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Coal holds the key to India's Energy Security, Shri R V Shahi, Former Secretary, Ministry Of Power

Coal holds the key to India's Energy Security
[R V Shahi's Weekly Column for Infraline, December 31, 2007]

Inspite of serious global concerns relating to climate change and desire of all for reducing CO2 emissions, it appears that atleast for next 25 years coal will continue to dominate India's (and also of many other countries) energy scene. The India Energy Forum organized the second Coal Summit at Delhi on 10th & 11th December, 2007, in association with MGMI & India Coal Forum. The theme of the Summit was "Road Map for 2 Billion Tonnes per year Coal Production by 2031 - 32". This projection is aligned to the Integrated Energy Policy (IEP) which provides a detailed estimate for the Eleventh Plan and also a perspective for next 25 years upto 2031-32. As per National Electricity Policy, for meeting India's power needs we must pursue all the technology options including nuclear and various new and renewable sources of power generation. Considering the huge coal reserves in the country and also keeping in view the need for growth of power generation at the rate of 8 to 9% for next 25 years, it would appear that with coal reserves available in the country, as also through import of coal, the power plants based on coal will have major contribution to make. We must, however, be sensitive to the global warming concerns. This would require a twin strategy - enhancing, to the extent possible, non fossil fuel based power generation capacity and secondly using efficient technologies so that for the minimum possible amount of coal consumed and therefore least possible CO2 emissions, we have maximum amount of power generation and most efficient consumption. Clean coal technologies already established and demonstrated should be extensively used. Also we should encourage proactively taking-up other clean coal technologies which are still at the developmental stage.

In the Coal Summit a large number of well prepared papers were presented. Apart from a paper "Indian Coal Industry : Desirable Policy Initiatives", which I had prepared, I also had the privilege of chairing a session concerning coal pricing, productivity and regulatory framework in the coal sector. In this paper I propose to cover three aspects -

  1. My own paper which brings out eight important policy initiatives required to deal with the challenge - (i) need for a comprehensive Indian Coal Act, (ii) streamlining the procedure for captive coal mining, (iii) expanding the meaning and scope of captive mining, (iv) acquisition of coal mines abroad, (v) inevitability of the coal regulator, (vi) CMPDI to be separated from Coal India to function as an independent organization, (vii) coal producers must be required to supply washed coal and (viii) financing options for expansion of coal production base. A copy of the paper which details these suggested policy initiatives is annexed.

  2. To highlight important features of some of the comprehensive papers presented in the Summit, which I consider are relevant to articulate the need for an accelerated growth in Indian coal production so that GDP growth target in the country is not only adequately supported but also the issue of energy security is appropriately addressed. I propose to pick up a few of these papers and bring out important highlights.

  3. To discuss in detail the presentations and points made in the session that I chaired.

Three papers concerning development of coal production in China, South Africa and Indonesia are worth mentioning. In the year 1980 total coal production in China was about 0.6 billion tonnes. And, in a period of 25 years it has risen to about 2.3 billion tonnes. This accounts for about 46% of the world coal production. During the year 2007 the coal production is likely to exceed 2.5 billion tonnes. We often try to compare India's economic development with that of China in last few decades. China has a coal bearing area of over 550,000 sq.km. and has a coal reserve of the order of 5,700 billion tonnes. The identified reserves are more than 1,000 billion tonnes of which about 200 billion tonnes can be used directly. In the year 2006, out of 2.3 billion tonnes of coal produced, approximately 1.3 billion tonnes were consumed by the power sector. China's coal consumption is mainly self-sustained. Total import is hardly of the order of 1% of consumption. Since they wanted to have a great degree of energy security, right from the initial days, they started focusing on introduction of coal mining technologies prevalent all over the world. They had strategies for development of coal mines through introduction of advanced equipment during 1940's and 50's. Subsequently during 1960's and 70's they stressed heavily on development of domestic mining equipment. 1980's and 90's saw the Chinese coal industry switching over to fully mechanized technology.

China was able to achieve a sustained growth of 9 to 10% during the last 25 years. I have made this point in other papers. One of the most important reasons of India not having been able to do what China could do was lack of adequate power and other infrastructure, and this inadequacy emanated from our lacklustre approach to two important and essential inputs for power development, namely, fuel and manufacturing capability. If we had created the type of power plant manufacturing capability which China did and supported with the type of fuel expansion programmes which they evolved and implemented, may be, not to the same degree but even somewhere near that, our growth story and economic development history would have been different. We are now more or less at the same level where China was in 1980. Our growth projection for next 25 years is also more or less similar to what China did during the period of last 25 years (1980 - 2005). We missed a great opportunity throughout 1980's and 90's, primarily on account of our less imaginative approach to energy development plans and programmes. We must not miss the opportunity in next 25 years.

