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Cover Story | September 2014

The missing link

India has been hit by a huge coal shortage that is affecting its power production, necessitating coal imports and increasing its trade deficit. Power Today analyses the causes that led to the shortages and what the government´s response to the shortage has been, and which remedies can be explored.

Turning around the coal sector in India is among the top priorities of the new government. Though the sector suffers from many anomalies, the health of the industry can be encapsulated by a single statistic: India is the third largest importer of coal, though it sits on the fifth-largest reserves of the commodity.

Now the activities of the earlier UPA government are under the lens. The unaccountable functioning of the linkage committee leading to abundant allocation of coal linkages for power generation without factoring in other issues such as realistic domestic coal production, allocation and pricing of imported coal and import infrastructure and logistics is the primary cause behind the coal shortage. All indications, including the relevant policy and contractual documents, clearly indicated that imports would be required to meet the linkage commitments. However, the government did not take any policy measures to address this eventuality. Other stakeholders, particularly power plant developers and their financiers, ignored the very realistic possibility of coal imports and based their business plans on abundant availability of domestic coal, which was never promised. Thus, it could be said that they contributed to the coal shortage unlike the popular perception that they are victims of it. Coal India Ltd (CIL) could have ameliorated the shortage to some extent if it had been more efficient.

On top of all this, the earlier government´s response to the unraveling shortage was very ineffective and inadequate. Issuing presidential directives to CIL and forcing it to sign Fuel Supply Agreements (FSAs) did not help as CIL could not possibly supply domestic coal in the quantities expected and consumers were unwilling to take imported coal at higher cost. The recent decision by the Cabinet Committee on Economic Affairs also does not help to address the situation, as it fundamentally does not change anything. It only reiterates existing policies such as the New Coal Distribution Policy in an attempt to address the problems faced by some power developers. More importantly, it does not address the important short-term questions of pricing and allocation of imported coal, diplomatic initiatives to ensure low-cost imports and import logistics, nor does it address long term questions of energy security and future of the coal and power sectors

Rising imports, subdued domestic production
According to the BP Statistical Review of World Energy, India has the world´s fifth largest coal reserves which is 7 per cent of the entire world´s deposits. But India´ coal import bill is on the rise. During 2009 to 2014, India has imported 560 mt of imported coal amounting to Rs 3.47 lakh crore. The loss of forex was also coupled with low level of mine productivity by CIL and captive coal miners (see graph below).

To start with, for producers sitting on coal reserves, getting permits and licenses to start mining operations takes ages. Consider this: none of the 10 coal blocks allotted between 2008 and January 2013 in Chhattisgarh have started production so far. Of the 86 allotted, only 15 or so are producing (a total of around 30 MTPA). ´Starting the rest at the earliest and increasing production to 100 MTPA by 2017 and 300 MTPA by FY22 should be targeted,´ says P Umashankar, Former Secretary, Ministry of Power, Government of India.

Meanwhile, compared with other countries, India has achieved annual coal production of only 4,000 tonnes, compared to 10,000 tonnes in China and over 22,000 tonnes in Australia. ´For the country´s own energy security, we cannot overwhelmingly depend on imported coal as it would be a big drain on our foreign exchange and the country will be exposed to international price fluctuations. Every effort should be made to restrict the quantity of imports at the current level of 150 MT,´ says Debasish Mishra, Senior Director, Deloitte Touche Tohmatsu India Pvt Ltd.

Now, despite having production of 4,000 tonnes per year, all this quantity has not been evacuated due to lack of proper mining infrastructure, i.e., rail linkages. This has led to many power plants raising an SOS as 42 power plants in India had less than seven days coal stock and 25 power plants had less than four days of stocks. Incidentally, for most of the power plants in India, CIL was unable to provide more than 50 per cent of the required coal.

Confirming the dire situation, an NTPC official who did not wish to be named said that the State-owned organisation recently sounded the government as six NTPC plants with aggregate generation capacity of nearly 17,000 MW face a shutdown situation. The same case is with Maharashtra based Mahagenco, as out of 29 power generating units, around four to five are likely to face shutdown due to inadequate coal supply, according to a Mahagenco official.

