The euphoric rise of the power sector was marred by the coal mining scam, dampening of the general sentiment while painting a bleak picture of the Indian business environment. But, things will not remain as it was since energy is essential for the country. Purnendu Chaubey takes an analytical review on how the things are shaping up beyond Coal Gate.
The growth of any economy and its global competitiveness hinges greatly on the availability of reliable and quality power at affordable prices. India, despite its burgeoning economy faces the arduous task of meeting the ever increasing power demands with the gulf between demand and supply widening. Large capacity additions have been planned in recent times to bridge this gap. the Government of India initially set a very ambitious target of adding 1,00,000 MW during the 12th Plan which was then brought down to 88,000 MW to make this goal realistic and pragmatic. While there have already been efforts to have a diverse portfolio of fuel options in power generation, coal continues to remain the primary source of fuel responsible for more than three quarters of the India electricity needs.
About 70 per cent of India's own coal production of about 600 million tonne is already utilised for power generation. As per the long term assessment made in the Integrated Energy Policy document, the coal demand is likely to rise to 840 million tonne by the end of 12th Plan, 1,430 million tonne by 2027 and to 2,020 million tonne by 2032. There is a wide spread fear that this enhanced requirement of coal would not be met by coal companies due to resources and other constraints.
The recent scam with respect to the allotment of coal blocks that shook the nation and instilled a sense of shock and awe among many onlookers.The euphoric rise of the power sector was marred by the coal mining scam, dampening the general sentiment while painting a bleak picture of the Indian business environment. But, things will not remain as they were since energy is pivotal to the country's success at the global stage . The ambitious goals with respect to the capacity addition faced a stumbling block because of uncertainty surrounding the coal.
The CAG report on Performance Audit of Allocation of Coal Blocks and Augmentation of Coal Production believes that as a result of the delay in introducing competitive bidding process, there has been a loss of Rs 1.86 lakh crore to the Government of India. It has arrived at the estimates based on the average cost of production and average sale price of opencast mines of Coal India (CIL) in the year 2010-11.The CAG in its report names 25 companies including Essar Power, Hindalco, Tata Steel, Tata Power and Jindal Steel and Power which have got the blocks in various states. "A part of this financial gain could have accrued to the national exchequer by operationalising the decision taken years earlier to introduce competitive bidding for allocation of coal blocks," CAG said.
The de-reservation of 48 blocks of coal and allocating them to captive consumers was a move forumated by the Ministry of Coal to increase production but the move did not yield the desired results (till now) since production has not started quite yet in these blocks. In fact, captive coal mining is a mechanism envisaged to encourage private sector participation in coal mining. However, the production of coal from captive mining has not been encouraging instead of the intended 73.00 million tonne from such blocks during 2010-11 only 34.64 million tonne of coal could be produced.
The current status of coal blocks may be illustrated by the following representation:
The Screening Committee recommended the allocation of a coal block by way of minutes of the meeting of Screening Committee. The minutes did not give any evidence of a comparative method that would have been used to allot the coal blocks and did not indicate the methodology used to evaluate each of the applicants. Thus, the method followed was not transparent. Although the concept of competitive bidding for coal blocks was first introduced on June 28, 2004, the exact procedure to be followed for competitive bidding is yet to be finalised.
The auditing body said it is "of the strong opinion that there is a need for a strict regulatory and monitoring mechanism to ensure that benefist of cheaper coal is passed on to consumers".
The CAG recommended that:
The industry players who secured coal blocks were from varied backgrounds—including those with no track record in power generation or even manufacturing. Yet, they managed to secure coal blocks against proposed projects.
- There should be an empowered group along the lines of Foreign Investment Promotion Board as a single-window mechanism with representatives of Central and state government ministries to grant the requisite clearances such as mining lease, mining plan, forest clearance, environment management plan and land acquisition for accelerating the procedures to commence of production.
- The Ministry of Coal should evolve a system of giving incentives to encourage production performance from captive coal blocks and disincentives to discourage non-performance and should work out the modalities of competitive bidding soon.
The route was simple: take the state leadership into ‘confidence’ and they would, in turn, recommend the name for block allocation. A little known Kolkata-based company, for example, promised huge capacities in Chhattisgarh.
It is by way of political connections that certain corporates managed to acquire access to natural resources. The list of consortium members in blocks makes it clear that there are many who do not have any ‘business’ to be there.
