The Quest for extra coal

Written by Indronil Roychowdhury | Updated: Jul 2 2014, 06:59am hrs
Since the beginning of this year, the worlds largest coal miner, Coal India Ltd (CIL), was expecting its restructuring after Deloitte submitted a report that is said to have suggested spinning off seven CIL subsidiaries into independent entities. The restructuring plan also called for handing over mines to private hands for merchant mining, wherein standalone mining companies would be formed with a cluster of mines. The idea behind such plans, following the TL Shankar Committee recommendations, was to bring about competition for increasing productivity.

The new coal and power minister Piyush Goyal has made it clear that there would be no restructuring of CIL as of now. But productivity and supplies to the power sector have to go up, and for that e-auction has to be cut down and linkage revisited.

If the UPA-2 government thought of restructuring as a way to reform the coal sector, the new government has gone into a problem-solving mode. The first major step towards it was bringing power and coal under one ministry. This will put a stop to the blame game between the two ministries, Partha. S. Bhattacharyya, former CIL chairman, said. But will that solve the real problems that are hurting consumers interest, asks Subhasri Chaudhuri, secretary general of the Coal Consumers Association of India.

Power utilities are still experiencing grade slippagegetting a lower grade against demand and payment for a higher gradeat the unloading end. This, despite the introduction of third party sampling. Coal supplied contain boulders, stone and uncrushed coal, which reduces the throughput of terminal sidingin receipt of coal rake and coal qualityand increases the landed cost of coal, through high detention and demurrage charges. The more the grade slippage, the more the requirement in tonnage terms, and this increases the demand-supply gap.

Further, there are issues like faulty weighbridges and erratic supply of coal over and above the larger issues of inadequate railway infrastructure and slow green clearances. But settling the small issues can help coal consumers to a great extent.

When a coal company regulates supplies to thermal power stations without taking them on board, it affects their coal stock planning, and in turn, generation. It is expected that with both coal and power coming under one roof, regulation will happen on broader consensus.

The minister has asked CIL to cut down on e-auction to supply that extra amount to the power sector, but that extra amount wouldnt be too high to make an impact on the demand-supply gap. CIL supplies 10% of its total production (supplied 46 mt through e-auction in FY 14) but earns a high premium, which increases its top line and bottom line. Last fiscal was an exception and CIL couldnt earn a high premium from e-auction because of a drop in international coal prices. Many companies chose to get imported coal than sourcing the e-auction coal. So the minister was not wrong when he said that cutting down on e-auction would not affect CILs profit. But the company will have to make adjustment in long-term revenue projections when the emphasis is on supplying coal at a discounted, notified price to the power sector. Also, CIL has to cater to non-power sectors as well.

Pricing is another issue. According to Chaudhuri, coal prices of captive power plants are higher by 30% compared to the price for public power houses and independent power producers. This is discriminatory. The captive power generators are also contributing to the increase in power supply. With this differentiation, it has become de-motivating to put up captive power units.

Coal for the cement sector and sponge iron units is another area of concern, and cutting down on e-auction means squeezing availability for these sectors.

Goyal has talked about revisiting linkages but that is a complicated area, and it has become more so with captive blocks taken away from many. There are plants where coal blocks have been de-allocated as statutory clearances could not be obtained in time for various reasons. In such circumstances, many companies dont have fuel supply agreement with CIL, so restoring linkages is the option. According to Chaudhuri, the clauses of tapering linkage should be revisited and modified. The companies which have not delayed production deliberately should be supplied linked coal even after the zero date of starting production, on a case to case basis.

But all these need more coal, and CIL has to find from where would this extra coal come.

The coal ministry has mulled that the surrendered portion of coal blocks be transferred to CIL, which will help it produce extra coal. The matter has to be taken to the board but former chairman S Narsing Rao left without taking a call on it. In fact, A K Dubey, joint secretary, ministry of coal, who is holding the additional charge of CIL chairman, took the decision of not putting the surrendered portion of a block for auction as this would bring two types of allocations covered by two sets of rules on the same block. But the company has to take a call and CIL still to bring its house in order under the new government.

Goyal told FE that the company needs efficient leadership to feed the country with required coal. The need of the hour, an official said, is to get a whole time dedicated chairman, who will have to drive the company for enhanced production. Former chairman S Narsing Rao has always held that increased production is the key to solutions to all problems and whatever new plans come with the new government, the key issue remains the same.