Coal Threat for Power Generation in India - My Article in the Mining India Magazine

Demand and supply gap for thermal coal of nearly 100 million tonnes in 2012 is likely to reach about 200 million tonnes in 2017. CIL plans to increase its production by about 180 million tonnes in the same period through public-private partnerships which may enhance the production by 60-70 MTPA, through expansion existing opencast and underground mines to expand capacities which may enhance the production by 30-40 MTPA, and through opening new projects in relatively unexploited coalfields – North Karanpura, Ib Valley and Mand-Raigarh – which may enhance the production by 60-80 MTPA. However, challenges exist in the production increase in the form of delays in clearances and approvals, land acquisition and development of infrastructure to evacuate coal.

Regulatory uncertainties in India indicate that growth in imports is likely to continue. Investment climate has worsened. Land acquisition and rehabilitation & resettlement of project affected people have become challenging and procedures for approvals and clearances are labyrinthine and unpredictable.

Demand for imported thermal coal crossed 100 million tonnes in 2011-12 although the final off-take was lower at about 80 million tonnes due to concerns about affordability of imported coal based power. Indonesia and South Africa have been major sources of coal imports for Indian thermal coal. While Indonesia coal exports have been growing at brisk pace, South African exports have nearly been stagnant. Other sources are likely to emerge – Mozambique, Australia and USA – have been considered. Challenges have been the price of imported coal and infrastructure to transport coal.

Coal imports from Indonesia

While Indonesia is clearly the favorite for thermal coal imports and acquisition of mining assets, coal sector there has been in regulatory flux.  Indonesia's Law No. 4 of 2009 on Minerals and Coal Mining (the 'New Mining Law') replaced Law No. 11 of 1967 (the 'Old Mining Law'). The Law through Implementing Regulations regulates the following:

–      Mining Area Determination;

–      Mineral and Coal Mining Business Activities; 

–      Mining Services for Minerals and Coal (i.e. who may provide mining services and their licensing requirements);

–      Post-Mining and Reclamation Activities;

–      Prioritization of Coal and Mineral Supply for Domestic Interest;

–      Investment changes pursuant to the old 'Contracts of Work' and 'Coal Contracts of Work';

–      Transparency of state and regional income generated from extractive industries; and

–      Administrative sanctions in the event of non-compliance.

 

For those who acquired or desired to acquire mines, there is now divestment obligation - after 5 years of production, the holder of an IUP  (Izin Usaha Pertambangan – coal mining permit) to divest its foreign shareholding so that at the end of 10 years of production a minimum of 51% of the shares are locally owned. An IUP holder is obliged to carry out processing and refining activities related to the mining products produced by it in Indonesia. There is imposed Domestic Market Obligation (DMO).

 IUP holders who export coal are required to refer to the benchmark price set by the minister in charge of minerals and coal mining affairs. A Standard Price is fixed monthly by reference to a number of indices. Exporters even those to their own power plants in India are to sell at the standard price only except for low grade coal. For those, who own stakes in mines, the Indonesian rule will force such companies to transact at market prices, which may be seen as raising the cost of delivered coal in India. This is true but is not fatal. Taking a holistic view, however, the cash flows in an integrated Indonesian coal mining and Indian power generation unit after this regulation will continue to be similar (albeit a little lower, obviously), except that royalty and income taxes will be paid in Indonesia, and the cash flows will need to be brought on the books on Indian power project after paying taxes in Indonesia through appropriate and innovative business structuring.

Export duties have been contemplated though it has not been imposed yet. The proposal that has been muted is to keep the duties at a high of 20 to 30%. This could make exports less lucrative for domestic producers in Indonesia which may impact the future investments. The same could make imports into India expensive if the export duties are passed on even partially to consumers in India.

From the mine acquisition perspectives, there are significant geological risks in Indonesian acquisition. Often the resource estimate data and calculations are not reliable. The acquirers must insist on JORC compliant reports or conduct drilling – greater geological risks exist now since low-hanging fruits have gone and several prospects are exploration IUPs which are in the market for quick sell off without any investments to prove the asset. Regulatory uncertainties can have significant impact on coal asset valuations. Infrastructure challenges require greater quantum of investments than pure mining license acquisition

Coal imports from South Africa

South Africa’s thermal coal exports have been in the range of 65 to 70 million tonnes since 2009-10. The stagnation in exports is partly attributable to limitations in infrastructure to support exports, and weather related disruptions in the first-half of 2011. Thermal coal exports from South Africa are expected to increase by 3 per cent and 4 per cent.  The growth in exports will be supported by gradual improvements to the efficiency of the infrastructure network, including increased capacity of the rail line to the Richards Bay Coal Terminal.

