Should coal mines be auctioned

Written by RV Shahi | Dilip Kumar Jena | Updated: Mar 31 2012, 07:16am hrs
In India, coal constitutes more than 50% of commercial energy. Our power sector is dependent on coal-based generation to the extent of almost 75%, even though, in terms of installed capacity, coal-based power plants constitute 55% of the total capacity. The power sector and coal sector are so interdependent that while 75% of power generation is coal based, more than 85% of domestic coal production is consumed by the power industry. It is for this reason that the adverse performance of the coal industry in the last three years has so severely impacted the power sector, so much so that, as at present, more than one third of 95 power plants across the country face critical and supercritical stock positions.

Power sector reform initiatives, led by the Electricity Act 2003, were indeed responded overwhelmingly by the private sector, resulting in massive capacity additions. Based on the understanding given by the Indian coal companies, a large number of power plants have been established and are being established. However, Coal India has been reluctant to sign Fuel Supply Agreements that would commit them to supply only 80% of the requirement, fearing that they may not be able to ramp up coal production to meet these obligations. In spite of rising imports of coal, the price of which is becoming excessively high, thus making power cost unaffordable, uncertainties about adequacies of fuel supplies for the power plants have led to serious concerns among developers and lenders. Financial closures of new power projects are faced with serious question marks. Even disbursements in cases of those power projects already financially closed are becoming uncertain. Large capacity additions in the last few years are the outcomes of power projects started in the Tenth and early years of the Eleventh Plans. Fuel mismatch uncertainties, leading to issues of financial closures, are going to severely impact the interests of developers, and hence capacity addition programmes in the future.

This situation has obviously been caused primarily on account of virtually no reform initiatives in the coal sector. Indian power and coal industries are like two wheels of a cartone has moved forward, another has remained stagnant. The Coal Mines (Nationalisation) Amendment Bill 2000 was introduced in Parliament earlier than the Electricity Bill. The Electricity Act became a reality in June 2003, while the Coal Bill is still pending in Parliament. Several recommendations made in the Integrated Energy Policy (2006) have remained unattended. It was decided almost six years ago that a coal regulator will be put in place at the earliest. This is still to happen. A lot of uncertainties have been created by the new MMDR Bill, which seeks to allow 26% of profits to be shared to the locals at district levels. This provision has created a larger number of questions rather than answering the major issues confronting the development of the coal sector. If a greater degree of energy security has to be brought about, and power sector facilitated to grow at 9 to 10%, a similar growth in the coal sector is essential. This could be possible only through a radical restructuring of the coal sector, just as was done in the case of the power sector. The coal sector has to be opened up, and the Bill, which has been on the back burner for over a decade, needs to be enacted.

The method of allocation of coal blocks has come under debate. It is needless to emphasise that it requires a transparent process to be followed. But any attempt at bidding/auction, with the sole objective of generating revenue for the Government, would be counter-productive. Bidding must aim at reducing the cost of production and, accordingly, price at which coal will be supplied to the power industry. In India, the manufacturing sector needs power at a price that will make them competitive globally just as the service sector, agriculture, and other consumers also need power at affordable rates. This will not be possible if the Government wishes to, through bidding, generate huge revenue.

The author is chairman, Energy Infratech Private Limited

At present, India largely depends on coal to meet its commercial energy demand. The power sector is the largest consumer of coal in India and accounts for nearly 66% of the total demand. Of the 185.5 GW (November 2011) of installed power generation capacity, coal-based capacity constitutes 55%, while it contributes to more than 70% of the power generated. The second major consumer of coal is the steel industry, accounting for about 14% of the total consumption. The cement industry accounts for about 4% of the coal consumption.

With more than 285 billion tonnes of coal resources, India has the 5th largest coal reserve base in the world. Of the total reserves, nearly 88% are non- coking coal reserves while tertiary coal reserves account for a meager 0.5% and the balance is coking coal. Currently, total coal production stands at about 550 million tonnes against a demand of more than 600 million tonnes, with PSUs accounting for 85% of the production. Other supply sources include production from captive coal blocks (around 5%) and imports (around 10%).Though annual production is growing at 6%, it might not be sufficient to meet the projected demand of 1 billion tonnes per annum by the end of the Twelfth Five Year Plan. Further, coal production grew at a modest 0.4% in the period April-February 2012.

Coal output in India has suffered mainly due to procedural challenges, project delays and captive mining laws. Foreseeing the grim situation, our lawmakers proposed to pass the Coal Mines Nationalisation (Amendment) Bill, 2000 (CMNA) and also amend the Mines and Minerals (Development and Regulation) Act, 1957 (MMDR). While the MMDR was amended, the CMNA, which provides for commercial coal mining in India, is still pending in Parliament.

The principal driver for nationalisation of coal resources in 1973 was the need for addressing safety issues, but the other main reason was to facilitate Government funding to develop coal mines. Private participation is being gradually permitted by amending the Coal Mines Nationalisation Act to allow captive mining by companies engaged primarily in iron and steel making, power generation and cement production. Though the safety records have significantly improved, the capacity augmentation from captive coal blocks has been dismal as only 26 mines could come online as compared to a targeted 76 mines in FY10. The reasons for such a poor performance include the lack of mine development capabilities of the owners, small base of reasonably strong mining services companies and slow adoption of leading industry practices owing to limited presence of global mining companies due to the captive mining policy, among others.

Though, the amended MMDR (2010) provided for auctioning of coal blocks, the Auction by Competitive Bidding of Coal Mines Rules, 2012 were notified only recently after a delay of more than one year. Also, these rules do not provide for an optimal mechanism for segregating blocks to be reserved for Government companies and for allocation through auction, pre-qualification criteria, method to dispose current applications and instruments to address inherent bias towards large, balance-sheet funded, integrated companies, among others.

The lack of single window clearance for land, resettlement & rehabilitation, water, environment & forest, local permissions and execution of concessionsetc, is resulting in a delay of development of coal resources of 8-12 years as compared to 5-6 years globally.

The lack of policy intervention for providing fiscal benefits and other incentives including tax holidays for exploration activities and mega coal mining projects (capacity more than 20 million tonnes per annum for opencast and 5 million tonnes per annum for underground mines), introduction of PPP in coal evacuation infrastructure creation and delay in appointment of a coal regulator have led to stagnation in the sector.

A further delay in policy decisions may worsen coal availability in domestic markets. Also, the devised policies in their final form should aim to improve investor confidence in coal mining projects and address the immediate and long-term needs of other stakeholders.

The author is senior consultant and knowledge manager, Mining, PwC