Coal is king in India—and will likely remain so

Divers use a pulley to enter a coal mine that collapsed in Ksan, in the northeastern state of Meghalaya, India, December 29, 2018.  REUTERS/Anuwar Hazarika - RC1CD6B9DBA0

In conversations about avoiding the worst impacts of climate change, removing coal from the world’s energy system is always at the top of the list of solutions. Here in the United States, inexpensive natural gas has out-competed coal in the power system, bringing about a 40 percent decline in coal-fired generation over the last decade. However, coal is still king in other parts of the world.

India’s ambitious renewable energy goals have received a lot of international attention, but coal still provides half of India’s commercial primary energy and is the dominant fuel for power generation. In “Coal in India: Adjusting to transition,” Rahul Tongia and I state that we expect coal to remain the dominant fuel in the power sector in India, through 2030 and beyond.

Despite its dominant position in the Indian energy market, the Indian coal industry still faces structural and financial challenges. Additionally, the Indian power system is riddled with inefficiencies and distortions, from coal mining through final power sales to consumers.

Coal India Limited (CIL), which provides about 85 percent of India’s domestic production of coal, is the world’s largest coal mining company. Coal is central to India’s political economy. The central government owns about three-quarters of CIL, which provides revenue to the treasury through dividend payments and taxes on coal production. Coal-producing states are among the poorest in India, and CIL contributes significant tax revenue and employment in these areas. Indian Railways transports the bulk of domestic coal and they over-charge for coal transport to subsidize passenger transport. For power plants located far from mines, coal transport is often the largest component of their coal costs.

Despite CIL’s position in the economy, it struggles to meet growing demand. The Indian government wants more private sector coal mining, but obtaining land and permits to expand production are the greatest challenges, and these are not unique to CIL.

Coal-fired power generation is also facing financial stress in India, as capacity has grown faster than power demand over the last several years. Renewable energy is also displacing coal-fired generation, lowering the use of coal plants and reducing their profitability. Stress is particularly acute for new privately-owned power plants. These are often more efficient and flexible in their operation than older plants, but are disadvantaged compared to publicly-owned plants in obtaining coal supply and in signing power purchase agreements (PPAs) to sell their power. This problem is likely to get worse before it gets better, since an additional 50 gigawatts of coal-fired generation are under construction in the country.

Inefficiencies in the power sector continue at the retail level. State-level power distribution companies buy power from generators, predominantly through PPAs, for sale to consumers at regulated prices. However, they lose money on every kilowatt-hour sold. Additionally, commercial and industrial customers pay higher rates to subsidize residential consumers.

India’s energy policy currently focuses on bringing affordable electricity to all homes. India’s per-capita electricity consumption is only one-third of the world average, and millions of homes still lack an electricity connection. The environment is important, but local air pollution, rather than climate change, is the primary concern. Despite growing coal consumption, India is on track to meet its Nationally Determined Contribution under the Paris Agreement.

To reduce pollution and greenhouse gas emissions in India, improving the efficiency of the coal-fired power system is a more realistic goal than wishing it away entirely. However, the inefficiency and rigidity built into the Indian power system make such optimization more difficult. PPAs treat all power the same, whether it is available on a steady or intermittent basis (generally from coal or renewables, respectively). Such rigidity removes the market incentive to develop flexible power generation or power storage to complement renewable energy. Newer, more efficient coal-fired power plants are often not dispatched first, because they lack PPAs or because they are located further from coal mines, meaning that higher transportation cost makes their power more expensive than less efficient plants located closer to mines. Furthermore, a system where the distribution companies perpetually lose money prevents needed investment in more efficient power distribution and smarter grids.

In the long run, a holistic approach to India’s power system could result in greater efficiency and lower greenhouse gas emissions. However, getting the incentives right for such a transition will be a political challenge.