India Re-energized

By A.M. Shah
Contributing Author, Cornerstone

On 20 June 2014, Narendra Modi, the new Prime Minister (PM) of India, listened to presentations given by two of his ministers, Dharmendra Pradhan (petroleum and gas) and Piyush Goyal (power, coal, and new and renewable energy). They briefed him on energy security scenarios as well as their respective plans for the next five years. Modi is hoping that these two ministers can assist him in ringing in an energy revolution in the country. The overall plan is very simple: The country must be able to exploit most of its domestic coal; this fuel must reach the consumer in the most efficient manner possible; and more oil and gas are to be produced domestically to generate more electricity for Indian homes. While the plan is simple, successful execution will depend on the ability to overcome a myriad of institutional and technical hurdles that have gotten the better of previous national leaders.

The BJP party’s sweeping victory in India’s recent elections gave Prime Minister Modi the largest majority in recent history.

The BJP party’s sweeping victory in India’s recent elections gave Prime Minister Modi the largest majority in recent history.

During his campaign, Modi sold the dream of having around-the-clock access to electricity for every household in the country. In a nation where one third of the population does not have access to power, 24×7 electricity is a tremendous aspiration. To put it into context, the number of Indians without any access to power is about equal to the entire U.S. population. The rest of the country, on average, faces 8.5 hours of power shedding every day—in some places there is no electricity access for 16 hours each day. This means that such areas have no electricity for 2000 to 3000 hours annually, the equivalent of 83–125 days.1

Modi seemingly understands that, in a country of 1.25 billion people and multiple stakeholders, providing reliable electricity is not an easy task. In his campaign and in his actions in his previous position he arguably demonstrated the mettle to resolve the entangled challenges India’s energy sector faces. Major hurdles include stagnation in clearances for new mines, unclear environmental norms and a general lack of environmental regulations, Coal India’s struggle to increase production, relatively low plant capacity factors of key power generation companies, and the troubled finances of many power distribution companies.

Despite the many challenges, India’s people have placed their trust in nationalist leader Modi. In an historic verdict, India gave him a full majority—a first in the last 30 years.2 His party won 282 seats (not including allies) out of 543. To add to his sweeping victory, in various states Modi’s opponents were brought to naught, and several of his party’s candidates won by a margin of more than 10%.3

What gave the voters such confidence? Perhaps it was Modi’s track record as Chief Minister (CM) of the Indian state of Gujarat, which had double-digit growth even during the global economic slowdown. In addition, Gujarat is also one of only two states in India with 24-hour electricity access. During Modi’s tenure Gujarat started electricity-focused reforms in 2004. In 2005, the state electricity board was unbundled into four separate distribution companies responsible for sup-plying electricity to different parts of the state. He took a step to segregate the power required in the agriculture sector for irrigation purposes from commercial and residential demand. In 2012-13 the holding company Gujarat Urja Vikas Nigam posted profits of Rs13.81 Crores (roughly US$2 million)—a notable accomplishment when the national average of losses for power providers is about 27%1—while the state enjoyed 24×7 access to electricity.4 As a PM candidate Modi promised uninterrupted power supply to all Indians; as a major step following up on that promise, on 10 July the national government announced that the Deen Dayal Upadhyay Gram Jyoti Yojna program had commenced; this is the village electrification scheme, named after founder of BJP DD Upadhyaya. For the initial phase Rs.500 Cr (~US$90 million) has been allocated.5

No doubt Modi was able to boast of some major successes as CM, but as PM he faces different challenges. In India, power comes under the “concurrent” list of duties. Modi will not be able to approach energy reforms the same way he did as CM because the central or federal government has a limited role to play. Most of the work will have to be done by the respective states. However, to date the states have not demonstrated that they have adequate organization, commitment, or resources to fix the energy infrastructure challenges in India. For instance, the rail system is insufficient to handle additional coal, environmental regulations are lacking, natural gas production is insufficient, and widespread electricity theft are just a few challenges that have plagued progress efforts to date.

One aspect that may make it possible for the federal government to break through previous bottlenecks is the nature of the sweeping victory that put Modi into power; this momentum makes it likely that Modi’s BJP party may win four out of five upcoming state elections, paving the way for more support at the state level for a transition in the energy sector. Currently Modi’s ruling alliance is in power in six Indian states. With 10 or more friendly states, Modi may very well have the influence necessary to jumpstart energy-related changes. It may be the best chance a national-level leader has had to reform India’s energy sector, but success is far from guaranteed.

