Coal Insights, September 2020

EDITORIAL Chief Editor Dr Mahul Brahma, Tel: +91 85840 08241, E-mail: mahul.brahma@mjunction.in Editor Arindam Bandyopadhyay, Tel: +91 91633 48016 Email: arindam.bandyopadhyay@mjunction.in Associate Editor Sumit Kumar Maitra, Tel +91 85840 08181, Email: Sumit.Maitra@mjunction.in Editorial Board Alok Srivastava, General Manager, MMTC Ltd Amitabh Panda, Group Director (Shipping & Logistics Operations), Tata Steel Group Anil Razdan, Energy Consultant, Formerly of the IAS, Former Secretary Power & Sp. Secretary Petroleum & Natural Gas, India Anirudha Gupta, Mining & Metals professional and former Director, P&H Joy Mining Equipment India Ltd Ashok Jain, Managing Director, Saumya Mining Ltd Deepak Bhattacharyya, Chief - Horizon 1 businesses, mjunction services ltd Ganesan Natarajan, Former Whole Time Director, Ennore Coke K C Gandhi, Joint President (Material), Shree Cement Ltd Lawrence Metzroth, Vice President – Analysis & Strategy, Arch Coal Inc Sandeep Kumar, Managing Director, Tata Metaliks Ltd Senior Correspondent Ritwik Sinha, Tel + 85840 08234, Email: ritwik.sinha@mjunction.in Balaka Ghosh Chatterjee, Tel + 85840 08190, Email: Balaka.Chatterjee@mjunction.in Analyst Sanjoy Bag, Tel +91 85840 08215, Email: sanjoy.bag@mjunction.in Business Lead Soumitra Bose, Tel: +91 92310 00232, Email: soumitra.bose@mjunction.in Advertising Soudipto Malakar, Tel: +91 91633 48243, Email: soudipto.malakar@mjunction.in Sumit Jalan, Tel: +91 83369 25981, Email: sumit.jalan@mjunction.in Subscription Niladri Kar, Tel: +91 83369 96510, Email: niladri.kar@mjunction.in Email: publication.vspl@mjunction.in Toll free number 1800 41 920 001, press 6 for publication.

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Dear Reader, Demand for power, or coal-fired electricity for India, is a key barometer of the state of economy.

That it has bounced back to last year’s level might partly settle the debate over the shape of recovery or its simulacrum. The need of the hour is to start talking about growth.

That we now have to live with the virus is a foregone conclusion till we create complete herd immunity or a widely available cure. So going back to work and pushing the pedal real hard are the things we need to do now.

With per capita power consumption about one-third of global average, we do have a lot of space to grow…only if we can take the challenges head-on.

The stressed power distribution companies are not adequately equipped to expand power distribution. So unless we solve the subsidy issue through the proposed Direct Benefit Transfer scheme in its present form or any of its altered versions, strategies like “Power for All” will only lead to financial agony.

The simple task of billing customers in rural areas itself is a major challenge putting into question the efficacy of any subsidy management scheme.

At the back end of the electricity chain, it’s not a happy story either.

Even as lot of capacities continue to be stranded, the healthy operating ones are now faced with the immediate challenge of meeting the emission norms for pollutants like particulate matter, sulphur dioxide, oxides of nitrogen, mercury, as well as for specific water consumption.

The 2019 deadline has been missed and the revised one set for 2022 isn’t far away. Missing that deadline won’t shine a light on us at a time when we are being seen as one of the few economies banking on coal for reviving our economy in a post-Covid world.

Our current issue of Coal Insights tackles these issues in a comprehensive way.

Coal India is implementing a major transformational strategy that will completely revamp the way this near-monopoly miner would be operating in an era of merchant coal.

That strategy has been accessed by and articulated for our readers in this issue.

In the tender for combined tariff of coal-fired and solar energy, thermal power companies have been left out of the proposed Power Purchase Agreements that would only be signed with the renewable energy producers. This would create several implementation issues. Our September edition explores those aspects as well.

