By Armin Rosencranz, Rajnish Wadehra and Aditya Vora

Coal in India is primarily a public sector industry, with a few private coal mines. India’s power generation capacity totals 305 gigawatts (GW). Coal based thermal power plants produce 185GW, and consume 76 per cent of total coal available in the country. The power sector thus has a disproportionate impact on future coal demand.

Stagnation in the Coal Industry

The coal industry is mired in controversies and contradictions. Coal India Ltd, the country’s public sector coal-producing monopoly, has stagnated, with its output hovering between 370 to 450 million tonnes from 2007 till 2013. Meanwhile, lucrative coal-bearing mines were allotted as coal blocks to private users. However, a majority of these coal blocks never produced anything.

All coal block allocations, riddled with corruption, were annulled by the Supreme Court in 2014, and fresh allotments have been made since under the Coal Mines (Nationalisation) Amendment Act of 2014.

Given India’s large coal reserves, Coal India Ltd. acquired fresh mines and obtained speedy environment clearances in the past two years. In this short time, India’s coal production has increased rapidly to 550 million tonnes. But at this production level, all its coal is not being sold: the demand is scarce because of a depressed economic and industrial climate.

India's coal production increased rapidly in the past two years as Coal India Ltd. was allotted fresh mines.

India’s coal production increased rapidly in the past two years as Coal India Ltd. acquired fresh mines. | Photo Courtesy: Pixabay

Imports of coal were placed under the open general license and made duty-free six years ago, when domestic coal production was stagnating. India began importing 160 to 185 million tonnes of coal annually. One would expect imports to dwindle down, now that domestic output has increased. But surprisingly, imports continue to soar. In 2014-15 about 200 million tonnes were imported as per official figures. This doesn’t tally with figures released by international sources, which indicate that the total quantity of coal imported by India in 2014-15 was 260 million tonnes. Again in 2015-16, officially 160 million tonnes were imported. However, MJunction Services Ltd, India’s leading coal auction portal, has placed the figure at 181 million tonnes. While Coal India has been facing trouble selling its cheaper coal in today’s depressed market, expensive imports continue unabated.

The government could impose a duty or an environment cess on imports but has not done so. The lobby that works to drive coal imports artificially high is strong and entrenched in the government, representing public and private companies that own large power plants and coal mines – overseas as well as domestically. One of the drivers might also be the advantage of transfer pricing which could lead to transfer of profits overseas, as duty-free coal imports provide a huge opportunity for players to over-value their imports and send foreign exchange out of India freely.

The Link Between Coal and Power

Power producers using imported coal benefit by being permitted to charge a higher tariff for the power they generate.

Consider another double-edged benefit, which is that coal costs are allowed as a ‘pass-through’ while administering prices for power. This means that increases in actual cost of coal are allowed by regulators to be used to increase the price of thermal power sold by power generating companies to distribution companies (discoms). Therefore, power producers using imported coal benefit by being permitted to charge a higher tariff for the power they generate. Those that gain are central and state government-owned public sector or joint venture power plants along with many private power producers. Long term power purchase agreements signed with state-owned discoms bring in extra money as higher coal costs are allowed to pass through and raise power prices. Domestic consumers end up being burdened unfairly to pay higher prices for electricity while the importers make large profits.

Power plants that don’t have long-term power selling agreements are having a hard time selling spot power, as these prices have fallen drastically. All India’s power plants put together are running at about 60% capacity — 10% lower than they were last year. Those private plants that survived on spot sales have already gone under, defaulting on loans. Many have been sold and there seem to be more on the way. State owned discoms that fail to pass on higher costs to their consumers continue to accumulate huge losses. Poor health of this industry is the primary reason why there are few private investors ready to set up new units to generate power or to privatize the ailing distribution sector.

With power prices depressed, Coal India’s predicament has been that its increased coal output is not selling and stocks are piling up at pit heads. But surprisingly, the government has not  lowered its prices of coal. On the contrary, the government decided to raise its prices a few months ago. Lowering coal prices would have lowered not just domestic tariffs, but also prices of industrial and consumer goods, as power is a large input in all manufacturing. This would certainly have given the economy a much-needed boost.

The dilemma is that Coal India's output has increased but its stocks are piling up.

The dilemma is that Coal India’s output has increased but its stocks are piling up. | Photo Courtesy: Pixabay

Coal India has linkages or committed fuel supply agreements with most large power plants which must purchase this coal at Coal India’s price. Almost 90% of Coal India’s coal is sold through these agreements. The rest is sold by e-auctions under the government’s orders to whoever wishes to bid for these. E-auctions used to yield prices 40% more than Coal India’s allotment prices till recently, but now the difference has narrowed down to barely 10 percent. This means that Coal India Ltd. saw its chance and has succeeded in mopping up whatever premium it could from the market, even though profit maximisation is not what the Coal Mines Nationalisation Act expressly nationalised Indian coal mines for.

It is well-known that the government is anxious to sell another 10% of Coal India’s slaveholding to private investors. This was floated at the stock exchange in 2010 when the first tranche of about 10 percent of Coal India’s shares were sold.

It has been one of the best performers, consistently paying out high dividends. The government reduced its shareholding further from 89 to 79 percent in early 2015. The issue was oversubscribed.

Strong protests were registered by workers’ unions, but behind-the-doors parleys, facilitated by the support of certain unions affiliated to the ruling party, averted two major nationwide strikes. It is easy to see that the prerogative of meeting its disinvestment targets to balance its budget deficit holds sway for the government over the larger good of the nation while Coal India makes large profits.

Coal India’s “Strategic Relevance” as stated in the Chairman’s note in its Annual Report for 2015-16 is that it, inter alia,

“Commands nearly 74% of the Indian coal market;

Feeds 82 of 86 coal based thermal power plants in India;

Supplies coal at prices discounted to international prices;

Insulates Indian coal consumers against price volatility;

Makes the end user industry globally competitive.”Keller, 2003

Big Plans for Coal India

Tripling the country’s coal output from 550 million to 1.5 billion tonnes by 2020 will far outstrip the carbon reductions that India plans to achieve with its bold solar and renewable energy targets.

While the world shuts its coal mines to contain climate damage, the government has planned Coal India’s output to increase to about 1 billion tonnes by 2020. Private coal blocks have been allotted a target to produce another 1/2 billion tonnes by 2020. In today’s frail economic climate, when the government is delaying further auctions of more coal mines and bids for four new Ultra Mega (Coal) Power Projects, and scant fresh investment in power generation is on the anvil, this is an insanely high target. Tripling the country’s coal output from 550 million to 1.5 billion tonnes by 2020 will far outstrip the carbon reductions that India plans to achieve with its bold solar and renewable energy targets.

India needs to achieve a judicious balance of meeting its growth and energy needs while adhering to its climate goals. It would be wise to curtail its dependence on coal by producing more renewable energy and perhaps more nuclear power.

Armin Rosencranz is a professor of law at Jindal Global University, Sonipat. Rajnish Wadehra is a Research Associate at the Jindal School of Government and Public Policy. Aditya Vora is a student at Jindal Global Law School.

Featured Image Credits: Pexels

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Posted by The Indian Economist