BenefitsofOptimizingtheRailwayLogisticsforLinkagebasedCoal PowerPlants

YasirAltafandDr.RashikaGupta 01.11.2011
Coal is arguably one of the most dominant issues being debated in the country today. The popular lamentisaboutanalarmingincreaseinthesupply shortfallsbeingwitnessedintherecentyears.The predicamenthasbeenaccentuatedbyafactorwhichisvastlyignoredbytheplannersandgeneration utilitiesalike.Overtheyears,thedynamicsofcoalrationingbyCILanditssubsidiariescombinedwith badeconomicshavemisalignedtheallocationprocessoflinkagecoaltopowerplants.Thishasresulted inan inefficient movementof coalin the country withinstancesofimportedcoal being consumedby pithead power plants and large quantities of domestic coal consumed by coastal power plants. The classic examples being certain pithead and coastal power plants belonging to NTPC and TNEB respectively(Figure1).Thissituationhasalsoledtoanoverallincreaseinthedeliveredcostofpower forconsumers.
Figure1:Currentandexpectedtrendincoalflowsandcapacityadditionsissuboptimal(Illustrativeonly)

Economically recoverable reserves are lower in outer rings 1x 2x 3x

Current production and consumption trends would increase transportation distances as coal movement shifts away from outer to inner rings

1x 1x 1x Current production rates are approximate similar within all the rings H Current geographic distribution of installed capacity & ongoing trend in future additions (by 2016)
Skew in current imported Coal Consumption (2010)

NTPC hinterland plants (11.2 MT) TNEB coastal plants ( 2.17 MT)

Thecurrentvulnerabilityandvagariesofcoalsupplyandrationingextendintothefuturealso.TheLetter ofAssuranceLoAbasedallocationpolicyofdomesticcoalisspreadingtheresourcethini.e.,alarge numberofplantsarenotgettingmeaningfulquantityofcoaltomeettheirnormativefuelrequirements (Figure 2). Apart from inefficient usage of resource, it is creating uncertainty for investment decisions andtherebythecapacityadditionprobabilities.

Figure2:DomesticcoaldemandsupplyandCILFuelSupplyAgreement(FSA)triggerprojectionsby2016

1000 800

100% 80% 60% 40% 20% 0% 2012 CoalDemand 2013 2014 2015 2016 LikelyFSAtriggers ExpectedDomesticSupply

MillionTonnes

600 400 200 0

Coal production and transportation have long lead times and cannot adjust quickly to the growing demand. So the need to plan ahead and invest is imperative. Today, coal accounts for 44 percent of railway freight tonnage. Evidence of stress on the transport system can be seen in the fact that the critical stock of coal at major power stations has seen a declining trend in the recent past, while coal stockpileshaveaccumulatedatthepitheads.TheMinistryofRailwayscontinuestorationaccesstothe congested railway links by supplying only a fraction of the wagons requested by shippers and consumers.Underlyingtherailwaycongestionarethelongtermunderinvestmentandinefficienciesin transport use. Congestion, inefficiency and underinvestment can be traced to higher than planned economicgrowth,decadesoflowsubsidizedpricesfortransportandsuboptimalinvestmentdecisions. Therefore, other than mitigating the coal supply constraints itself; there is an urgent need to ensure transportinfrastructureconstraintsparticularlyaroundrailwaysalongwithportexpansionprojectsare completedontimesothatthepowerprojectsdontsufferduetothenonavailabilityofcoal.Dedicated coal freight corridors need to be developed in the key coal belt regions with appropriate cost sharing mechanisms among various beneficiaries. Also, addition of coal washeries need to be fast tracked for reducingburdenonrailwaysandimprovingefficiencyofpowerstations. Howeverasanimmediateaction,redistributionofexistingcoallinkagescouldleadtoefficientusageof existingcoalproductioncapacities,decreasethecostoflogisticsandleadtomoreefficientmovement of coal and rolling stock usage. Linkage rationalization i.e. linkages based on proximity to geographic locationsofplants,domesticminesandportscombinedwithheatcontentofcoal,canbeconsideredto ensure optimal coal flows and minimize superfluous transportation caused due to cross movement of bothdomesticandimportedcoal.Duetooptimizationofthecurrentcoaldistributionpatternoflinkage plants,theaverageshippingdistanceofrailwaysdecreasesfrom530kmto480kmandaround31ofthe 96existingplantsshowreductionintonneskmtravelled.