Meanwhile, independent power producers are also grappling with this coal shortage as they have been unable to get adequate coal supply, despite being near captive mines. Reliance Power, which has 4,000 MW of power plants in Sasan and Chitrangi, is facing acute coal shortage. However, with the Ministry of Environment and Forests clearing the Chhatrasal block, which has 160 MT of reserves, three mines have been allocated to Sasan Power, which will help the unit tide over the crisis. A senior official from Reliance Power says, ´At present, what we are facing, is acute shortage of coal, but not finance.´ He further adds: ´And once we get that (coal), the cautious power majors will add capacity.´

The broken link
Many coal consumers are not located at pit-heads and therefore increasing demand for coal also translates into increasing need for coal transport. According to experts, the issue of rail linkage was mainly with captive coal miners because at the time of allocation of mines to the private players, Indian Railways did not concentrate on strong rail networks, since mining operations were privately held.

Now the main question that arises is, who should fund and build the rail linkage projects? ´Of course, it should be the captive mine owners, because while allocating mines it was a direction from the government itself,´ says Sunil Srivastava, Managing Director, Balaji Railroad Systems Ltd.

What went wrong? Srivastava says that captive mine operators were reluctant to invest money in rail linkages as they felt that those who will get mines in the later part of the auctions will certainly have an advantage. These players would be able to use infrastructure without spending funds. This has made many private players back off from creating the much-needed infrastructure.

However, this can be solved if rail linkage projects can be undertaken on public-private partnership (PPP) model. Considering the amount of money involved, i.e., approximately Rs 250 crore for laying a 100 km rail line, the government should allow third party or private entities to create world-class infrastructure (rail line, storage system etc.,) in the vicinity of coal mines, and the coal miners can take the advantage by paying user fee charges. This will sort out the issue of rail linkage as well as storage system and will create enough opportunities for private players. ´To sort out the coal linkage issue, all the captive mine owners should form a special purpose vehicle (SPV), and invest the money on a cost-sharing basis,´ says Asheesh Sharma, Managing Director, Mahagenco.

But for this too, private players have refused to come together and form a unit to settle the linkages issue. Recently, when a Hyderabad-based private rail consultant went with a proposal to Adani Group to build a common rail linkage with another coal miner Indiabulls, Adani refused the proposal. At present, although Adani Group has received the necessary permission to lay around 100 km of rail line, the Indiabulls project has been stuck with the Ministry of Environment and Forests.

´This is a clear case of competition as one player does not want other players´ operations to start on time,´ a senior official from that consultancy told Power Today. In a recent development, Adani has received approval for its $15.5 billion Carmichael coal and rail project in Australia. The expert from the consultancy feels that if Indian players can invest such massive amounts globally for securing coal supplies, they surely can look at building up Indian infrastructure and securing coal linkages with similar amounts of money.

Coal block valuation
The government has set a floor price (per tonne) for coal blocks that were put up for auction. But the valuation methodology employed to reach the floor price uses the international price for Indonesian coal. This price is much higher than the price of similar quality coal available in domestic markets through linkages with CIL. ´The high floor price makes these coal blocks unattractive and (leads to) limited bidder participation and interest,´ says Yogesh Daruka, Director, Energy, Utilities & Mining, PwC. At the same time, technical limitations and risk factors such as limited contract tenure & land acquisition have not been factored in while arriving at the floor price. To this, Debashish Mishra says, ´Until now there has not been any valuation of coal mines. Earlier rounds of allocation of coal mines were not based on valuation-based bids. They were given to captive users.´

Improve coal quality
In general, Indian coal is characterised by high ash and moisture content up to 45 per cent, but is suitable for thermal power production. The only means to enhance the quality of coal produced is to beneficiate it by employing coal washing, which would also provide coal of consistent quality. However, coal washing in India has not been very successful owing to challenges around allocation of coal under washery mode, disposal of rejects and contractual structures between washery operators and generating companies.