Resource base is about 55 billion tonnes of largely thermal grade coal. Coal seams are relatively thick and close to the surface, which allows for low-cost mining; a quarter of South Africa’s bituminous coal is between 15-50 meters below the surface and much of the remainder between 50-200 meters.

Resource deals with innovative payment structures provide good investment opportunity in South African coal mining. Expansion of RBCT sets the scene for growth of the country’s large position as a supplier of thermal coal into the international markets.

About 77 per cent of South Africa's primary energy needs are provided by coal, a fact unlikely to change in the next two decades owing to the relative lack of suitable alternatives to coal as an energy source. The South African power sector has been facing capacity constraints and the economy has faced severe outages recently. This may make exports difficult given that the domestic markets needs will be given priority over exports.

Coal imports from Australia

Australia faces stiff competition from Indonesia in serving the Asian Market, Indonesia having a clear advantage in terms of logistics. In 2011, Australia’s thermal coal exports grew by four per cent, relative to 2010, to total 148 million tonnes. Projections are for growth at an average annual rate of 11 per cent between 2013 and 2017, to total 271 million tonnes by the end of the period. Business environment in Australia is relatively stable and the country has a robust mining legislation with minimal political and regulatory risks.

Responding to demand, coal producers in Australia are investing heavily in new coal mine, rail and port infrastructure. Export coal industry in Australia is serviced by nine coal loading terminals located in Queensland and New South Wales. Number of rail projects under construction in South Wales, Queensland that would lead to increase in supply chain capacity. Governments are supporting expansion in export infrastructure with the Australian Rail Track Corporation forecast to invest $1.4 billion over five years in the Hunter Valley, and the Queensland Government recently completing 69 km of the Northern Missing Link.

Cost of coal mining in Australia is higher than Indonesia due to labour constraints, which make human resources expensive, and regulatory compliances which require investments in environmental management whose standards are higher. Cost of coal transportation is higher than Indonesia due to longer distance between the coal basins and ports, also congestions on the railway network has begun to hamper dispatches. Shipping cost from Australian ports to India is almost double of the shipping cost from Indonesia, voyage days and fuel costs are higher.

Coal imports and Blending

Quality of domestic coal has been deteriorating – ash content has been observed to be close to 50% in several cases. This also necessitates imports, apart from shortages in supplies, to make power generation less environmentally threatening. However, blending is technically challenging and all types of coals may not be amenable to blending for power generation plants in India. Imports therefore also present technical challenges of blending with Indian coals. Compatibility of coals used for blending needs to be ensured to avoid problems in boiler operation due to large variations in aggregate/individual coal quality from acceptable design limits. Large proportion of blending of imported coal of very low ash content, in boilers designed for high ash coal, could affect the heat transfer profile between the radiative and convective sections of the boiler and may lead to difficulty in attaining rated main steam and reheat steam temperatures.

It has been observed from the operations of several power plants that even if the blended coal in the laboratory testing environment closely resembles the design coal for the boiler, power plant performance does not meet the expectations.  This is mainly due to petrographic characteristics of coal which are reflected by the transformation of inorganic particles during combustion and the manner in which the organics are dispersed in coal. 

The main characteristics of coal that affect boiler design are ash content, volatile matter, moisture content, fixed carbon, gross calorific value (GCV), Hardgrove  Grindability Index (HGI), coal reactivity and ash fusion characteristics. High ash content in coal influences furnace sizing. Indian coal contains high quantum of abrasive ash necessitating lower flue gas velocities and larger spacing of pressure parts to minimize the flue gas erosion. Further, heat is retained in the ash and released slowly in the super-heater, re-heater and economiser zone.

Coal with very high moisture content de-rates the capacity of mills and requires higher quantum of heat for coal drying in the mill thus necessitating higher hot air temperature at mill inlet and thus impacting sizing of economizer and air pre-heater. Fixed carbon and Volatile Matter provide an insight into the reactivity of coal. FC/VM ratio which is called as fuel ratio indicates the combustion characteristics of the coal. When the ratio is more than 1.5, combustion would be difficult and if the ratio is less than 1.5, it is easy to burn. Hardgrove Grindability Index (HGI) is important from grinding considerations and large variation in HGI poses problem of selective grinding of one coal over another and difficulty in achieving desired coal fineness for proper combustion.

The boilers designed with Indian coal parameters are likely to perform well with up to 15% blending. The new design guidelines prescribe that target should range from 100% domestic coal consumption to 30% blending. This design flexibility will have capital cost implications. This range is likely to be implemented by new power plants in view of shortages expected from domestic coal sources.