The real beneficiaries were big players. A rough assessment shows that a couple of industrial houses, as mentioned by the CAG, bagged a lion’s share of the blocks. The government cannot deny responsibility for awarding blocks free of cost for merchant power generation, thereby helping private players earn a windfall profit. And, we are not talking about coal blocks allotted to firms with power purchase agreements and captive generation plans.
The Ministry of Coal indicated that the process of coal allocation that was being followed has been in place since 1993 and the delays in implementing the allocation of coal blocks using the process of competitive bidding was due to several reasons, some of which are:
• Strong opposition from the coal-rich state governments in arriving at a consensus for following the process of competitive bidding
• The Ministry of Power’s viewpoint that this could lead to enhanced cost of producing electricity which might affect the end customer
• The Department of Legal Affairs arrived at the conclusion that the process can be achieved by administrative instructions and amendment to the Mines and Minerals (Development & Regulation) Act.
• If administrative instructions would have been followed instead of going through the legislative procedure, it would have been undemocratic and contrary to the spirit of the functioning of the federal polity. It has also stated that the allottees were selected on these parameters.
• Techno-economic feasibility of the end use of project
• Status of preparedness in setting up the end use project
• Past track record in execution of project
• Financial and technical capabilities of the applicants
• Recommendations of the state governments and the administrative ministry involved
Government referred that there was an urgent need to step up the coal production and fuel economic growth. And, since CIL was not in a position to cater to the projected demand, policy makers were forced to draw an ‘emergency plan’ to ramp up production. Assets which were yet to figure in the CIL’s development agenda were dished out to captive users.
Eventually, the approach adopted reveals the government’s habit of choosing a path which requires the least approvals and the smallest number of stakeholders. Instead of inviting bids for the blocks in an open and transparent process which would have required a new legislation, the government sought nominations and allocated the blocks by screening companies.
But, why did the government not restrict such allotment only for commercial power generation, ensuring that such electricity would be available to the nation either at a regulated price or through PPA with designated distribution utilities? This simple measure could have ensured that there would be a ‘power for all’ at an affordable price.
Instead captive blocks were granted to steel, cement, merchant power and even downstream industries such as ferroalloys. They pocketed the benefit of getting coal free of cost. Some fly-by-night operators even monetised the benefit by selling their project plans to serious players.
The bottom line: The nation was not only deprived of revenues for allotment but also those that facilitated the required coal production (which was the cornerstone of the argument in favour of such ad hoc distribution of assets free of cost) — and is now paying for the imports.
Cases of cheating and criminal conspiracy were registered by the Central Bureau of Investigation (CBI) against a number of companies, their owners and unknown officials of the Coal Ministry and state government who were supposedly involved in large scale irregularities to get these allotments. The CBI had also examined the past areas of operation of some of the companies which were allotted coal blocks in Jharkhand, Chhattisgarh and Karnataka, alleging some of these firms had been set up only for getting coal blocks allocated and the same was later sublet to other companies at a premium. The government had formed the Inter Ministerial Group (IMG) in July to review the progress of coal blocks allocated to firms for captive use. A total of 58 mines were issued show-cause notices for their failure to develop blocks within the stipulated timeline. The Coal Ministry decided to deallocate a number of coal blocks given to firms, and in some extreme cases they went ahead with the encashment of the bank guarantee.
IMPACT ON POWER SECTOR INADEQUATE COAL SUPPLY
Inadequate coal supplies to power projects under construction could delay India’s power generation plans, thereby derailing the country’s economic growth. Power utilities will require 842 million tonne of coal in the terminal year of the 12th Plan (2016-17) and what is likely to be available is 682 million tonne, which is also an optimistic scenario. The ongoing coal fiasco could derail majority of the 40,760 MW thermal power capacity addition under construction in the private sector.
DECLINE IN EQUIPMENT MANUFACTURING SECTOR
Companies such as Kirloskar Pneumatic, Tractors India, Triveni Turbines and Everest Kanto, which are in segments such as compressors, turbines and cranes, have seen sales de-growth of around 30 per cent. Besides, Larsen & Toubro’s machinery and industrial business, too, reported 17 per cent year-on-year (y-o-y) decline in sales in Q1FY13; while the business of Thermax and industrial business of Crompton Greaves fell 6 per cent y-o-y during the quarter. That’s hardly a surprise, given that India Inc’s capex cycle has virtually come to a standstill and the coal scam has further dented corporate sentiment. In fact, a recent Reserve Bank of India report only further accentuates the point that corporates are no longer bullish about future investments.
