Why is India facing a coal shortage? (By Sudarshan Varadhan)

India is the second largest importer, consumer and producer of coal, and has the world's fourth largest reserves. It mainly imports from Indonesia, Australia and South Africa.

Chennai - Indian utilities are scrambling to secure coal supplies as inventories hit critically lowl evels. Here is a brief summary of the factors that have led to the country's coal shortage.

WHAT ARE THE CURRENT STOCK LEVELS?
As at Sept. 29, 16 of India's 135 coal-fired power plants had zero coal stocks, according to the Central Electricity Authority (CEA). Over half of the plants had stocks that would last fewer than three days, while over 80% had less than a week's stock left. Coal accounts for over 70% of India's electricity output,and utilities account for about 75% of India's coal consumption.

WHAT CAUSED THE COAL SHORTAGE?
India's industrial power demand has surged after the second coronavirus pandemic wave. On top of that, a widening price gap between lower domestic prices and record global coal prices has led buyers to shun imports. State-run Coal India, which produces over 80% of India's coal, on Wednesday said an increase in global coa lprices and freight costs had led to a curtailment in power production by plants using imported coal, adding to the pressure on utilities using domestically mined coal to ramp up output.

WHY ARE PRICES BETWEEN DOMESTIC AND GLOBAL COAL WIDENING? Domestic coal prices in India are largely decided by CoalIndia. An increase in coal prices generally has a knock oneffect on power prices and inflation, making a hike a politically sensitive decision. Coal India has kept prices steady over the last year despite global coal prices rising steeply in the same period. While the company's chairman has said the miner will increase prices, itis not immediately clear when it will happen. Meanwhile, Asia's coal price benchmarks have hit recordhighs in the recent times, buoyed by global demand for power generation fuels as economies open up. A major power crisis inChina is the latest event driving global demand for the fuel.

WHY ARE UTILITIES UNABLE TO PASS ON HIGHER COSTS?

India's power tariffs, set by the respective states, areamong the lowest in the world, according to the websiteglobalpetrolprices.com, as state-run distribution companies have absorbed higher input costs to keep tariffs steady. This has left many of these companies deeply indebted, with cumulative liabilities running into billions of dollars. The companies' strained balance sheets have consistently triggered delayed payments to power producers, often affectingcash flows and disincentivising further investment in theelectricity generation sector. Indian power producers locked in long-term agreements with distribution utilities often cannot pass on higher input costsunless clauses are included in their contracts.

WHAT DOES INDIA'S CRISIS MEAN FOR GLOBAL COAL MARKETS?
India is the second largest importer, consumer and producer of coal, and has the world's fourth largest reserves. It mainly imports from Indonesia, Australia and South Africa. CRISIL, a unit of ratings agency S&P, said it expectsAustralian and Indonesian thermal coal prices to increase overthe remainder of this fiscal year, due to supply constraints and high demand from China and elsewhere. India's average weekly coal imports during August throughlate September - when global coal prices rallied over 40% toall-time highs - dropped by more than 30% from the average forthe first seven months of the year to just under 3 milliontonnes, according to data compiled by Kplr. The import total for the most recent week was less than 1.5million tonnes, the smallest in at least two years, and websitesof major coal importing state utilities did not show any newtenders seeking new cargoes this month.

WHO ARE THE WINNERS AND LOSERS?
Shares of Indian power producers NTPC Ltd, TataPower and Torrent Power, and Coal Indiahave been rising strongly in recent weeks, spurred by risingpower demand. An official at a large utility operator said many traderswho bought coal at the domestic spot auctions sold the fuel atsteep premiums. Many non-power consumers of coal, and import-based powerplants have curtailed production due to high foreign prices. While large scale outages like those in China seem unlikelyin the immediate future, some pockets of the country might facepower outages, officials say.

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