India, the fourth-largest energy consumer in the world, is facing a crippling power crisis. The worsening squeeze on the coal supply in India is triggering this massive power crisis that is threatening to stall the world’s fastest-expanding major economy.
Coal inventories at Indian power plants fell to around 8.1 million tons at the end of September. That makes about 76% less than a year earlier, according to the government data. Average spot power prices at the Indian Energy Exchange Ltd. jumped more than 63% in September to 4.4 rupees a kilowatt-hour.
More than half of India's 135 coal-fired power plants run on fumes - as coal stocks run alarmingly low. Hence, In a country where 70% of the electricity is generated using coal, this is a vital cause for concern as it threatens to derail India's post-pandemic economic recovery.
India’s Central Electricity Authority (CEA) warned that coal reserves at over half of the country’s power plants could burn out in three days or less as a post-pandemic surge in manufacturing excessive power demand. All this has caught power producers off guard.
“Nobody thought that the industrial demand would pick up so quickly, so power stations did not bother to replenish their coal inventory,” says Nitin Bansal, associate director at India Ratings and Research. “But now stocks are depleting day by day.”
Why is this happening?
This crisis has been in the making for months.
As India's economy picked up after a fatal second wave of Covid-19, power demand rose immensely.
The monsoon season also slowed the coal production because heavy rains make it difficult for miners to extract the rock from underground shafts and open pits. Monsoon rains usually start at the end of May or in early June and last till September. Although, this year, the showers continued until early October.
Power consumption in the last two months alone jumped by almost 17%, compared to the same period in 2019. At the same time, global coal prices rose by 40%, and India's imports fell to a two-year low. The country is the world's second-largest importer of coal despite also being home to the fourth-largest coal reserves in the world. Power plants that usually rely on imports are now heavily dependent on Indian coal, adding further pressure to already increased domestic supplies.
What is likely to be the impact of this?
Experts say importing more coal to make up for national shortages is not an option at present.
"We have seen shortages in the past, but what is unusual this time is coal is extremely expensive now," said Dr. Aurodeep Nandi, India Economist and Vice President at Nomura. "If I, as a company, import valuable coal, I will raise my prices, right? Businesses at the end of the day pass on these costs to consumers, so there is an inflationary impact - both direct and indirect - that could potentially come from this," he added.
If the crisis lasts, a surge in the cost of electricity will be received by consumers. The retail increase is already high as everything from oil to food has become more expensive. In recent years, India's production has lagged as the nation tried to reduce its dependence on coal to meet climate targets.
What could happen next?
It is unclear how long the prevailing circumstances will last, but Dr. Nandi is tentatively optimistic.
He says, "with the monsoon on its way out and winter approaching, the power demand usually falls. So, the mismatch between demand and supply may iron out to some extent".
Vivek Jain adds, "This is a global phenomenon, one not specifically restricted to India. If gas prices dip today, there could be a switch back to gas. It's a compelling situation".
For now, the Indian government has said it is working with state-run enterprises to ramp up production and mining to reduce the gap between supply and demand.