For the benefit of you, dear Reader, we try to focus on short-tomedium run picture of the economy. We avoid crystal gazing as an editorial policy because as an economist I have always admired a timeless quote by John Maynard Keynes, “But this long run is a misleading guide to current affairs. In the long run we are all dead.”

Happy reading and stay safe.

Chief Editor

Articles are invited from industry partners for publication in Coal Insights. The selection of articles is subject to scrutiny by the editorial desk and its decision will be final and binding. The copyright of the published articles will be held by the publication.

Coal Insights, September 2020

3

CONTENTS 18 Seaborne thermal coal offers firm up in September 19 Seaborne coking coal offers rise in September 23 Adani, JSPL eye commercial mining auction 25 India’s July coal imports down 26% on year 26 Coal India logs 7.1% growth in production in August 27 SCCL’s coal production down 40% in August 28 Coal India to focus on washeries for coking coal import substitution 33 Coal India to float MDO tenders shortly for 10 mines 36 Coal demand to remain subdued: Rating agencies 37 August sponge iron output down 2.2% on year 38 India to contribute most to global CO2 emission: IEA 41 US coal output estimated at 511 MMst in 2020 44 Coal’s share in India energy basket may drop 40% by 2050: BP 46 Traffic at major ports down 16.6% till August 47 Indian Railways’ coal handling down 22% in April-August 48 Railways eyes PPP mode to touch `50 lakh crore capex target 49 Expert Speak: Port performance enhancement – a requisite for growth 56 Adani sees flat coal output growth in FY21 58 Corporate Update 60 Government Update 62 E-auction data 64 Port Data

4 Coal Insights, September 2020

6 | COVER STORY

Power Overdrive: Charging beyond Covid

20 | SPECIAL FEATURE

Electricity generation has revived but sector needs to face several challenges before growth returns.

Commercial coal mining in India: A disruptor or a magic-bullet?

With auction just few weeks away, prospective bidders are seeking answers to their doubts.

30 | FEATURE Power producers seek PPA role in combined tariff bid Solar Energy Corp to sign pact only with the renewable energy producers.

51 | CORPORATE

Coal India plans major profit-boost exercise Chairman Pramod Agrawal detailed strategy before investors’ community

54 | CORPORATE

NLC India suffers project delays on Covid impact Efforts are on to bring back migrant workers

COVER STORY

Power overdrive

Charging beyond Covid Sumit Maitra

6 Coal Insights, September 2020

COVER STORY

F

rom the lows of April, power demand has come back to normalcy (or at 2019’s levels) beginning September with the easing of lockdowns and the consequent gradual resumption of economic activities.

India’s coal-fired electricity generation rose 9.4 percent in the first half of September, provisional government data now shows with demand from industries rising for the first time since lock-downs were enforced.

This should come as much relief to the coal sector, and the economy watchers in general.

Till August, energy demand contracted for the sixth consecutive month as demand over April-August dropped 11 percent over same period of 2019.

But in that month, decline in power demand narrowed to 2 percent on year from 4.1 percent in July and 11 percent in June.

This was led by an improvement in demand from the northern region (up 1.3 percent again drop of 0.8 percent in July) and southern region (down 4.5 percent against shrinkage of 9.8 percent in July), due to the further lifting of lockdown for certain economic activities under Unlock 3.0.

In line with generation, short-term power price at Indian Energy Exchange were at `2.43/kWh in August down from `2.47/ kWh seen in July and `3.32/kWh witnessed in August of 2019.

Power demand revives in September

Power generation in August grew 2.6 percent on year and 3.9 percent on month in the country with resumption in economic activity though, till August, generation was still down by 11 percent.

In August, demand growth, however, continued to remain negative at 2 percent.

But in September demand has started surpassing 2019’s figures. On September 1, peak demand of 162 GW was 1000 MW higher than same day of 2019.

That was not one-off phenomenon as demand met on September 7 at 1,69,058 MW was also higher than the year ago demand of 1,66,909 MW. The upward trend has continued and maximum demand met on September 10 was 1,73,500 MW which was higher than 1,71,079 MW on the same day of the previous year.

