Open the coal seams, totally

Domestic coal production has stagnated over the last two years while power generation capacity has been growing at a healthy pace of 15% per annum

In recent weeks, the Union power ministry has been furiously lobbying with the coal ministry and other sections of the government to ease electricity producers’ woes. The latter complain that coal supplies are not sufficient to meet their minimum commitments to power distribution companies. As a result, they will lose a lot of money. The power ministry is knocking on the right doors: coal ministry oversees the functioning of public sector Coal India Limited (CIL) which accounts for 80% domestic production of the black stuff. More importantly, it is the only domestic producer allowed to sell coal in the open market. The alarm bells, however, have gone off rather late. Domestic coal production has stagnated over the last two years while power generation capacity has been growing at a healthy pace of 15% per annum.

Coal India is quick to blame the situation on a new set of environment norms, the Comprehensive Environment Pollution Index. While this has canned several mining projects in the planning stage and led to closure of a few existing ones, it offers a shallow excuse. A new mine takes four-five years to develop; but then, the brakes were applied only last year.

To add to this, the near-monopoly supplier sells 10% of its output on a spot basis. The “e-auction” fetches it 80% more than what it gets from long-term deals. That offers a clue to another aspect of the problem—Coal India is forced by the government to sell coal at prices half that prevailing in the international markets. As much as it explains the lure for power producers to secure supply from CIL, it is also responsible for depriving CIL funds to aggressively mine coal. The rising global coal prices have offered some succour—early this year, CIL raised prices by a whopping 18%.

In this backdrop, while going about alleviating the power producer’s woes, the government must make a distinction between supply constraint and price constraint. Coal India has not signed a single supply deal since 2009 on the grounds that it cannot secure supplies beyond 50% of the contract—beyond this trigger, it will not pay any damages in case of short supply. Power producers have meanwhile gone ahead and signed up power deals where minimum commitments are no less than 85%.

Intervention to the point of facilitating supplies is fine. No more. The larger initiative should be that of opening up the coal mining business to private participation in a manner that allows marketing and pricing freedom.