Inside India’s coal industry, part 2: Govt gears up to ramp up mining but renewables push may render business tricky
Coal India wants to ramp up production. But it is also looking to chart a new roadmap because the sector is at a cross roads. It must find alternative uses for its coal as demand from the power sector wanes
Editor's note: Travelling across some of the coal belts in India, Shantanu Guha Ray, in a two-part series, looks at the insurmountable crisis facing the coal sector. This is the second part in the series.
Troubled by mounting criticism that bottlenecks and red tape delay supply of coal in India, the government is trying to evolve an unique strategy to boost production, improve efficiencies and sell this dry fuel in the open market.
At the heart of this effort is a move to push commercial mining of coal in India, a country with 309 billion tonnes of resource identified so far spread over approximately 14,000 sq km. Stakeholders, claim those in the know in the coal ministry, have already sent in their recommendations to an approach paper offered by the NDA government in March 2017.
The idea is to auction large coal mines to private mining companies with freedom to sell and no restriction on end use, a deviation from the previous rule which forced companies to use coal mined from captive mines for use in their plants, be it power, steel, cement or aluminium.
The ministry, it is learnt, even wants to support an online platform to electronically track coal trade across the country every day. The ostensible objective is to make the process of coal sale and purchase transparent and ease the process of doing business for both Indian and multinational companies under a well-defined market framework.
“Commercial mining of coal, having been turned into a law by Parliament, will be a path-breaking move, and will usher in a regime of efficient mining with induction of much-needed capital, technology and new skill sets and help develop a vibrant domestic coal market,” says Prabir Niyogi, head of the Ficci Committee on Power.
A lot of coal deposits remain unexplored, claims Niyogi, Chief Executive, Corporate Affairs, RP-Sanjeev Goenka group of companies. Out of 309 billion tonnes of identified resource, only 138 billion tonnes are classified as “proved”. The balance 171 billion tonnes are grouped under “indicated” and “inferred” categories, signifying that detailed exploration to confirm such resource into mineable category is a tall task that the government cannot do it alone.
“Herein lies the opportunity to invite private companies with specialised exploration skills to take part in India’s coal story and help develop the coal sector befitting a growing economy,” adds Niyogi.
Market observers say the government must push the proposal hard, keeping in mind growing pressures from companies on state-owned Coal India Ltd (CIL) for supply of the fuel.
In the offices of the coal ministry, located in the heart of Lutyens Delhi, representatives of private power, steel, and aluminium producers have been making regular presentations to explain their helplessness with coal supplies.
Their grievances are being met with stoic silence from bureaucrats who, in turn, are explaining their side of the story, including how the scenario has changed post the coal block de-allocations of 2014. And how, there’s little one can do about it.
The allocations had happened over the two decades between 1993 and 2008 when the government decided to allocate captive coal blocks to investors committing thousands of crores to create power, steel, cement and aluminium plants.
The blocks to be offered were either not economically attractive for mining to CIL or not part of its development plans; to make matters worse, bulk of the blocks were located in the interiors of mineral rich belts of Jharkhand, Odisha and Chhattisgarh, virtually inaccessible from nearest towns.
A few companies acquired the blocks and invested thousands of crores to set up pit-head-based plants and the associated infrastructure, including access roads and rail links to and from the mines. Interestingly, the region around these coal blocks flourished as a host of companies set up operations in the vicinity. But following the alleged loss of Rs 1.86 lakh crore of revenue to the exchequer raked up by the Comptroller and Auditor General of India (CAG), the Supreme Court termed all these allocations illegal and arbitrary, ordering their de-allocation in 2014. An additional levy of Rs 295 per tonne of coal mined since the date of commencement of production came as an additional burden on the few companies that were successful in converting the coal blocks into operational mines after years of hard work. None of the captive coal block allottees were heard by the apex court before passing the judgment.
The government is keen to beef up coal production and solve routine supply and demand problems but is grappling with finding an effective solution. The once publicised coal swapping mechanism, to smoothen the coal movement from pit head to plants, continues to remain on paper.
The NITI Aayog has already recommended, in the draft of a new National Energy Policy, that the seven units of CIL be split into independent companies to make them more competitive. The idea, said the think tank, was to make seven subsidiaries of CIL independent companies and allow them to compete against one another in an open coal market. The splitting up of CIL and radically altering the method of allocating coal blocks are measures aimed at introducing transparency of coal pricing under competition while increasing production, reducing costs and improving the economies of scale riding on the crest of efficient mining practices. In its recently published India Action Plan in August 2017 that looks at revitalising the economy across all industrial sectors, NITI Aayog has taken up the cause of commercial coal mining in order to bring in specialised skills and push the frontiers of efficiency.
“The coal business has always been tricky in India but there were some rays of hope when the auctions took place. But eventually, the coal block de-allocation was the first trigger for the current crisis,” says energy expert and author Gautam Banerjee.