CIL’s month-wise coal despatches to power sector (in mt) Month

“Effect of Covid is waning. Trend is clear.

Power demand has picked up”: power secretary Sanjiv Sahai Till the first 15 days of September, country’s overall electricity generation rose 1.6 percent driven by higher consumption by industrial states such as Maharashtra and Gujarat where factories and mills reopened.

“Power demand is normalising. Effect of Covid is waning. Trend (of comparable daily power demand met) is clear. Power demand has picked up,” said power secretary Sanjiv Sahai. Rise in demand were pronounced in industrial cities and trading hubs. Electricity use in Gujarat rose 6.2 percent, whereas consumption in Maharashtra rose 4.3 percent.

The two states, among the most industrial in the country, together account for about a fifth of annual power consumption.

Power consumption by industries and offices account for half of India’s electricity demand. Most states have removed nearly all restrictions and opened up factories, even as coronavirus cases continue to surge in the country.

Coal-fired electricity generation accounted for 70 percent of India’s power output in 2019, according to India’s Central Electricity Authority. The share of the fuel in power generation fell to as low as 60 percent during the coronavirus lockdowns, as use of renewable energy for electricity generation rose.

Coal India Ltd, the world’s largest coal miner, had reported its first increase in production in five months during the month of August, driven by higher demand from power producers.

2020-21

2019-20

2018-19

April

31.95

40.9

40.3

May

30.15

40.4

42.7

June

30.94

38.2

40.2

July

32.76

37.4

38.7

August

33.86

33.5

36.9

September

28.3

35.9

October

33.8

41.9

November

38.8

43.1

December

42.1

42.9

January

43.2

42.0

February

42.58

40.1

March

42.30

45.84

Rising coal supply to power plants

Total

463.0

491.5

Coal despatches to the power sector by Coal India went up 1.2 percent in August, over the corresponding month of previous fiscal.

Note: The aggregate may not match with monthly entries due to revision and rounding off.

Source: Ministry of Coal

Coal Insights, September 2020

7

SPECIAL FEATURE that nobody seems to want more coal on his platter while everybody wants to do business with it!

Commercial coal mining in India: A disruptor or a magic-bullet?

Arindam Bandyopadhyay

W

hen the world was busy downing shutters, the Indian coal sector was opened up! Commercial coal mining, announced by the government in June, was not just about opening the doors, but infusing fresh blood into the anemic body of an economy which has, like fellow countrymen, remained under seize ever since coronavirus invaded the Indian air space in March.

An avenue to restart investment flows, generate employment, upgrade technology and, of course, augment coal production – it was a naturopath’s remedy for holistic cure complete with a message for self-reliance!

But will it work on an unknown malady that has seized not only the body but also the mind of an economy?

While the market remains tightlipped, notes, cautions and apprehensions are being exchanged, privately, on three basic concerns: Will there be sufficient participation of bidders? Will production from the blocks start in time? And lastly, will there be adequate demand for the coal produced? What is not being talked about, however, is: what will happen to the coal sector if any of the above three concerns turns out to be true.

Behind the doors, nobody is questioning the good intent behind the move, but the same cannot be said about the timing of the shift.

Something that could be a game-changer for the economy some 15-20 years back, it is apprehended, may not be as effective in the era of fast-changing energy dynamics in global and local markets. Blame it on the unions’ pressure tactics or the lack of government will, the fact remains that had commercial mining been launched earlier, the country could have

20 Coal Insights, September 2020

Old faults in a new seam

saved an outgo of at least `700,000 crore only on thermal coal imports over the past decade which is equivalent to one year’s crude import bill (as of FY2019-20).

But nothing comes before time, if at all.

If it took the government(s) 20 years to make way for commercial mining, it may take a few years more to actually get started at any significant scale. The launch of auctions would mean little if bidders do not turn up in good numbers.

Given the lukewarm response to the recent tranches of captive block allocation – some of these were annulled due to lack of participation – one cannot rule out a scenario where a good number of blocks remain unsold this time as well.

