India’s Energy dependence could be skewed towards Coal amidst war frenzy

The unrest in Europe does not seem to mellow down any time soon, judging from the current geopolitical scenario of Eastern Europe. Although ceasefire had been declared with effect from 10 A.M Moscow time, Monday, Ukrainian president Volodymyr Zelensky accuses Russian troops of night-time shelling of Ukrainian cities. Crude Oil spiralled to USD 130/b as of Monday the 7th of March with Brent prices soaring as high as USD 139/b. As the US and EU allies contemplate a ban on Russian crude, ChemAnalyst predicts Oil price to continue its surge for the rest of the quarter and perhaps longer.

India’s energy security could be gravely impacted if the current trend in the crude and natural gas markets continue for long. Natural gas prices too have breached the USD 5/MMBtu mark on Monday. CLSA predicts Indian LNG prices to be constantly above the USD 30/MMBtu mark throughout 2022 which could mean further pressure on India’s energy basket. The government will have to continue its policy of rationing coal at subsidized prices to offset the inflationary effect of rising petroleum prices.

State-run coal miner Coal India Ltd. (CIL) had already warned the government that it would have to cut output to maintain the current price support without exhausting its resources, as far back as mid-February. India’s coal mining operations are almost entirely powered by diesel and the cost pressure from rising crude oil prices on Diesel could mean that the CIL will have no option left but to pass on at least part of the hike to the Power generation companies failing which the government will have to bear the brunt of the subsidies thus leading to higher government spending and the inflation in the economy that follows suit.

Thus, the Indian government will be forced, however reluctant it may be to fall back on coal reserves for the near future as Crude and LNG prices are expected to continue their upward surge for the next couple of months. No respite is in sight as far as India’s skewed energy balance is concerned. Over 70% of India’s power generation is still reliant on coal. The Government will have no option left but to rationalise subsidies on coal as a pre-emptive measure to rein in inflation in the long term.