India is blessed with 100 billion tonne of coal reserves. Nearly 67% of power produced in India comes from coal-based power plants. Yet, 600 million people were plunged into darkness last month. Power plants struggle to produce enough electricity because coal is not being mined at the rate it should be. With the coal block allocation coming under the central auditor?s scanner and, currently, in the eye of a political storm, more uncertain times lie ahead for power producers who bid for projects, banking on India?s coal production being ramped up. To overcome these challenges, more flexibility, less red tape and more incentives ? whether stick or carrot ? are required, James O?Connell, senior managing editor, Platts Coal Report, tells Viraj Nair and Debabrata Das at an interview prior to the start of the Platts Coal Forum 2012. Edited Excerpts:
India has vast coal resources, yet there are shortages at power plants. Moreover, there is a lot of interest in coal blocks. What?s the best price determination model for coal blocks in the country, especially in the wake of the so-called coalgate issue?
The current system definitely needs a review, because a number of coal blocks have been allocated, but very few are actually operational. Not only that, the ultra mega power projects (UMPP) that were won in tenders several years ago are still not up and running. In relation to allocation of coal blocks ? if they want to maintain the current ownership status quo ? they should introduce date of completion or date of launch.
There is also an issue with tariffs, which are a major obstacle in getting power plants operational. Coal prices have doubled or more since the awarding of the tenders. I would call for a complete overhaul of the tariff system. India has an incredible amount of coal reserves. It?s time to get it out of the ground.
Should foreign players be allowed to bid for coal blocks?
These companies would bring the expertise of operating in different environments. India is fairly unique in the sense that it has the largest miner in the world ? Coal India which produces half a billion tonne of coal a year ? but the flipside is that production has stalled because of bureaucracy and red tape. There are a couple of issues that are highlighted right now, the coalgate scandal and the blackout of a few weeks ago. Things are coming to a head.
Coal India or the government needs to take a serious look at the pros and cons of bringing in those with experience and potentially the pros and cons of splitting up Coal India into more manageable companies. The miner could definitely be a leaner machine and probably more effective in terms of production growth, if there was an element of reform.
Considering India has such vast resources, is there a need to import coal?
The reason India needs to import is that Coal India?s production growth has been flat for a number of years ? it has hit a glass ceiling in terms of production. There are also problems with the distribution network, reflecting a lack of rail infrastructure. You either reform the rail or the national grid. But a plan needs to be established to either reform both, or have a strategic decision committee to set priorities. At the moment, the rail network is inadequate. It?s extremely important to make sure there is sufficient electricity to power economic growth. India is still going to need to import high quality coal from South Africa or elsewhere. The quality of Indian coal is reasonable, comparable to standard Indonesian coal, so India will need to import higher quality coal to blend with its own.
Globally, coal prices are weak. How long do you think the depression in the coal markets will continue?
Experts are saying there are two components to international coal prices ? the price of coal and the price of freight. There is a general acknowledgement in the freight industry that it will remain depressed for another two to three years. What?s influencing coal prices is pure supply-demand. The US is looking to ramp up coal exports, which are already at a 20-year high. The likes of India and China will benefit, as the US increases exports to major markets in Asia. Columbia, South Africa and Indonesia are also looking to sell a lot of coal. Since everybody is competing for the same markets, costs favour the buyers. In the last twelve months, the market has turned from a seller?s market to a buyer?s market.