Putting captive coal to work

Written by Noor Mohammad | Noor Mohammad | Updated: Jul 24 2013, 17:03pm hrs
The government has set up a committee to frame a detailed policy on surplus coal usage from captive blocks. The panels policy suggestions will have a bearing on private sector companies like Reliance Power, Jindal Steel and Power, Tata Group and Electrosteel Castings.

As many as 195 captive blocks with geological reserves of 44 billion tonnes were allocated in the last 20 years to public and private companies for captive use in their projects in sectors like power, steel and cement. Of these, only 30 block are under production now.

The need for a policy on surplus coal usage was felt after a controversy erupted over a ministerial panels decision in 2008 to allow diversion of surplus coal from Reliance Powers Sasan ultra mega power project (UMPP) in Madhya Pradesh. Tata Power, which had pulled out of the projects bidding, cried foul and challenged the move in court. Later, the comptroller and auditor general (CAG) too raised objections to the panels decision.

Another reason for the matter assuming urgency is the rupees depreciation in recent weeks. Rising coal imports have widened the countrys current account deficit and aided the rupees fall.

The huge demand-supply gap in domestic coal has become a national concern, and experts have been pointing to the need to tap surplus coal from captive blocks.

Coal production becomes surplus at a captive mine in case of any mismatch in the operation schedule of the mine or the end-user project. For example, a captive owner could face an excess coal situation if the mine starts production while the end-user project has not yet begun operations. It takes a couple of years for a mine to reach peak production, while generation can be ramped up at power plants in a matter of hours.

Coal banking and direct sale to Coal India Ltd (CIL) are major two options being talked about. Under the coal banking arrangement, a captive block can supply excess coal to the nearest mine of a CIL subsidiary and get the same quantity back when it needs the coal later. The alternative option envisages direct sale of excess coal by the captive block owner to CIL or its subsidiary at a mutually agreed price. Both the arrangements should help CIL in meeting its coal supply commitments to user industries.

But the success of the second option will hinge on pricing. Unless attractive incentives are offered to captive block owners, they may not be persuaded to enhance their production. In any case, they will be taking fuel risks as sold coal would not be returned by CIL to captive block owners under the arrangement.

There has to be certain incentive for captive block owner to enhance coal production, said Pukhraj Sethiya, manager, mining and energy utilities, PwC.

Former Union power secretary RV Shahi said excess coal from captive mines could be sold to CIL to help it meet its supply commitments under fuel linkage. But, Pricing should be decided by the proposed coal regulator rather the coal ministry to ensure transparency of the process, he said.

The lack of a transparent mechanism was a key reason captive coal usage becoming a topic of contention. In the absence of a policy on usage of excess coal, the ministerial panel, the empowered group of ministers (EGoM) on UMPPs, in 2008, had to use its discretion to grant Reliance Power the permission to divert Sasan coal against certain conditions. Later the attorney general too supported this decision.

To avoid similar controversies in the future, the government has now decided to lay down policy guidelines for usage of excess coal from all captive mines. However, before getting down to formulate policy, the panel had reportedly thought it prudent to seek the law ministry opinion on the topic. The matter has been referred to the law ministry to know whether such measures are feasible under the existing law, a coal ministry official said.

India meets about 60% of its electricity requirement from coal. While coal production is growing at 3-4% annually, domestic demand is rising by 6-7% and imports, by 22%.