Infrastructure challenges, such as insufficient rail capacity, present major hurdles for improving India’s energy sector.

Infrastructure challenges, such as insufficient rail capacity, present major hurdles for improving India’s energy sector.

Modi’s Energy Game Plan

About 60% of India’s 249.5-GW installed power capacity is based on coal.6 The last 10 years have seen numerous conflicts between the power producers and the major coal producer, Coal India Ltd (CIL). To put it into context, on 18 June, 50% of Indian coal-fired power plants had reached a critical threshold: They had seven or fewer days of coal stockpiles on site—despite the fact that India has ample coal, over 286 billion tonnes of reserves. Per the current Five-Year Plan, ending in fiscal year 2016-17, production of coal is expected to rise to 795 Mt (million tonnes), but demand is expected to be 980 Mt.7 These estimates are based on a projected 6–7% growth rate in gross domestic product. To bridge this gap, India imports 12% of its required coal, primarily from Indonesia, Australia, and South Africa. This is in addition to its $169 billion bill from oil imports.

Modi has a reputation for empowering his team to make decisions and then solidly backing them. One of Modi’s first actions as PM was to combine the coal and power ministries and appoint a junior minister over both, Piyush Goyal. Similarly, the petroleum ministry is also headed by a junior minister. This strongly implies that the Prime Minister’s Office (PMO) will be directly involved in these ministries. This first step is intended to reduce the amount of bureaucracy that could otherwise spell the failure of potential improvements in the energy sector.

Goyal—a banker turned politician—is devoting his time to fixing the communication gap among these ministries and training the officers to work collaboratively. In addition to other initiatives, Goyal is also trying to house top officers in a single building to facilitate frequent meetings where they will hopefully identify synergies and reduce delays in decision making. With the single stroke that combined the coal and power ministries, Modi may well have taken the needed action to reduce the hugely problematic delays in energy projects. Now, with more involvement from the PMO, it is hoped that there can be more aligned thinking about how to deal with different fuel options, and thus avoid the problems associated with the slow decisions at the top level of the previous government.

Regarding the logistics supporting the coal industry, the new government is pushing to streamline rail connectivity to mines in remote and difficult-to-access areas; three new railroads could provide access to mines that could yield an estimated 300 million tonnes of coal each year.8 The new railway lines include 1) Tori-Shibpur-Hazaribagh (91 km), 2) Jharsuguda-Barpalli-Sardega (52 km), and 3) Bhupdeopur-Raigarh-Mand (180 km). Over the years construction of these lines has been delayed due to challenges related to land acquisition and environment-related clearances. Modi has asked the railway minister, D.V. Sadananda Gowda, to give timelines to his officers and make sure that these timelines are met.

Modi also plans to increase the participation of private players in the mining sector. A bill related to regulation of coal quality is likely to be tabled in the winter session of the Parliament, along with amendments to the Nationalization of Coal Act and Minerals and Mine Development Act. This would pave the way for participation of more private players in mining. There is also some movement around the concept that India must invest in developing the skillsets of mining professionals and also promote underground mining and clean coal technologies to support a more sustainable development of industries that produce and consume coal. The new government has hinted that it wants more R&D in developing coal-to-liquids (CTL), coal bed methane (CBM), and underground coal gasification (UCG). All this would require private and international players to move into the sector.

Given that Modi strongly supports fewer energy imports, without question he will be put an emphasis on the oil and gas sectors. Each year India imports crude oil and petroleum worth US$169 billion and exports petrol and diesel worth US$61 billion. Per recent projections, the country’s consumption of petroleum products is increasing by roughly 9% annually. The best way to curtail the oil import-export imbalance is to export more, so Modi is planning to increase India’s refining capacity by 25 MTPA in the next five years.

Moreover, the new government is looking at alternative sources of crude oil, especially outside the Middle East. With the U.S. importing much less oil from the international market there is surplus of 350 million barrels of oil daily; India is tapping into these traders. India is particularly keen on looking at opportunities for sourcing oil and gas from North and Latin America, which will continue advancement of diversification. In addition, Modi’s team is working to renew India’s relationship with Russia with the goal to source more oil and gas—a prospect that may be more appealing to Russia after the recent events in and around Ukraine. Meanwhile, Modi has asked Pradhan to advance India’s shale gas exploration to increase domestic production, which may commence by December of this year. The power supply companies ONGC and OIL are already working on this. A decision about a new gas price in the country should be announced sometime after September.