South Africa produced in the year 2005 about 245 million tonnes of coal (170 million tonnes for domestic consumption and 75 million tonnes for export). South Africa ranks 6th in the world coal reserves, 5th in respect of the production and also 5th rank in the world in respect of export. They have mechanized their system of coal mining. I remember having sent a team of NTPC and CEA engineers to South Africa during 2004-05 and the team returned satisfied with a good feedback about the capability of the country in respect of coal mining. They reported that because of the method of mining and the level of productivity and efficiency, the cost of production in Open Cast Mining was only about 6 US dollars per tonne (this is less than half of the cost of production in India). Our coal industry, therefore, has to learn from South African technologies and their method of working.

Indonesia has been a focus of attention for most of the Indian power development companies, both old and the new upcoming agencies. They have all come to recognize that in the field of electricity the real control lies not in power but in the source of power. They have all understood that if they had ownership (fully or partly) of coal as the energy source, it would not only make a good business sense but also they would be the winners in the power industry in coming years when the structure of this industry slowly changes from one of being highly regulated to the one of assuming a competitive structure. What is, however, rather unfortunate is that this wisdom has dawned upon them rather belatedly because when this process of approaching coal mining owners in Indonesia and Australia was initiated by Indian agencies (Public Sector Companies were abysmally slow and even private agencies were late), by that time Chinese agencies had already blocked and acquired a number of coal mines. Indonesia is one of the top twelve coal bearing countries in the world, its reserve ranks - 12, production ranks - 7 and export ranks - 2 in the world. In the year 2006 Indonesia exported 108 million tonnes of coal, next only to Australia which exported 232 million tonnes of coal. Even now there is a scope to acquire Indonesian mines. Proximity of this country makes it a good proposition.

In the overall approach towards energy security, what we had recommended in the Working Group on Power (Eleventh Plan) is that India should follow a strategy for a reasonably balanced dependence on imported coal. Though we have huge reserves, we must not exhaust all of them and must conserve substantial portion of these for our future generations. This is the approach which gave rise to the concept of a chain of coastal power stations (including Ultra Mega Projects) based on imported coal or domestic coal blended with imported coal.

The session chaired by me had four distinguished panelists - a former Chairman of Coal India Ltd., a Senior Advisor from TERI and experts from Price Water House and from ICRA Management Consultancy. They made comprehensive presentations on productivity, benchmark performance, and approach towards coal pricing and regulatory framework for the coal sector. The presentation by the former Coal India Chairman was indeed very forthright and telling. It did bring out that absence of competition in the coal industry led to complacency. Now that we have the backlog of many years of low growth, a very high compounded annual growth rate is needed. An analysis of the output and labour productivity in the Indian coal sector reveals that there is considerable scope for improvement. Productivity of machines also needs to be substantially improved. For example while the availability of Electric Shovel is of the order of 80% utilization is hardly 58%, of Dumper - availability (67%), utilization (50%), of Dozer - availability (70%), utilization (45%) and of Drill - availability (78%), utilization (40%). The Government of India policy of Compensatory Afforestation is definitely posing a serious issue in getting expeditious forest clearance for developing mines. Similarly policy of rehabilitation and resettlement and expectation of people at large are holding the process of easy and speedy land acquisition. Another issue which was discussed relates to pricing. The presentations both by Price Water House and ICRA Management Consultancy brought out that more than 94% of coal produced is by Government owned and controlled companies. There is hardly any market and therefore competition. Under the circumstances, to balance the interests of all stakeholders including the investors and consumers, regulation appears inevitable, at least till the time market develops. May be in a period of 5 to 10 years from now when the large number of captive mines get developed, and if the policy permits sale of coal in the open market, price discovery through competitive process could reduce the need for regulatory interventions. Some of the important conclusions of this session could be summarized as given below :

  1. Coal is the only sector which has remained untouched and totally aloof from major reform initiatives which started in 1991. Several sectors made major changes since then so that they are aligned to the overall objective of economic development and targeted growth. More or less coal industry has remained stuck-up.

  2. There is a pressing need for an Indian Coal Act. The Coal Mine Denationalization Bill has remained pending in the Parliament for over seven years now. It needs to be pursued and enacted. Slow movement in this industry has affected, and shall continue to seriously affect growth and the issue of energy security.

  3. The Government initiative on identifying over 30 billion tonnes of coal reserves for captive mining is a laudable step. But it is only the second best solution. The first best would emanate from Indian Coal Act.

