – this adage encourages us to solve not only the energy production problem but also issues of security, cost effectiveness, social impact and welfare, etc.  This is one reason the US is considering a Green New Deal, that isn’t just about clean energy but inclusivity, employment, resilience, etc.

Such a lens would encourage not just supply side but also demand side solutions as well as digital and smart grids in electricity.  One way for the government to encourage innovation is to provide the right signaling, instead of mandating top-down targets. If the real goal is cleaner energy (rather, sustainable human development), then simply focusing on adding more solar panels (or EVs, or other solution) isn’t optimal as it risks crowding out alternatives including efficiency, public transport, etc.

One of the key gaps towards making the larger sector (energy, not coal) more sustainable is the lack of an integrated energy policy, which bridges not just fuel types but also geographies and jurisdictions, not to mention ministries outside the multiple energy related ones (environment, housing, railways, highways, etc.). The last gap isn’t new innovation or even new ideas but enforcement of existing norms and regulations be it in terms of efficiency, emissions, etc.

Should the government privatize or split up CIL? How should coal be regulated?

For any change in policy, in this case being considered for the supply side, the first question becomes what is the objective function? Is the private sector to bring in capital or to bring in efficiency? Coal India is already profitable and many mines already harness private sector efficiency through contracting (via MDOs – mine developers and operators).

Coal India limited, the world’s largest coal miner (through its subsidiaries), is already listed on the bourses in the government stake has been steadily falling over time. However, it remains a public sector enterprise or unit (PSU).  CIL is not just entrenched but also a positive force in many underdeveloped coal bearing regions and has extensive Corporate Social Responsibility (CSR) mandates. One hopes that as the private sector grows (especially given commercial mining has been opened up), they would not weaken social, labour, and environmental norms in the name of cost-efficiency.

The good news is that opening up mining to commercial miners is unlikely to increase carbon emissions since it is demand that dictates how much coal will get consumed. The first displacement will likely not be of CIL per se but of expensive imports, which were well over 200 million tonnes in FY 2018-19.

Coal in India by supplier

(references and methodology for the figure can be found at Figure 1.8 –  Future of Coal in India: Smooth Transition or Bumpy Road Ahead?)

Competition to CIL is a better option than trying to create competition within CIL by splitting up the subsidiaries into separate competing companies. The first reason is because of the locational spread across subsidiaries – transport costs are very high. The second reason, as the below figures show, is because the differences between the subsidiaries and their relative (non-) profitability have less to do with management capabilities for inefficiency than with legacy reasons (high use of underground mining) or poor stripping ratios in selected regions (subsidiaries).

Financials and output spread across CIL subsidiaries (FY 2018)

(references and methodology for the figure can be found at Figure 1.10 –  Future of Coal in India: Smooth Transition or Bumpy Road Ahead?)

Factors determining the cost structure spread across CIL subsidiaries

(references and methodology for the figure can be found at Figure 1.11 –  Future of Coal in India: Smooth Transition or Bumpy Road Ahead?)

Given expectations of a larger non-CIL (plus SCCL) role in coal production domestically, the government should plan for holistic regulations or even an independent Coal Regulator. Here, the focus shouldn’t just be on creating a level playing field for the private sector but also monitoring CIL for performance. CIL isn’t a statutory monopoly but is a de-facto monopoly. While they don’t charge monopoly prices, they do exert market power downstream in terms of contracts that consumers often have no choice but to sign (the alternatives are expensive).

What are some of the biggest challenges of the coal sector?

There’s not just one but multiple energy transitions underway. More than just the rise of renewable energy we also have changes in market structure/competition, digitalization, rise of edge-based energy (like rooftop solar), etc.  The challenge isn’t simply managing such a transition but making it a just transition.  If India was historically worried about social welfare redistribution across energy policy, this challenge will only become heightened by the transitions.

Who are existing winners and losers of coal is an important question even before we consider newer or exacerbated winners and losers under the transition. It’s unfortunate that regions that supply coal are often underdeveloped, and land remains a deep social problem in terms of rights, access, and livelihoods.

The challenge isn’t simply based on location but also structural across the ecosystem. A power plant that is not just near coal but has contract giving them notified price coal (under a Fuel Supply Agreement, or FSA), which is cheaper, as well as a power purchase agreement (PPA) with the utility, is vastly better off than a merchant power plant buying more expensive coal through e-Auctions or even imports and then trying to sell power on a power exchange.

As widely accepted, cleaning up coal (rather, all energy use) is important for India, which in 2019 was home to six of the 10 most polluted cities in the world. The challenge isn’t awareness or even source apportionment – the challenge is one of implementation of policies that face local or state resistance, often on economic or livelihood grounds.

Many of these challenges come back to historical silo-based regulations and poor signaling. Decades of scarcity meant the solution to India’s energy problems was always “more”. This is no longer true.  Not only has the supply-side picture improved dramatically, demand elasticity versus GDP is also falling, due to both structural changes in the economy (the rise of the services sector) as well as energy efficiency.

In fact, overcapacity due to poor signaling has meant stranded assets in the coal power sector, which have led to disproportional risk in the banking sector coming from power plants. Another important example of poor signaling is how the majority of power in the country (about 90%) treats all electricity the same regardless of location, time of day, predictability, dispatchability, ramping capability, etc., that too under rigid, static, power purchase agreements. FSAs and PPAs may ostensibly give cheaper energy, but they don’t always, and they also create many other distortions, such as making capital costs of coal plants locked in. Ultimately, these instruments transfer risk, instead of reducing risks. And consumers pay for all of these.

How would we address some of the challenges?

Some of the challenges may require a big bang approach while others might be addressed gradually or incrementally. Efficiency improvements are a no-brainer, but they also will not be enough. Regardless of the specifics, almost all challenges require the same ingredient: political will.

A few of the specific areas where this needs to be applied are:

• Disrupting the status quo with entrenched winners who resist change;
• Finding better instruments than cross subsidies and attendant distortions, including, for example, by raising passenger fares for railways or finding explicit budgetary support, or rationalizing electricity consumer pricing (maybe via Direct Benefit Transfers);
• Encouraging more competition and flexibility across stakeholders instead of relying on static and rigid contracts;
• Enforcing pollution standards, beginning with making emissions data public;
• Moving towards holistic regulation of carbon such as through a carbon tax (or, alternatively, an emissions trading scheme).

The coal transition is already underway. There may be a lot of uncertainty, but what is even more certain is that the future will not look like the past – and it shouldn’t. The future should be cleaner, more inclusive, more efficient, and more secure, not to mention cost-effective.