According to official sources, the initial response from the market has been rather encouraging. The government has been getting a lot of enquiries from nontraditional sectors, i.e. people who are not current stakeholders of the industry. While that comes as good news, the problem is

Ideas, like fresh flowers, are always beautiful.

What use they would be put to is a different matter. When the then government thought out captive blocks concept, way back in 1993, and amended the Coal Mines (Nationalisation) Act, 1973, the move might have had been as justified and novel as commercial mining may seem to be today. Twenty years later, captive blocks became the eyesore to the community and prompted mass de-allocation of blocks which allegedly shook up the investors’ confidence. Although the government tried to restore peace, by working overtime to prepare for auction of the de-allocated blocks, and tasted initial success too, captive production never really picked up big time.

The primary reason behind the mass deallocation of captive blocks in 2014 was “nontransparent and discretionary” mechanism of block allocation, but the trigger behind the move was stunted production. Barring a few ‘special’ cases, the ‘fault’ of the majority of captive block allottees was that they couldn’t deliver production as promised. And in the majority of the cases, the reasons for failure were institutional bottlenecks – land, water, statutory clearances, connectivity etc. – things on which they had little control.

Jump cut to 2020. Despite the best efforts by the government to streamline procedures

India's non-coking coal imports in last 10 years (in mn tons)

200 180 160 140 120 100 80 60 40 20 0

FY11

FY12

FY13

Source: India Coal Market Watch

FY14

FY15

FY16

FY17

FY18

FY19

FY20

FEATURE

Power producers seek PPA signatory role in 5,000 MW combined tariff bid Sumit Maitra

T

hermal power companies want to participate directly in the 5,000Mega Watt tender floated by Solar Energy Corporation of India for bundled renewable plus coal-based power tariff bids.

Earlier in March, Solar Energy Corporation of India floated tender inviting Expression of Interest from only Renewable Energy (RE) developers for supply of 5,000 MW of electricity from grid-connected projects which would be bundled with power from coal-fir ed thermal projects so that round-the-clock (RTC) power can be provided under single contract.

The tariff-based competitive bidding of a single tariff for renewable energy complemented with thermal energy would lead to Power Purchase Agreements with successful RE developers for a period of 25 years.

The Thermal Power Producers (TPPs), for whom new PPA opportunities are hardly coming on their way, want to be signatories to those agreements as well along with RE power producers.

“As long-term power procurement tender opportunities have been almost nil in the past several years, the tender floated by SECI is extremely important to ensure that bidders who have secured coal linkages through LoA route and Shakti B(iii) are able to utilize and access their linkage coal,” Ashok Khurana, director general, Association of Power Producers have said in a letter written to power secretary Sanjiv Sahai.

Power ministry vide its Gazette

30 Coal Insights, September 2020

Notification dated July 22 issued guidelines for competitive bidding process following which SECI amended certain provision of the bidding document in line with those guidelines.

APP, in its letter, a copy of which is available with Coal Insights, has also requested some changes in some of those bidding conditions to facilitate greater participation from thermal power producers leading to lower tariff.

Key Bid terms issues

Usage of linkage coal RE developer is required to enter into an agreement with the thermal power projects.

However, under the earlier Letter of Arrangement regime as well Shakti scheme, access to linkage coal is granted only when the power project executes PPA with a Discoms or a trading companies including SECI which in turn should have back-toback PPA with any Discoms.

According to APP, there is uncertainty as to whether the agreement with RE developer would allow thermal power producers to access coal under their existing linkage since they are not party to the PPA with SECI. To provide clarity and provide comfort to bid applicable for a long 25 years, APP has suggested allowing either of the two options:

1. Thermal generator may be made a signatory to the PPA between bwteen RE developer and SECI 2. Eligibility conditions in the FSA (under both LOA route and SHAKTI scheme)

may be amended to add the option of ‘RTC (round-the-clock) PPA by RE developer, complemented with thermal power’ under the definition of PPA under Clause 1.1 sub clause (gg) of FSA (under LOA route) and Clause 1.1.46 under Shakti B(iii) TPPs, which have been awarded coal linkages through LoA route or under Shakti policy, need to enter into PPAs with Discoms or state agencies within specific time period

INTERNATIONAL

India to contribute most to global CO2 emission: IEA Coal Insights Bureau

I

ndia would be contributing the largest share of CO2 emission in coming days as China gets rid of polluting bulk materials leading to shift in their production to India, says International Energy Agency.