Quality of Indian coal, that is, the ash content and colorific value content, cannot be changed as it depends upon geological factors. ´However, what can be done is to make washing compulsory and have stringent quality norms so that the consumers receive the grade of coal that they are paying for,´ says a senior official from Reliance Power.

In terms of exploration of coal in the country, it is carried out in two stages. In the first stage, Geological Survey of India takes up regional exploration of coal to locate potential mineral-bearing areas. Subsequently, various agencies including CMPDI, GSI, Mineral Exploration Corporation Ltd (MECL) and private parties are engaged for detailed assessment.

India´s spending on exploration has remained very low (less than 0.5 per cent of global spend on exploration). As it stands, a sizable gap exists between current technical systems and capacities and what is required to meet the country´s demand.

This gap can be bridged by strengthening the capability of existing agencies and outsourcing some of the work from external private companies. Further, a robust FDI and PPP framework in the sector will help attract global capabilities and investments and spur exploration growth in India. This of course will require the overall policy to be structured well to attract global players and investment.

Will CERC revise tariffs?
Let´s hear it from the horse´s mouth. When asked about whether fall in international coal prices can influence Central Electricity Regulatory Authority (CERC) to slash tariffs, former Chairman of CERC, Dr Pramod Deo says that there is a possibility of revision in tariffs as this is an automatic process and CERC comes out with indices based on international trends in coal prices.

Meanwhile, the falling global prices will lead to reduction in tariffs only for those projects where the imported fuel prices were passed through in the tariffs. For many projects which import fuel, the import prices are not yet fully factored into the tariffs, and so there is unlikely to be a reduction in tariffs.

A report by Prayas, a non-government organisation, suggests some solutions to address the shortage in the short-term and to reform the sector in the long-term. For the short-term, it suggests that the increased costs of power generation due to imported coal should be shared equitably between the various parties responsible for this situation, namely power producers, their financiers and CIL. It also suggests that the coal sector is in urgent need of various systemic reforms to address many issues beginning with role, structure, functioning and accountability of the linkage committee and covering issues such as the coal distribution policy, productivity and efficiency of CIL, accountability for quality and quantity of coal delivered and the coal market structure and pricing. The proposed Coal Regulatory Authority could be a useful vehicle to implement and oversee some of the desired reforms, if it is structured and empowered appropriately.

At the end, here are a few suggestions to be considered by the government:

  • Encourage private players to construct rail linkages; the same can be used by coal miners by paying user charges.
  • Promotion of FDI in mining through Mine Developer cum Operator Model.
  • Make coal washing compulsory for quality coal.
  • Spend more in geological exploration for new coal discoveries.
  • Increase in domestic production is the answer to arrest forex outflow.
  • Cap on import of coal should be revised from the current level. 


Rahul Kamat


Coal allocation illegal between 1993-2009: SC
The Supreme Court has cancelled the allocation of all coal mining rights between 1993 and 2009 on the grounds that the process used to assign licenses lacked transparency.

The SC will decide how the mining rights should be re-assigned in a series of hearings starting September.

The judges said that no guidelines were followed in handing out coal licenses, and that 36 different committees acted arbitrarily and "public good suffered" as a result. The allocation of coal licenses has been the subject of a CBI investigation that is being monitored by the Supreme Court since the State auditor said in 2012 that Rs 1.83 lakh crore had been lost because coal rights were not auctioned.

The CBI has inquested the assignment of 195 coal block allocations since 1993.

The misperception that led to demand mismatch
It was lack of coordination between the Power and Coal Ministries that has led to the fiasco the country is facing now. Despite India´s coal production target being lowered to 554 mtpa from 680 mtpa in 2011-12, the target was not met and actual production fell short of the original target by about 21 per cent. Surprisingly, despite widespread knowledge that large additional power capacity was expected to come on line, the final target for coal production in 2011/12 was lower than the target of 572 mtpa for 2010/11.

´This was likely because the coal sector was unprepared for so much power capacity coming on line, and it raises serious questions about sector planning, the process of awarding linkages, and coordination between ministries,´ says a rather peeved Dr Pramod Deo, former Chairman, Central Electricity Regulatory Commission.

