Penned by Shelly Singh and Varnika Gupta
Lately, news channels across the world broadcasted the perilous state of the energy crisis in India as coal supplies dwindled to the lowest ever seen, with coal stock worth a few days remaining. In addition, different power distribution plants across India sent alert messages to their customers regarding expected power outages which can be observed given that more than 50% of India’s electricity supply relies on coal. As of now, India is the world’s largest coal consumer after China. Simply put, there is a looming power crisis in India worsened by the pandemic, which can put several parts of the country into complete blackout or long power cuts. The crisis is not only faced in India, but across the world, as countries scramble to find a fix for it. Let us look into the details on how India came to such a dire state in terms of coal consumption and how it will likely impact the economy.
India is the 2nd largest importer, consumer and producer of coal in the world with world’s fourth largest coal reserves. Countries like Indonesia, South Africa and Australia are the major suppliers for coal, which is used as fuel in thermal power plants. As per Ministry of Power, Government of India, total installed generation capacity of the country stands at 3,88,138 MW of which 52.1% is met by Coal, generating 70% of the output, and rest by various other sources like lignite, renewable energy and nuclear power plants.
Not only coal shortage, but also hike in prices of domestic natural gas by 60% a fortnight ago, in tandem with international prices, left a dent in energy woes of the country. Domestic coal prices set by Coal India, failed to rise despite rising global prices, which has led to slashing of imports of coal adversely affecting the thermal power generation in the country.
As per data from the Central Electricity Authority (CEA), over half of the country’s 135 coal-fired power plants were left with an average of less than four days of coal stocks in September-end, down from the average of 13 days at the start of August.
It is not only India, which is facing this never before seen scenario, but countries like China and UK are also dealing with energy crunch as supply of energy sources like coal and natural gas failed to meet the soaring demand. Natural Gas prices have risen sharply in Europe while many factories in China have shut down due to power disruptions which led to power rationing systems.
This rise in energy prices affected various economic decisions across supply chains with many companies across Europe and Asia forced to shut down as they were unable to bear the high energy costs.
REASONS FOR SHORTAGE OF POWER SUPPLY
Many consider the lag in bouncing back of supply as compared to the demand of energy as the primary reason for shortage. The consumer demand post the economy returning back to normal after the pandemic has bounced back faster than the production. The supply side has failed to bounce back as quickly due to disruptions caused in the supply chain due to the pandemic.
The shortage of supply has already led to a high surge in energy prices. This can also be associated with greenflation, which is caused by increasing restrictions placed by the government on traditional energy sources. As India moves towards its climate change targets and meeting global emission targets, the government regulators have been encouraging the use of renewable sources of energy. It is also believed that this aggressive push towards the adoption of renewable energy may have led investors to under-invest in traditional energy sources, in turn leading to insufficient supplies to meet rising demand.
In some states, including Delhi and Punjab, factors such as excess rainfall hitting the coal movement and imported coal-based power plants generating less than their capacity due to high record rates have led to this shortage.
The primary impact is rise in global prices of coal arising due to increased demand and supply constraints after the pandemic. There has been significant improvement in the manufacturing sector in India which further increased the demand for electricity. Higher global prices of coal and rates in domestic freight pushed utilities that are dependent on imported coal to delay purchases from abroad, which resulted in increased dependency on domestic stock of coal, depleting them.
Another direct impact of the shortage is power rationing, which according to some, has already started informally. Since power stations such as Tata, Adani, JSW among others have started cutting down production, areas which are dependent on imported coal generation plants will have to face power outages. States of Madhya Pradesh, Maharashtra, Jharkhand, Chhattisgarh, and West Bengal may not experience power squeeze because they are home to India’s commercial coal-mining industry.
The crisis is also likely to cost inflation, industry experts say. They say that the electricity shortage could result in retail inflation, affecting prices of oil to food. Seeing the high prices if companies resorted to importing expensive coal, they will raise their prices, and will eventually pass on their incurred costs to the end consumers.
WHAT CAN THE GOVERNMENT DO?
Electricity powers everything, so the entire manufacturing sector- cement, steel, construction – everything gets impacted once there is a coal shortage. The current situation is a wake-up call for India. According to some experperts, the time has come to reduce its over-dependence on coal and more aggressively pursue a renewable energy strategy.
The government is also hoping to source coal from so-called “captive” mines. Captive mines are operations that produce coal or minerals solely for the company that owns them and under normal conditions are not allowed to sell what they produce to other businesses.
The overwhelming verdict from experts is that short-term fixes may help to get India through the current energy crunch but the country needs to work towards long-term alternatives to ensure its growing domestic power needs are met.
Energy supplies are likely to remain constrained for a while as it takes time for producers to boost their output in response to higher prices. Price controls, while popular during times of crisis, may make things worse by affecting the incentive that producers possess to boost supplies. They may also encourage consumers to overuse energy and worsen shortages.
With renewable energy sources such as wind and solar energy turning out to be unreliable especially during winters, countries may be forced to rely on traditional fossil fuels and governments may need to rethink their energy policy, and look forward to a mix of renewable and traditional energy sources as a long term solution.
However, the question of how India can achieve a balance between meeting demand for electricity from its almost 1.4bn people and the desire to cut its reliance on heavily polluting coal burning power plants is still a major challenge for the government right now.
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