Urgent need to overhaul coal mining policy

The Indian economy is growing at a fast pace. That calls for a commensurate increase in electricity consumption. But a stumbling domestic coal sector threatens to derail the power sector growth.

India will have to overhaul its coal mining policy if it is to ensure its long-term energy security and maintain economic growth momentum. While major reform measures like delicensing of power generation and electricity trading have been introduced in the power sector during the past two decades, required reforms have not happened in the coal sector. The result is that domestic coal production has started stagnating, which in turn poses a serious threat to the growth of the power sector and also to overall economic growth.

The government has proposed to set up an independent regulator for the coal sector. However, not much has happened in this regard. Similarly, proposed reforms for beginning auctioning of captive coal blocks and allowing commercial mining under the captive policy are yet to be implemented.

“There is an urgent need for implementing proposed reforms in the coal sector,” RV Shahi, a former Union power secretary said.

Normally, it takes five-six years to start coal production from a new mine. The developer has to conduct studies, acquire land and secure forest and environment clearances before it can undertake development to commence production. After all physical and statutory clearances are in place, development work can be completed in a year’s time.

The ministry of environment and forests’ (MoEF) growing activism on environmental issues in recent years has made coal mining more difficult. As a result, Coal India Ltd, which meets about 80% of the power sector’s coal requirement, reported zero growth in 2010-11.

Environmental hurdles are also leading to a delay in coal production from captive mines, nullifying the very idea of allocating captive coal blocks to help power project developers meet their fuel requirements on an assured basis.

The coal ministry has cancelled allocation of five captive mines to NTPC due to delay in development work. But NTPC says the delay is because of difficulty in getting statutory clearances, for which it is not responsible. The central utility has envisioned meeting 20% of its coal requirement from captive mines. Its coal sourcing matrix will go haywire if the company finally loses these blocks.

The big question is: Should a power project developer lose its captive coal block if work on the mining project is slow because of difficulty in securing environmental and forest clearances?

“The impact of delay in clearances for coal mining projects will be seriously felt three-four years down the line,” Shahi said.

Meeting the limited gap in domestic coal supply through imports is not a bad idea. However, the scene becomes alarming when imports rise not because of shortage of domestic coal reserves but due to growing environmental hurdles to mining. That is what is happening in India. That poses a serious fuel risk to the domestic power sector.

The government has made mandatory tariff bidding for allocation for power projects. Under this regime, developers quote a fixed fuel price. In case of any disruption in coal supply from the basic source, their calculations would go awry. The continuing coal shortage poses serious risks to investments made in such projects.

Indonesia, a key coal exporter to India, has recently switched to a new coal pricing methodology based on international indices. As a result of the new pricing formula, the price of Indonesian coal will go up by $30 a tonne and lead to a R0.70 per unit increase in cost of electricity generation, according to industry experts. Until recently, Indonesian coal producers had the freedom to sell their coal at their own price.

Indian power project developers are importing about 40 million tonnes of coal from the Southeast Asian country. As a result, private power companies like Tata Power and Reliance Power, which are sourcing Indonesian coal under long-term contracts to meet fuel requirements of their projects bagged through tariff bidding, are likely to take a hit on their profits. Under the bidding regime, developers cannot pass on increase in fuel costs to electricity buyers.