Government to fast-track mining infrastructure projects
The Railway Budget gives the impression that the new government understands obstacles in development of the Indian coal sector and is putting in efforts to resolve them. The Railways Minister announced three new railway lines: Tori-Shivpur-Kathautia, Jharsuguda-Barpalli-Sardega and Bhupeopur-Raigarh-Mand from coal-rich Jharkhand, Odisha and Chhattisgarh respectively. However, these three projects are progressing slowly due to land acquisition and forest clearance issues at the State level. It was decided to have continuous monitoring of these projects at the minister´s level in order to give a fillip to the construction of these lines.

´A visit to Jharkhand and Chhattisgarh by high officials of all concerned ministries is likely to take place to sort out the pending issues of land acquisition and forest and environment,´ Prakash Javdekar, Union Minister, Ministry of Environment and Forests tells Power Today.

He also says that in the last 50 days, the government has cleared eight coal mining projects of Coal India, Jindal Steel and Power, Sasan Power, Mahanadi Coalfields, Hind Energy and Coal Benefication (India). The minister also clarified that small mining projects with less than five hectares won´t require Central government clearance.

The clean-up act: Use of fly ash
Investments in coal washing & power plant pollution control equipment and proper reclamation planning are essential to ensure that adverse impact of coal-based power is controlled. Fly ash utilisation from Indian coal-fired power plants is improving - in 2011, 56 per cent of fly ash (i.e., 170 million tonnes) was utilised for land development, cement/concrete, mine filling, and brick making. The Ministry of Environment and Forests has set a target to achieve 100 per cent fly ash utilisation by 2014. It is important that supporting investments in technology development and R&D are made in coal extraction, coal conversion, and coal-based power technologies in order to improve efficiency and performance of coal-based electricity generation. For sustainable development, companies need to focus on responsible development such as benefit-sharing with affected communities, compensatory reforestation for land stripped for mining, wildlife conservation and local area development. They should comply with requirements of the Forest Rights Act in order to be granted stage II approval - which is needed before they can start mining. Setting up of an organisation such as Coal Regulatory Authority is a positive step towards this cause. At the same time, the government should set up a framework for supporting faster approval of clearances and execution of projects.

´Government should encourage professional miners´
It is not a new revelation that India lacks in quality output of coal as well as mine productivity. What can be done to improve this scenario?
Encouraging more competition in this space will be the only answer. But it should be transparent. Basically, (firms in) mining activity require two kinds of skill sets û companies should be good in acquiring land, environment clearances, negotiations etc., and we also require professional mining companies. At present the government focus has been on the first set of skill sets. It has neglected the later one. Ergo, if the government really wants to move on, and to sort out the productivity, capability and quality of the coal, they should have a system where the preference is more for the second set of skills rather than the first one. If the government tries to move forward in this direction, a huge number of professional mining companies will take part in the auctioning process, where India will get the best and expert miners to look after this resource of the country. And once the country has its natural resources in the hands of experts and professionals, the productivity (of the industry) and quality of coal produced in India will be world class.

It seems CIL is the main culprit behind coal shortages in India as it was unable to gauge the demand-supply calculations´
I am surprised that everyone is blaming Coal India. What is the logic behind it? I agree that CIL was unable to match the demand required by generation companies in India, but the onus should be only on CIL, it should be on private coal miners too. When the captive coal mines were auctioned three-four years ago, the owners of these mines were unable to produce the coal as per the set target. But here these captive coal miners give excuses of rail linkages and environmental issues. I feel they are equally responsible for the current situation that we are facing now. There was clear disparity of quantity required and demand. In this case, the government was unable to anticipate future requirement from power generation companies due to excess amount of capacity addition. Now, the situation is such that we are now thinking whether to add any capacity or not due to shortage of coal. Today, we are doubly cautious of investing in new capacity additions.

How is MAHAGENCO coping with this?
We have learned to use coal more efficiently. The current situation is such where out of 29 generating units, around four-five units are starved due to coal shortage. And despite this, we have the option to run them on imported coal; we are trying to avoid this situation because we have to shell out extra funds from our kitty. This is why we are utilisng our available coal stock in efficient generation units only.

