In key reform, CCEA okays methodology for auction of coal blocks to private players for commercial use
In what marked the culmination of the government’s efforts over the last few years to populate the coal mining sector, promote investments in high-end mining technology and have a competitive domestic coal market, the Cabinet Committee on Economic Affairs (CCEA) on Tuesday set the ball rolling for auction of coal mines to private parties for commercial use by approving the relevant methodology. The key reform will virtually upend the Coal Mines (Nationalisation) Act, 1973, (CMNA) which has kept the sector largely a preserve of public-sector monolith Coal India (CIL). The CCEA decision will pave the way for global mining giants such as BHP Billiton, Rio Tinto and Glencore to invest in India’s coal mining sector, apart from local/homegrown players like Vedanta, Adani Group, Tata, GMR and JSPL
Despite the increasing share of non-fossil fuels in India’s energy mix, the market for coal is projected to grow at a solid pace for several more years as this high-emitting fuel will continue to be the mainstay for the country’s power generation. Also, coal exports are a potentially lucrative business for India. Recent years have seen other state-run entities too establishing a presence in commercial coal mining and a jump in captive coal production (thanks to a 1993 amendment to CMNA) by a veritable cross-section of industries, public and private, but only commercial coal mining by the private sector was to bring a transformative change in the sector. While a CMNA amendment to de-nationalise coal mining is yet to materialise, the legal route for commercial coal mining by private companies was cleared by the Narendra Modi government in March 2015, with the Coal Mines (Special Provisions) Act.
According to coal minister Piyush Goyal, under the methodology cleared by the CCEA, coal mines will be transferred to the private sector through forward auctions;
the company that quotes the highest commission (`/tonne) to state governments will win the blocks. The move, the minister said, would be economically beneficial to coal-bearing eastern Indian states such as Bihar, Jharkhand, West Bengal and Odisha as all royalties would be passed on to the state governments. When asked how the
decision would affect CIL and its arms, the minister said the PSU would become more competent as “greater competition would lead to improved efficiency”.
Speaking to a TV channel, former CIL chairman Partha Bhattacharya welcomed the CCEA decision. He expressed the hope that revenue maximisation would not be the auction’s objective, adding that the terms would be such that there is a premium on competence in commercial coal mining. Bhattacharya also stressed on the coal blocks to be auctioned to be of commercially viable sizes, say of 1.5-2 billion tonnes reserves so that 40-50 million tonnes (mt) could potentially be produced from each block annually.
India is estimated have coal reserves of up to 300 billion tonnes; the country produced 652 mt of coal in 2016-17: 554 mt by CIL, 62 mt by Singareni Collieries and the balance by captive coal producers. The country has set a target to increase coal production to 1,500 mt by 2022. After the Supreme Court, in 2014, cancelled 204 coal mines (barring 10 blocks with cumulative geological reserve of 5,418 mt) that were allocated to government and private companies since 1993, 84 mines (53 PSU allotment, 31 auction) have been reallocated for captive consumption to the power and non-regulated (steel, cement, fertilisers) sectors under the Coal Mines (Special Provisions) Act, 2015. These included coal blocks with extractable reserves of more than 8,500 mt.
Among these, 15 operational blocks had produced about 38 mt of coal in FY17, but, owing to lack of environmental clearances and other regulatory issues, others are getting operational at a very slow speed. A recent study published by CIL estimated that captive/commercial coal blocks may contribute 90-170 mt per annum by FY20.
Even though domestic coal production has improved in recent years, the rising demand for the fuel had led to a surge in coal imports — shipments peaked at 212 mt in 2014-15 but fell to 191 mt last financial year.
Currently, several power plants are facing acute coal shortage partly because of transportation bottlenecks. About 18,700 MW of thermal power capacity across the country does not have regular fuel supply agreements with CIL. Kameswara Rao, partner at PwC, said that once the CCEA decision is implemented and private players get into production of coal for sales, owners of distressed power assets won’t have to worry about uncertain fuel supplies. “On a broader note, we will see consolidation in the power sector and rise of large vertically-integrated energy companies with interests in coal mining, power generation, transmission and distribution and retail supply,” Rao said.
A discussion paper released by the coal ministry in 2017 had said that though commercial miners would have full flexibility to decide pricing and selling strategies, the revenue to be shared with the states will be linked to CIL’s price.The discussion paper also proposed to bar mining in forest areas. The NITI Aayog, in its “Three Year Action Agenda” for FY18-FY20 released in August 2017, had said that to cut import dependency, 25% of the untapped 5,100 sq km coal bearing area will have to be explored by 2019. According to industry sources, non-regulated sectors such as cement and steel, which were facing problems as coal is in short supply, are likely to dominate the initial auction. Vanita Varghava, partner at Khaitan & Co, said the opening of auction for private companies will provide a level playing field to them and reduce ambiguity and bring about transparency in the process.