European Union, United States and China are significantly cutting down on their emissions while India would keep on emitting at an increasing pace thus turning out to be the biggest contributor to global CO2 emission.

China is gradually moving away from the production of bulk materials, especially cement towards less energy-intensive manufacturing activities such as electronics, batteries and industrial equipment.

There are also significant efforts to reduce the direct CO2 footprint of industrial activity, leading to a reduction of 85-90 percent in direct CO2 emissions for heavy industry sectors by 2070, according to IEA forecast while India increase its share of global industrial emissions by 75 percent by 2070 as its production of bulk materials grows robustly to meet domestic demand.

“By 2070, India accounts for 15 percent of global CO2 emissions from industry.

Emissions from the industrial sector in the European Union and the United States are reduced by more than 90 percent in 2070 relative to current levels in the Sustainable Development Scenario, such that together they account for less than 10 percent of total emissions from industry,” warns IEA. In contrast, China’s share of global industrial emissions, currently at 45 percent, would come down by half by 2070 in IEA’s Sustainable Development Scenario.

“The enormous fleets of inefficient coal plants, steel foundries, chemical facilities and cement factories – many of them recently built – are set to produce enough emissions in the

38 Coal Insights, September 2020

coming decades to put international climate goals out of reach. But we can develop the technologies to address this through smart policies and investments today,” the report says.

Need for intervention through technology

Power sector and heavy industry sectors together account for about 60 percent of emissions today from existing energy infrastructure. That share climbs to nearly 100 percent in 2050 if no action is taken to manage the existing assets’ emissions, underscoring the need for the rapid development of technologies such as hydrogen and carbon capture, the report says.

Clean energy technologies are to be available in time for key investment decisions will be critical. In heavy industries, for example, strategically timed investments could help avoid around 40 percent of cumulative emissions from existing infrastructure.

India’s approach

The carbon footprint of the global energy system has been reduced in waves driven by government policies.

Wind and solar PV have seen rapid expansion, led by policy support in Europe, United States, China and India.

Public procurement also plays a role in creating niche markets in some countries including India which created dependable local markets for products, such as lightemitting diodes (LEDs), appliances and electric vehicles.

Deploying LEDs rapidly on a large scale with right financing and market mechanisms, India created one of the largest LED markets in the world thanks to the national Unnat Jyoti by ‘Affordable LEDs for All’ programme, which uses bulk procurement to offer LED bulbs at low prices.

“By 2070, India accounts for 15 percent of global CO2 emissions from industry”: International Energy Agency Coal is largest contributor to CO2 emission

Coal remains by far the biggest contributor to global energy-related CO2 emissions as it is the most carbon-intensive fossil fuel and the second-largest energy source worldwide.

Coal accounted for 45 percent of total CO2 emissions in 2019, followed by oil (34 percent) and natural gas (22 percent).

Apart from a brief hiatus in the 2000s, share of coal in the global energy mix has been declining in recent decades, while that of oil has been broadly flat and that of gas has been rising steadily.

IEA calculates that coal has been the single leading cause of global warming: CO2 emitted from coal combustion is responsible for more than 0.3 °C of the 1 °C increase in global average annual surface temperatures above pre-industrial levels.

Same coal but more efficient

Around 80 percent of the expected cumulative emissions from the power sector are from coal plants. By 2050, annual emissions from existing coal plants would be 5.9 Gt, nearly 70 percent of current levels ignoring any early retirement or other emission reduction measures.

Around 75 percent of cumulative power sector emissions through to 2070 are related to projects in Asia, with China alone accounting for almost 50 percent of all cumulative CO2 emissions.

More coal plants are still planned, although final investment decisions for new coal plants have fallen by about 80 percent over the past three years, from about 88 gigawatts (GW) in 2015 to around 17 GW in 2019.