´Currently, we lack technical systems and capacities´
To begin with, recently we have seen that many States had additional power to sell in the market, but States with power shortages did not buy. Was this a deliberate attempt to not buy power?
I do not believe that this was a deliberate attempt. Rather, the state of the T&D sector is responsible for such a scenario. The deficits have largely been in the southern States followed by northern and north-eastern States. Both southern & north-eastern States have limited inter-regional transmission capacity which restricts power transfers during peak hours of need. Our inter-regional capacity is presently capable of carrying merely 1.5 to 3 per cent of our installed generation capacity. This limitation has forced the southern region to buy power at high cost whereas eastern regional generators had to sell power at very low rates.

In addition to transmission constraints, the state of the distribution sector with issues around losses, tariffs and efficiencies coupled with apprehensions around whether regulators will allow pass-through in tariffs limits the ability of deficit States to buy expensive power.

Do you think environmental activists have been responsible for the derailment of projects using fossil fuel, especially coal?
As reported by Coal India, 20 new coal mine projects, planned with annual capacity of 52 million tonnes, have been delayed by difficulties in acquiring land and environmental clearances. The new government may accelerate environmental clearances to help fire up power plants, but land acquisition remains a major issue as it is influenced by many variables including local issues and efforts of activists.

Lack of geological data has been quoted as a reason for lack of new coal discoveries. How can this situation be tackled?
India´s spending on exploration has remained very low (less than 0.5 per cent of global spend on exploration). As it stands, a sizable gap exists between current technical systems & capacities and what is required to meet the country´s demand. This gap can be bridged by strengthening the capability of existing agencies and outsourcing some of the work from external private companies. Further, a robust FDI and PPP framework in the sector will help attract global capabilities & investments and spur exploration growth in India. This of course will require the overall policy to be structured well to attract global players and investment.

´End the hypocrisy through legislation´
What can be done to break up Coal India´s monopoly?
Anil Razdan: Coal India´s monopoly can only be broken by amending the present Coal Nationalisation Act. The time has come to rationalise the issue, create adequate safeguards for the workforce, enhance safety and environment compliance. This can be done by statute. A credible and empowered regulatory mechanism can ensure that the producers do not exploit the consumers and competition is enhanced as we have done in the power sector, so that the benefits of productivity and efficiency are captured. We have to introduce modern systems based on IT, satellite and digital technologies to check illegal mining and diversion of coal which may be a major worry. In any case, private participation is also possible presently, and is taking place through outsourcing operations of mining of Coal India, MDO, captive mining, and JVs with the State public sector where operational control is with the private sector. Why not end this hypocrisy through legislation and reap the benefits of competition and efficiency in a transparent manner? We could attract the best talents globally to help us organise the vital coal business competently. I do not visualise that we can allow exports of coal in the foreseeable future. By enhancing our domestic production we could save valuable foreign exchange and reduce volatility in international coal markets. Once domestic production of coal goes up significantly, the international prices of coal (imported) could also come down. I do not see this only as an issue of breaking Coal India´s monopoly. It is an issue of rationalising and revitalising the coal industry in India.

P Umashankar: As of now, CIL is too large and unwieldy with many subsidiaries, which slows down decision-making. There is no sense of competition and so CIL is not pushed to better efforts and greater efficiencies. CIL may be restructured to create fewer, say four, independent PSUs. This will make for quicker decision-making and engender competition which will be in the interest of the sector.

If I recall correctly, the Ministry of Coal has commissioned a consultancy on how this can be done and the way forward. I expect that the consultant's report will be available with the MoC. I think this report should be acted upon at the earliest.

Blurb
Of the 410 MT of domestic coal offtake to the power sector in 2011-12, 384 MT (93 per cent) was supplied by CIL and Singareni Collieries Company Ltd (SCCL). Coal from captive blocks only contributed about 26 MT in 2011-12.

62.5 GW of coal-based capacity proposed in the 12 Five-Year Plan, over 56.3 GW (90 per cent) will depend on coal linkage.

India´s spending on exploration has remained very low, i.e., less than 0.5 per cent of global spend.

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