Hyderabad: The Narendra Modi government inherited a troubled energy sector and took many positive steps over the last six years in each of the energy verticals. Breaking the half-a-century old monopoly of the State sector in commercial coal mining has been the most significant of them all.
However, the country may still be many reforms away to see a market economy working seamlessly in the coal sector, thereby offering user industries - including coal-power, steel, cement etc - level playing field and desired cost-advantage.
Fresh Anomalies
Problems are many. To begin with, while resolving pending issues in the coal and coal-power sector; the Modi government created fresh anomalies and was not in a mood to correct those mistakes, anticipatedly to avoid political glare.
The hurried captive block auction following deallocation of 204 captive blocks by the Supreme Court in September 2014 – is a case in point.
Captive mining was a compromised policy and was the source of many ills. Successive governments beginning with PV Narasimha Rao pushed it because they couldn’t afford the political risk of ending the monopoly of Coal India (CIL) and its peer Singareni Collieries (SCCL).
Deallocation offered a godsend opportunity to set things right. The government was aware of it, as they passed Coal Mines (Special Provisions) Ordinance in October 2014, paving way for private sector entry in commercial mining.
However, instead of going for a full-fledged reform, they reintroduced captive mining through auction of deallocated blocks in 2015. This is either to pacify nerves of the industry that was anticipating scarcity of fuel or to score quick political points or both.
The captive policy failed. Leaving aside the light year gap between actual and projected revenue flow to States and slow production growth; there is a difference in end-use restriction within the 10-odd tranches of auctions that took place between 2015 and 2019.
Captive auctions are now suspended. Beginning 2020, all blocks will be auctioned without any end-use restriction. However, the government didn’t offer any exit route to the existing captive lease holders.
Reform for Complication?
It means, India will continue to have two parallel systems of captive and commercial mining. And, within the captive segment, different mines will operate under different end-use rules – some can sell part production to market, others cannot.
From the market perspective, therefore, the situation is a little more complicated than it was, before deallocation. Such complications lead to distortions in the user industry segments.
Think of an electricity generator, say ‘A’, which had won captive assets with 100 percent end-use restriction, in the first round of bidding, in 2015. Due to intense competition, successful bidders offered high revenue-share to the government in the first round.
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Now compare this with another generator, ‘B’, who acquired mines in the last round in 2019 when competition was less intense and the government allowed sale of 25 percent coal to the open market.
In the prevailing demand-supply gap, B will have a more sustainable mining operation and can use revenues from open market sales to cross-subsidise electricity cost. Since electricity is sold on the grid at least cost basis, B will have greater grip over the market.
Now both A and B will face another competitor, who will not invest in mine and will get fuel from a commercial miner at market price. His cost of electricity will be different from A and B. The end sufferer will be banks, who lent to all three.
Slow impact
India needs drastic reduction in production cost, if it wants to encourage domestic manufacturing. Considering coal meets over 80 percent of primary energy needs of the nation, entry of private miners is a crucial step in this direction.
Behind the tall promises of energizing the nation; CIL used protection to breed inefficiency and reaped every benefit of the demand-supply gap. Government being the owner had been a partner in crime.
In 2019-20, the production cost of CIL was Rs 1,146 per tonne. Barely 30-40 per cent of the production came from 2.7 lakh employees. The rest are outsourced at a fraction of cost, meaning India is sacrificing its growth prospects to pamper a lethargic workforce.
The price of this inefficiency is paid by end users. In 2019-20, CIL sold 582 million tonne (mt) of fuel, of which 89 percent was sold through long term contracts (FSA) at an average price of Rs 1400 per tonne. Roughly 80 percent of FSAs are directed to the power sector.
Other sectors - like steel, cement - largely depend on imports or buy fuel from open market sales (e-auction), at exorbitantly high price of Rs 2,200 per tonne (FY20). Whatever little FSA sales take place to steel, cement etc are priced 20 per cent higher than power.
The availability of fuel whether in FSA or in the open market is not assured. CIL can choke the supply to sectors other than power, at free will. This is purely a seller’s market and the supply gap serves CIL’s interests.
This cycle will now be dented. The ongoing auction of 41 blocks in the commercial segment should primarily dent into CIL’s e-auction revenue, which is a significant contributor to profits, apart from ensuring supply of quality fuel.
Limited impact
However, the pace or quantum of such impacts will be too little to improve the nation’s cost efficiency, unless the government considers more reforms.
Developing a mine is a long-term business, more so in India where all-important land is a State subject. More than half the total reserves currently under the hammer are in Odisha, where not a single captive mine came up in the pre-deallocation regime, due to land hurdles.
It would be safe to assume that production from new commercial mines will not exceed 50 mt in five years. The government could have given the whole process a headstart by including the existing captive mines, producing roughly 60 mt, into commercial regime.
According to a recent ICRA study, the auctioned captive mines are producing at barely 25 per cent of their rated capacity. Right policy environment will see these mines ramping up quickly and impacting the open market prices.
Together with the new blocks, the segment will have a sizable capacity too soon thereby improving both the availability as well as reducing imports and open market prices to a bigger extent.
(Pratim Ranjan Bose is a Kolkata-based senior business journalist. Views expressed above are personal.)