CORPORATE ♦ Closure of unviable mines: CIL has identified 23 mines for closure in FY21; 82 mines closed in the last 3-4 years.

Even after considering all the closure costs (including labour costs), CIL will be saving to the tune of at least `500 crore

Coal India plans major profit-boost exercise to stay competitive Sumit Maitra

F

aced with fall in global prices and domestic demand and also with future competition from commercial miners, Coal India has drawn up a major multi-pronged profit maximization exercise through cost rationalisation and investment projects that touches almost all operational areas from manpower to evacuation infrastructure to legacy high-cost mines.

Coal India chairman Pramod Agrawal has worked on such a strategy and detailed it before the investors’ community who are wary of the mining behemoth’s ability to face such growing challenges.

Coal Insights has pieced together details of such a strategy from multiple sources, elaborated here.

Key strategy

♦ Pricing freedom by selling superior quality coal

During the first quarter of FY21, cost per ton reduced 3 percent from `1393 to `1360 per ton despite the fact that Coal India paid all the contractor labourers during the lockdown.

“Cost of production per ton reduced substantially that indicates that our cost controlling measures were slightly effected,” chairman Pramod Agrawal told analysts.

Key measures

♦ Natural attrition of manpower: 5 percent reduction in manpower annually for the next 5-10 years (from FY20 base of 2,72,445 employees) ♦ First mile connectivity and infrastructure creation to reduce costs. Currently CIL incurs `3400 crore on transportation charges on coal annually. This can decline substantially with improvement of first mile connectivity by mechanization

2014

productivity

♦ Mechanisation of evacuation to lower costs ♦ Improved disclosures

ESG

compliance

and

♦ Predictable capital allocation ♦ Not to invest in new mines where IRR is below 12 percent ♦ Closure of unviable mines

Focus on import substitution

Target: 200 mt extra sales in FY22 to substitute imports Coal India plans to sell around 200 million tons of coal in FY22 to those users who are now importing coal.

Factoring in the high ash content of Indian coal, this would help domestic imported coal users to avoid import of 150 mt in the next financial year, the coal mining major has told analysts.

For the current year, Coal India has set a target to replace 100 mt of coal imports through domestic sources.

To sell to imported coal users, Coal India is targeting sponge iron and cement plants which can be supplied higher quality of coal which is available in ECL, CCL or SECL. As production is being ramped up for WCL, efforts are on also to target importers in WCL’s command areas, the chairman said.

Costs and Manpower

♦ Incremental import substitution ♦ Improve manpower significantly

♦ 158 underground mines employ 45 percent of the workforce whereas contributes 5 percent of total production

Coal volumes Opencast (mn tons) Underground (mn tons) Employees (#) Opencast ('000s) Underground ('000s) Manpower productivity Opencast (tons/employee) Underground (tons/employee) Output per manshift – UG (tons)

2015

2016

523 31

537 31

576 30

572 30

147 200

147 186

147 176

144 166

155 144

157 128

155 117

2,899 181

3,127 188

3,446 192

3,623 190

3,473 212

3,669 237

3,690 257

Subsidiary

Output per manshift – OC (tons)

12.00 10.00

4.00

FY16

FY17

FY18

FY19

0.99

14.25

0.95

14.68

0.86

14.10

0.80

15.26

0.80

0.79

FY15

14.35

0.00

13.13

6.00

2.00

2020

505 34

14.00

Coal India is implementing multifaceted cost control measures, and its positive effect is already being seen.

2019

459 35

16.00

8.00

2018

426 36

18.00

Cost control measures

2017

FY20

ECL BCCL CCL NCL WCL SECL MCL NEC DCC+ HQ+CMPDIL Total

UG 9.2 1.0 0.7 0.0 4.2 14.1 0.8 0.0

FY20 OC 41.1 26.7 66.2 108.1 53.5 136.5 139.5 0.5

30.5

572.1

Manpower 57153 43425 38168 40401 51426 21991 14382 1213 4286 272445

Coal Insights, September 2020

51

66 Coal Insights, September 2020

Tear along the dotted line

Tear along the dotted line