Banerjee, who once operated out of the coal belt of Durgapur-Asansol in Bengal, said it is important for analysts to look into what the CAG said in its report. The CAG never said that there was any scam – let alone the imaginary figure of Rs 1.86 lakh crore. What the CAG said was that the national exchequer could have accrued a part of the gains made by captive coal block allottees if these captive coal blocks were auctioned. Secondly, what CAG calculated was on the net margin CIL made on per tonne of coal sold in 2010-11. This figure came to Rs 295 per tonne. There was no consideration made to look at any previous year, when the price of coal was much lower. There have been occasions when CIL made losses on every tonne of coal produced.
“By imposing a uniform penalty of Rs 295 per tonne of coal mined from the inception of captive mining, without reference to the cost of the mining and quality of coal, the court has in effect imposed an inequitable retrospective tax,” wrote former Coal Secretary PC Parakh in his book, The Coal Conundrum.
The NDA government, which swept to power in 2014, announced in fresh auctions in 2015 of coal blocks, which were de-allocated by the Supreme Court. The first two rounds were hyped to be a big success, and are tipped to have raised over Rs 3 lakh crore for the national and state exchequer. After the coal-hungry bidders realised the grave mistake of aggressive, if not irrational, bidding in first two rounds, the third round was tepid. Raising a big question mark on viability of auctions. The fourth and fifth rounds of coal block auctions were terminated for want of minimum bidders. Tepid industrial demand in a slowing economy did not help the cause either. “Coal auctions have been an unfound solution, raising the question if they are an unsound solution”, said Captain Ehsaan Khalid, a socio-economic expert.
Parakh, against whom the CBI has registered a case in coal block allocation, says “only five of the 31 mines auctioned by the government in 2015 have resumed production". "What a waste of a national resource when the country is facing serious coal shortage,” he says. From 2015-16, captive coal production from the de-allocated blocks that came up for auctions has seen a sharp fall with most mines – that were buzzing with activity until 2014 and bringing prosperity to the neighboring society remain shut.
Such is the crisis in the coal sector that no one in India wants to look at the fuel as a possible source of investment. Worse still, the present cash inflows to the sector - claimed PricewaterhouseCoopers in a report for the Indian Chamber of Commerce (ICC) - are simply not sufficient. “Industry players may face challenges in securing the required funding for the project. In the last few years, more funds have been raised through non-traditional instruments such as bonds. Presently, the country’s spending on exploration is low as compared to major mining countries,” it said.
But the demand for coal is increasing in India, the world’s third-largest carbon emitter that relies on coal-fired power plants to produce most of its energy for its 1.3 billion plus population. The Indian coal industry aspires to reach the 1.5 billion tonne mark by 2020.
“India’s energy efficiency is on a high but so is demand for coal,” says Ajay Mathur, director of The Energy and Research Institute (TERI) in New Delhi. He feels India could be looking at peak coal within the next five to 12 years.
Mathur says companies in the business need to develop pipelines to ferry coal from the mines to their plants, else issues of transportation will continue to plague the plants and impact production cycles. “Some companies have developed such pipelines but the rest have not,” says Mathur. Market observers say companies in the power generation business are not keen to make heavy investment in pipelines because such investments pay back over a very long period and worse, there is a huge push in India for renewable and alternative sources of energy.
“Their fears are not out of place,” says Roopen Roy, one of India’s foremost consultants and head of Kolkata-based Sumantrana, a high-end advisory firm.
Roy, a former Deloitte India head, says coal, eventually, will not be the ultimate answer for India’s power problems. “The time is not far when this great demand for ever more coal will end. I can see technology-driven changes happening faster and India’s future demand slowly turning flat,” says Roy.
He says in the last two years, coal consumption has slowed to its lowest level in two decades despite the economy growing at a 7 percent annual pace. Thermal power plants have been running below full capacity for years and as of June 2017, the plants were operating at only 57 percent of the total capacity, the lowest level ever. The rate of increase in coal consumption in India is now the slowest it’s seen since 2000 with the decade’s average of 6 percent, argues Roy. He says there is fast progress in adding renewable energy capacity and new measures to improve energy efficiency.
“India’s coal consumption will peak within the next decade and a half and then slow down,” says Roy. The International Energy Agency, however, says India’s coal consumption will climb by 4-5 percent a year through 2030.
Some efforts have also started to introduce efficient burning of coal and make it more environment-friendly. Power plants have started using washed coal before burning it. New plants are using super-critical technology which raises efficiency of the coal burned while reducing pollution.
India’s renewable energy generating capacity is expanding by 20 GW a year, toward a goal of 175 GW by 2022. Ray says this could cut annual growth in coal demand further down to as little as 2.5 percent.
Kolkata-based CIL wants to ramp up production, and is also looking to chart a new roadmap. Recently, it hired KPMG to design a future growth strategy beyond 2030. Interestingly, the tender document says “the coal sector is at a cross-roads, while it has performed well in the last several years, the potential for performance of the sector needs to be assessed in light of multiple changes in the energy sector”.
Even former CIL chairman Partha Bhattacharyya was recently quoted at an energy workshop in Singapore that CIL must find alternative uses for its coal as demand from the power sector wanes. Bhattacharya noted how China is using coal to make fertilizers and methanol, and South Africa is using coal to make oil and chemicals.
(Click here for first part of the series.)
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