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Sense & nonsense in coal auction: Jindal's mine at Rs 108/tn, Birla's at Rs 3,502

The success of the ongoing coal block auctions should not blind the government to the reality that the sector is far from being reformed. The very fact that Naveen Jindal got Gare Palma-IV (2&3) for Rs 108 a tonne while Hindalco won Gare Palma-IV (5) in Chhattisgarh at Rs 3,502 a tonne tells us that something is wrong.

This is what it may be; the policy of earmarking coal blocks for specific purposes, or the captive mining policy. There is absolutely no commercial sense in selling coal blocks based on who is going to use them. This is the surest way to kill the emergence of a domestic coal market and sensible, market-driven energy pricing that will optimise not just coal use, but all energy resources.

Just as beauty lies in the eye of the beholder, the same mine could have different values for different companies and users. A power company may want to pay less for coal than a metals company or a domestic user of chulhas. By earmarking mines for specific uses the government is essentially sanctioning wastage and inefficiency as each mine will have only a limited number of bidders at auctions, and those who get coal cheap will use it for the lowest value-added product or service.

 Sense & nonsense in coal auction: Jindals mine at Rs 108/tn, Birlas at Rs 3,502

Representational image. Reuters image

Coal is coal: it has varied uses and so every coal miner should be allowed to be a merchant mine. He should have the option of either using the stuff himself or sell it to someone else after mining.

Here are five reasons why future auctions should offer coal blocks to anyone who wants to mine them, and not just to captive consumers.

First, it will improve mining efficiency. Mining is a separate business from power or cement production. An efficient power producer should not be forced to become a miner - or vice versa. A power producer's main job is to produce power at lowest cost and service his end-consumers. If he also has to mine his coal, he will either be an inefficient (or sub-optimal) miner or an inefficient power producer, or both.

NTPC Chairman Arup Roy Choudhury, a public sector producer, made his unhappiness over captive mining plain in an interview to The Economic Times some time ago: “I am not happy at all. I am terribly unhappy that I have been made a miner from being a power generator. Mining is not my core competence. It is out of compulsion that I am getting into coal mining.”

Auctions based on captive consumption will make people diversify beyond their areas of competence. Not something to wish for.

Second, captive mining distorts the coal market. A coal consumer should be agnostic to the source of his coal, as long as he has assured supplies at reasonable prices, and where he can enter into long-term contracts that give him supply stability. An efficient coal market should essentially have only two prices - a spot market price, and a contractual long-term supply price, which is also linked to current market prices. A captive mines policy will ensure that there will be as many prices as there are consumers or producers.

Third, captive mining is an open invitation to corruption and cronyism even with auctions. Reason: there will be times when a cement company will find selling coal more profitable than selling cement. This means those who have won captive mines will want to make additional profits by selling coal in addition to cement or power. Can anyone bet that they will not do so? Especially when state-level officials may be more than willing to let them do so for a small bribe?

Fourth, as a depleting natural resource that needs to be mined sensibly and with the least damage to the environment, coal needs a regulator. But how effective will she be if she has to supervise different kinds of producers using coal for different purposes at different costs and prices? Will she announce different rules for various sectors? A mine that was bought for Rs 108 a tonne will be in a far better position to comply with costly environmental regulations than one that was bought for Rs 3,502 a tonne. Who will be in a better position to comply? Then again, the purpose of a regulator is to ensure that monopolies (local or national) are not abused to dupe the consumer. How will she ensure this if every miner is in a separate kind of business?

Fifth, no sensible energy policy can be drawn up if coal is going to be governed by different rules and prices for different consumers. In the ultimate analysis, a coal user could potentially be a diesel user or a gas user or a solar/wind energy user. Which source of energy will be optimum for him will depend on how energy prices are going to be determined. If coal is going to be sold at different prices for power and cement, it will become impossible to price renewable sources of power efficiently. What will be the benchmark for a solar subsidy, the price at which steel users buy power or the price at which power plants do so?

The ultimate aim of an energy policy is to allow the market to work so that all energy prices gravitate towards the same mean, with adjustments for other factors like ease of transport, distance from ports, speed of project execution, the price consumers are willing to pay for the end-product, environmental regulations, etc.

The ongoing coal auctions are better than the system we had in the past, where arbitrariness ruled the roost. Going forward, the policy of captive mining needs to end. The purpose of policy should be to open up energy markets, not close them down by giving consumers monopoly consumption rights in the form of captive mining leases.

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Updated Date: Feb 20, 2015 11:26:13 IST