Further miring up the outlook for the sector is the ruckus over coal block allocation. While it is too early to comment whether coal blocks allocated to private firms named in the CAG report and/or CBI inquiry get de-allocated, Bhel’s orders worth Rs 104 billion could face delays or even cancellation, and L&T could face a similar plight, with orders worth Rs 31 billion at risk of cancellation.”
Especially, as most of the new thermal projects are coming up amidst the backdrop of a domestic coal shortage, which will take some time to address fully. Further compounding the problem is how to pass on the cost of imported coal, which nearly all developers will need to blend with domestic coal to tide over production constraints, by way of tariffs. In their existing format, the tariff-based competitive bidding and 25-year long-term power purchase agreements do not allow for much leeway. Already newly commissioned projects, where imported coal is part of the feedstock, are stuck one way or the other. Tata Power’s Mundra UMPP is currently before the regulator, with the developer having gone back on the tariff it had bid for bagging the project. Reliance Power shelved work in June last year on its 4,000 MW Krishnapatnam project, citing higher coal costs.
Most analysts concur that till some of these issues are adequately sorted out, interventions by the Centre could still fall short of fully restoring the viability of the power sector, easily the biggest drag on India’s growth story.
The worry then is that if these issues are not addressed adequately, in less than half a decade there could be a situation where a majority of the stakeholders in the power sector would be in the red — be it project developers, banks and financial institutions, transmission firms or even the distribution utilities, the second bailout in less than a decade notwithstanding, according to analysts.
Even as coal remains the mainstay of the sector, it is more or less clear that CIL alone cannot cater to the needs of the sector, especially in the wake of the massive commissioning schedules.
The coal block de-allocations have created uncertainty on how fast these blocks would be re-awarded and on when production would begin. Indian banks have a total exposure of $59.7 billion (7.2 per cent of their loans) to the power sector, according to a recent report by Standard & Poor’s. While the distribution debt recast offers a glimmer of home despite nearly all banks needing to take a haircut, the coal output augmentation still hangs in balance. In the wake of these uncertainties, banks have already started evaluating their exposure to the power sector through stress tests. State Bank of India, the country’s largest public sector bank, is among the banking-sector players with the biggest exposure to the power sector, with outstandings pegged at around Rs 50,000 crore.
Restoring the faith and trust of the investing community through a quick redressal of the issues surrounding the coal fiasco is critical to make the power sector commercially viable. The thrust on power sector reforms and implementation of policy objectives have just begun to bear fruit but have been crippled somewhat due to the mammoth scam. However, sustained long term efforts will be required on the part of all stakeholders like government, judiciary, investigating agencies, manufacturers and suppliers, EPC contractors, financing agencies, utilities, government regulators, and end users to bring it back on the track.
India spends 1.6 lkh cr on coal import in three years
India has incurred an accumulated expenditure of Rs 159,567 crore on import of coal during the last three years, according to minister of state for coal Pratik Prakashbapu Patil
The gap between projected demand and domestic production of coal is estimated to reach around 185 million tones in next five years. According to an assessment by the Working Group for formulation of XII Plan, the projected domestic production is 795 million tones,, Patil said in a written reply in Lok Sabha. He also proposed to secure the supplies both through domestic production as well as import.
Meanwhile, the burden of supplying imported coal to power stations at the price of indigenous coal price is to be passed on to the consumers of domestic coal so that there is no revenue loss for Coal India (CIL). The Central Electricity Authority and CIL are jointly working on the scheme of price pooling and will submit the same to the power ministry for consideration. Patil said the government of West Bengal has expressed reservations on the proposed price pooling. The government will duly take it into consideration while deciding the matter, he said.
Advertise Here [300 W x 250 H pixels]
17 Oct 2016
I wish to start pvc / pp electric wire unit in Delhi. What kind of information I can get if I subscribe for your magazine
Sarfaraj Bilakhiya Says:
20 Sep 2016
Pls invite me all auction in gujarat
20 Jun 2016
we are doing business developing for solar power ,thermal power , customer supporting and we have 45 mw splar power on hand needs investors.....
pls call +910842559230