Figure3:Projectedcostsavingsduetolinkageoptimizationfor2010

SystemGenerationCost (Rs.000Crores)

180 171 160 6.6 165

Simulation(usingIPM)oftransportationcosts bymodelingcoallinkagesundercurrent allocationpolicyandoptimaldistribution @Analysisisvalidtotheextentdatawasavailable inthepublicdomain

100

*IPMisaproprietyLinearProgrammingmodel ofICFInternationalandiswellsuitedtoEnergy andTransportationinfrastructureoptimization

0 Actual Linkages Linkage Optimization

OptimizationofcoalmovementatnationallevelcanbringrapidannualsavingsintheorderofINR6,600 Croresandascoaldemandincreasesintheforeseeablefutureduetotheprevailingfavorableconditions for generation capacity addition, the value of savings could increase exponentially. If the announced capacityadditionsby2016materializeasplanned,thecostsavingstobemadebylinkageoptimization willincreaseandcouldbeintherangeof20,000to25,000Crores. Theotherseeminglypossibleimpactoflinkagerationalizationisonthedispatchpatternoftheplantsin theoverallmeritorderdispatchandresultingimpactonthevariousstakeholders.Currently,tocounter coal shortages, utilities are making individual standalone decisions to import coal leading to cross movements of domestic and imported coal flows. This adds to the congestion in the railway infrastructure. However with linkage optimization, coastal plants tend to utilize higher proportion of importedcoalandmoveupinthemeritorderdispatch,whileashinterlandplantswitnessreductionin imported coal consumption decreasing the cost of generation and moving down the meritorder dispatch(Figure4).

Figure4:Linkageoptimizationshiftsthemeritorderdispatchdownwards
4

VariablecostofGeneration(Rs./kWh)

Variablecostof plantsishigherunder actuallinkages

Variablecostgoes downwithlinkage optimization

300 20,974 34,890 61,541 76,248 90,112 CummulativeCapacity(MW) LinkageOptimization 49,024

ActualLinkages

For example, utilities with plants near coast see an increase in average cost of generation e.g. BSES, MAHAGENCO, GSECL, TNEB etc. while utilities with hinterland plants that were previously under prevailinglinkagepolicyandimportingcoalundergoadecreaseinaveragecostofgeneratione.g.,NTPC, CSPGCL, KPCL, UPRVNL (Figure 5) . Considering cost recovery implications for plants higherup in the meritorder, linkage optimization efforts will require important structural reforms complimented with properriskmanagingstructuresforsuchplants.Itwillrequirecommitmentandsupportatthehighest levelstostandareasonablechanceofpushingthroughsuchreformandcreatingconsumerandpolitical acceptance.
Figure5:ImpactonUtilitiesCoalConsumptionandCostofGenerationpostLinkageOptimization
15 0.4 0.3 10 0.2
CoalConsumption(MT)

5 0.1 0 0.0 0.1 5 0.2 10 0.3 15 DomesticCoal ImportedCoal Prices(Rs./kWh) 0.4

Prices(Rs./kWh)

Domestic coal will continue to be least cost alternative for power generation in the coming decades whilerailwayinfrastructurewouldbeitsmostcriticalneed.Inmanyrespects,thecurrentstateofaffairs is a serious indictment of random and arbitrary coal allocation policy. This when combined with geographic concentration of coal production at remote locations and shortage of transportation infrastructureonlyincreasesthedifficultyofcoalsupply. With more than 2 billion tonnes of coal to be produced from 2011 to 2016, even a small structural change in policy can have huge impacts on coal availability and savings in transportation. Coal optimizationcouldhelpensurethatinvestmentintransportandenergyisadequatetosustaingrowth, besides addressing the near term supply issues and providing right signals for siting new capacity additions. However, it would be critical to introduce reforms without any economic and political instability. If utilities are to be bailed out of current coal crisis on a sustained basis, it is a great opportunity for all stakeholders policy makers, regulators, state and central governments to come together, revisit and agree on some common minimum ground on reforming coal linkage and transportationpolicy.