On the solar power front, Modi plans to have two types of new solar farms: 1) large solar farms or “ultra mega” solar power projects, with an installed capacity of more than 1000 MW, which can be connected to the grid and 2) smaller solar “republics”, which may not be connected to the grid but would allow access to electricity for some households that do not currently have such access. As CM, Modi supported innovation in the solar sector and Gujarat is one of the few states that utilizes solar energy to bridge capacity gaps during peak load. In the first budget presentation, Modi’s Finance Minister, Arun Jaitely, allocated Rs.500 Crs (US$90 million) to set up large solar farms in the Indian states of Rajasthan, Gujarat, and Tamil Nadu, as well as the Laddakh region of Jammu and Kashmir.9 This money will be routed through the Solar Energy Corporation of India as project capital. For the smaller projects to support solar pumps for irrigation, the government has set aside Rs.400 Crs (US$75 million).9 To support these initiatives, it also reduced the import duty on various types of equipment required for both solar and wind energy.

Large and small solar power installations also have a role in Modi’s energy plan.

Large and small solar power installations also have a role in Modi’s energy plan.

Dealing with the Behemoth

In 2013-14, CIL produced 80% of the coal in India. Although the size of the company is impressive, it has been problem-ridden in recent years. Recently a presidential directive forcing CIL to sign fuel supply agreements was issued.10 The company refused to accept the decree. The fact that power plants are unable to obtain a reliable supply of fuel and that CIL has repeatedly missed production targets demonstrates the magnitude of the challenges.

What has been recently termed the “most probable”’ option by various market observers for dealing with the $41 billion conglomerate would be to break CIL into smaller components through comprehensive restructuring. The end goal of such a move would be to make mining in the country more efficient. Over the years, red tape, strikes, protests against land acquisition, and delays in obtaining environmental approvals have kept coal output far below demand. There are two opposing sides within the Modi regime: Some fully support breaking up CIL, while others strongly oppose the idea. Those that favor a breakup may believe that any reform in the energy sector must begin with Coal India; they argue that it is critical to get state governments involved in energy-sector reforms, specifically the states where CIL operates. Some, however, believe it would be easier to effectively manage coal production on a state-by-state level.

Narendra Modi shakes hands with Pakistan’s Prime Minister Nawaz Sharif on the day he was sworn in as Indian Prime Minister—26 May 2014 (Rex Features via AP Images).

Narendra Modi shakes hands with Pakistan’s Prime Minister Nawaz Sharif on the day he was sworn in as Indian Prime Minister—26 May 2014 (Rex Features via AP Images).

As CM, Modi found value in breaking up the state electricity board, but somewhat surprisingly, now that most of the blueprints of the new government are on the table, the Modi-led national government wants to keep CIL intact. Minister Goyal seems to trust that most of the issues with the company can be fixed. In his view, one argument in favor of keeping Coal India intact is that this improves the stock market valuation of the company; as well, the current structure also helps the “synergy of operations, moving talent and expertise” from state to state as needed.11 However, some have argued that the valuation of the company is based on the monopoly it enjoys, not on its performance. Transitioning CIL into a more successful enterprise will be difficult, to say the least. The company enjoys a near monopoly and has a tremendous amount of political power and has shown a strong will to resist reforms. Modi’s leadership is likely to tested, if not directly challenged, when dealing with CIL.12

In addition to finding a functional path forward for CIL, another reform being pushed by the coal minister is to increase the production and quality of coal. From now on there will be a third-party validation of quality. The state-run National Thermal Power Corporation (NTPC), which has the largest portfolio of coal-based power generation has locked horns with CIL on several occasions. The company has been directed to limit e-auctioning of coal to 25 million tonnes this year, down from 57 million tonnes, thus allowing more coal for generation of electricity.13

Energy Nationalism

Narendra Modi minced no words in letting the world know that he wants to reduce India’s dependence on imports. India’s current trade deficit is roughly US$88 billion, with the major culprit being energy imports worth US$185 billion, of which coal imports are a relatively minor US$15.4 billion. The government is strongly inclined to rationalize the coal imports and increase production domestically. Perhaps as a first indication of the seriousness of such intentions, on 11 July, production began at a 12-million-tonnes-per-year mine. This was the first major mine start-up in India in the last five years, and was fast-tracked after the Modi government took over.14 This level of production is a drop in the bucket, but was Modi’s way of showing his commitment to increasing domestic energy production. Still, the most challenging increases certainly lie ahead. Can Modi’s government simultaneously improve the problems of the environmental impact, safety standards, and coal quality assurances that currently characterize coal production in India and increase production?

