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February 06, 2012

India's Coal Crisis Hits Deep Freeze

Tata Mundra Pic fisherman
What began as a social crisis borne of forced evictions, loss of livelihoods, and brutal police repression, has quickly evolved into a financial one. In a series of excellent posts (part one here, part two here) my colleague Carl Pope has laid out the economic basis of the problem India now faces. The reality of which - that, geologically-speaking, coal is abundant, but economically speaking. cheap coal is not - has hit India hard threatening a vast pipeline of coal projects, and a banking sector that has underwritten them.

While the unfolding crisis has been chalk full of dramatic events, including a frantic meeting of large private power producers (Tata, Reliance) and Prime Minister Singh, it has largely been ignored by the broader public. Now the proverbial calm has descended before the financial storm as ministries have issued a deep freeze on the sector before the house of cards comes falling down – and billions of dollars in public money along with it.

High Stakes Drama

While policymakers in Delhi have been slow to react, power producers are fully aware of the dire situation they face. After two of the world’s largest coal plants faced bankruptcy due to skyrocketing prices, industry reacted with desperate demands, including requesting that the Indian government lobby Indonesia to reduce coal prices (think US begging the Saudis to lower the price of oil – which of course happens frequently). Their demands from the government to help reduce import prices have however seen little movement, and even less effect.

Turning their eyes to a solution to domestic supply constraints, India’s largest business houses demanded Prime Minister Singh exact promises from Coal India (CIL) – the world’s largest coal miner - to provide cheap coal to struggling projects. Bowing to their pressure, the Prime Minister convened a high level panel that issued stark warnings of fines for CIL if it failed to provide producers with what they wanted.  However, just like efforts to reduce the price of imported coal, the panel’s recommendations did little to stem the financial hemorrhaging.

Stewing in the background of this high stakes drama were recent moves by CIL to raise its prices – for the first time ever (remember internationally coal prices have tripled over just the past three years). CIL, which has been in ongoing discussions with its union over wage increases, rightly understood that prices must rise if workers are to be paid fair wages for the terrible working conditions they endure. Power producers were outraged and again pressured the government to quickly reverse a historic, yet modest, increase in coal prices while simultaneously forcing CIL to absorb a 40% increase in wages.

Then, in a move that was perhaps meant to cover these costs without the political backlash the private power producers would unleash on direct increases in the price of coal, the mining giant decided to move forward with upgrading and standardizing its coal classification system. The move would have raised the price of coal 25-40% as coal prices would be revised up to prevailing international levels – and help cover the cost of providing fair wages to its employees. This of course was met with fury by power producers forcing CIL to limit the price increase to certain grades of coal to quell their anger.

The Deep Freeze

Then came the bombshell – just a few days ago the coal minister sent a letter to the power ministry requesting an immediate freeze in the pipeline of coal projects. His reason: the worlds’ largest coal miner is unable to ensure adequate supply of coal and therefore the financial health of the coal project pipeline.

Almost immediately after CIL announced its desire for a freeze, the Reserve Bank of India (RBI) followed suit by suggesting banks freeze lines of credit for this “distressed sector.” The move followed months of warnings from financial analysts that systemic defaults loomed on coal plant loans and the widespread impact it would have on Indian banking sector due to high exposure. This was the moment the drama that had been under the public radar went mainstream.

Now that the coal ministry and the RBI have placed India’s coal crisis is in a deep freeze policymakers, civil society, and industry have a unique opportunity to reflect before they take a crucial step that will determine India’s future. In doing so a lesson from the US experience may prove uniquely useful. As Carl Pope puts it:

Between 2001 and 2010, the U.S. almost locked itself into a generation of 180 costly and unneeded coal-fired power plants. Campaigns led by the environmental community, the enacting of state renewable energy standards, and more-abundant competitive sources like wind and natural gas, headed off that almost catastrophic coal rush. Now Asia faces a similar choice -- overbuild coal plants and guarantee bloated prices that will depress its economic potential, or pivot away from reliance on new coal and start deploying the new, low-cost power leaders -- efficiency, distributed generation, wind, and solar.”

Carl’s right - if there is one lesson that must inform this critical point in Indian development, it’s this: coal is not cheap and its costs threaten not only social and environmental destruction but the stability of the Indian banking system itself, with as much as 56,000 Crore ($12.6 Billion) in public funds on the line.

The choice is clear: bailout private power producers on the backs of average citizens or make a break with the financial basket case that is the coal industry. Now that the public is watching, industry is wounded, and the government is forced to act, there is an enormous opportunity to ensure the latter. After all, a crisis is a terrible thing to waste.

-- Justin Guay, Sierra Club International Program. Photo is of fishermen near Tata Mundra.

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