Rastriya Swayamsewak Sangh (RSS)—a think tank for the ruling BJP party—is also against such a large trade deficit, and believes that increased domestic production of coal will add to employment and would help the indigenous development of the country. In addition, it is likely that the government will ask all new power plants to install equipment (e.g., boilers and turbines) sourced from companies having manufacturing capabilities in India. This will likely benefit the Japanese, European, and U.S. companies having joint ventures in the country.

India is also exploring a renewal of its relationship with Pakistan and Bangladesh. Specifically, India plans to sell 1200 MW of power, oil, products from HMEL’s Bhathinda Refinery, and LNG through a planned pipeline to Pakistan.15 India has long eyed the gas flowing through a pipeline from Bangladesh, but to date no progress has been made on gaining access to the gas. Perhaps as a first step to advance many policy items, including energy, Modi invited state heads of all neighboring countries to his swearing-in ceremony, reviving most of these talks.

Expectations are high for Modi, especially within India’s energy sector, but we will have to wait for at least a year to analyze which way the “hope” is moving.

 

REFERENCES

  1. Mahajan, A.S. (2014, 27 April). Power hungry. Business Today, businesstoday.intoday.in/story/power-shortage-top-priority-elections-2014-new-govt-reforms/1/204936.html
  2. ANI. (2014, 16 May). First time a non-Congress govt. has come with a clear majority: Modi. Yahoo News, in.news.yahoo.com/first-time-non-congress-govt-come-clear-majority-145432402.html
  3. Election Commission of India. (2014). General election to Lok Sabha: Trends and result 2014, eciresults.nic.in/
  4. Gujarat Electricity Regulatory Commission. (2014, 24 April). Mid-term review of business plan for Paschim Gujarat Vij Company Limited (PGVCL), www.gercin.org/tarifforderpdf/en_1399887956.pdf
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  8. The Hindu Business Line. (2014, 8 July). Will the new railway projects help India unearth all the coal?, www.thehindubusinessline.com/economy/will-the-new-railway-projects-help-india-unearth-all-the-coal/article6189584.ece
  9. Jaitley, A. (2014, 10 July). Speech on budget 2014–2015, indiabudget.nic.in/ub2014-15/bs/bs.pdf
  10. Singh, R., & Kanekal, N. (2012, 4 April). CIL gets presidential directive. Live Mint & The Wall Street Journal, www.livemint.com/Companies/bqVFWyqsakYFP44U7fvSfP/CIL-gets-presidential-directive.html
  11. The Times of India. (2014, 29 June). Coal India not to be split: Piyush Goyal, timesofindia.indiatimes.com/business/india-business/Coal-India-not-to-be-split-Piyush-Goyal/articleshow/37447513.cms
  12. Asthana, S. (2014, May 22). 5 challenges Modi govt will face to reform Coal India. Business Standard, www.business-standard.com/article/companies/5-challenges-modi-govt-will-face-to-reform-coal-india-114052201153_1.html
  13. The Economic Times. (2014, 24 June). Govt asks CIL to improve performance to avoid restructuring, articles.economictimes.indiatimes.com/2014-06-24/news/50825983_1_coal-india-domestic-coal-production-bharat-coking-coal-ltd
  14. Reuters. (2014, 11 July). India starts first new major coal mine in at least five years, in.reuters.com/article/2014/07/11/coal-india-mine-idINKBN0FG10O20140711
  15. The Indian Express. (2014, 24 May). India, Pakistan may shake hands on electricity, hydrocarbons, indianexpress.com/article/business/economy/india-pakistan-may-shake-hands-on-electricity-hydrocarbons/
The content in Cornerstone does not necessarily reflect the views of the World Coal Association or its members.

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