  4. In the captive coal mining procedure, so long as end use by a number of agencies is identified, the purpose of captive mining would be met irrespective of the fact whether the captive mines are developed by the end user agencies or any other company.. This interpretation may be given a favourable consideration so that even with this second best option a lot of changes could be brought about, pending the legislative decision on the Indian Coal Mines Act.

  5. Only block allocation for captive mining may not be enough. In initial couple of years, captive mine developers will need to be supported for Geological reports, land acquisition and other clearances, during the period of learning curve, to get best results from this initiative.

  6. Pending emergence of a matured market, which may take 5 to 10 years depending on the speed of actions on many initiatives as mentioned above, a Coal Regulator seems essential. The scope of functions of the Coal Regulator, which will consist primarily of development and pricing, should be delineated from other regulatory/governmental interventions so that overlaps and duplications are avoided.

  7. Even with a number of interventions - already in place and those being suggested - for a number of years, public sector companies will continue to have major role. Benchmarking of performance parameters and comparison with internationally achieved levels of performance must be disseminated. These companies must be made to improve their performance and efficiency of operations. Competition can drive this, but in the transition period other interventions will be necessary.

  8. A lot can also be done by proper deployment of gas, nuclear fuel, hydroelectric potential and other renewable technologies. We must, however, design our strategy of energy security centering around coal which really holds the real key for such a security. All aspects - domestic coal, imported coal, new technologies for investigation, mining technology, washing, CBM etc. on the one hand and efficient demand side management (DSM) in coal consumption - will need to be attended to.

Copy right : R.V. SHAHI

Annexure

Indian Coal Industry: Desirable Policy Initiatives[1]
[R. V. Shahi]

Indian coal industry has, during the last several years, been able to achieve an annual growth rate of the order of 5-6%. While the entire economic activities are now getting geared to achieve an overall growth of 9-10% over the next 20-25 years, aligned to this, the energy segment also will have to grow at a corresponding rate. Obviously, therefore, the Coal Industry has to prepare itself for an annual growth of over 9%, which would mean almost doubling the growth rate as compared to the achievements in last few years. In the next 25 years the annual production of coal may exceed two billion tons per year from the present level of 450 millions tones per year. It appears that power sector will continue to be the major consumer of coal in the range of 75-80% percent of total coal production.

Obviously, this type of a growth, as projected above, will not be possible unless major policy initiatives and structural changes are made. There would be numerous actions which would be needed at various levels in various organizations. In this paper an attempt is being made to outline only the important policy initiatives and structural changes that are considered necessary for meeting the above ambitious goal and targets.

  1. The first and foremost is the legislative change in the coal sector which has been overdue. The coal industry has worked - and no doubt has made substantial progress - under the overall legislative framework of Coal Mines Act, which was amended to effect the nationalization of coal industry during the period 1971-73. Historically, prior to seventies the Coal industry was owned and managed by a large number of private players. The Central government took a decision in 1971 to nationalize the private coal mines. This was implemented in two pages - coking coal mines were nationalized in 1971-72 through an Act namely Coking Coal Mines (Emergency Provisions) Act 1971. This Act provided for taking over, in the public interest, management of Coking Coal Mines. Subsequently Coking Coal Mines (Nationalization) Act was passed in 1972 under which Coking Coal Mines, other than the mines with TISCO and IISCO, were nationalized in May 1972. Coal Mines (Taking Over of Management) Act 1973 enabled the Government of India to take over the management of even non-coking coal mines. Coal Mines (Nationalization Act) 1973 facilitated complete public sector takeover of coal industry. Under this Act only public sector companies can mine coal. In 1976 and subsequently in 1993 additional provisions were made in the Act facilitating coal mining for captive end use for steel, power, cement. At present out of about 450 million tones of coal production only about 28 million tones (about 6%) is contributed by private companies including TISCO, IISCO and other captive mines.

When major economic policy changes were made in 1991, they covered almost the entire gamut of economic activities. Power sector was opened up for 100% FDI. A number of others sectors were also opened up for 100% FDI. Many industrial sectors were opened up for private sector but in respect of FDI, limits were fixed which, from time to time, have been enhanced in last 15 years. During the 15 years after the historic economic policy of 1991 and with several new initiatives thereafter, today the steel sector, tele communication, petroleum, power, airlines, fertilizer, automobile etc. present an altogether different profile and character, totally different from what they were in 1991. Even in the banking sector the scenario has entirely changed. A number of private banks, and under competition even public sector banks provide menu of options. Insurance sector has seen later development of a new market structure during last 5-6 years. The picture is entirely different with a number of agencies. It needs to be underscored that in all these areas varying degrees of competition, apart from the competition that is more extensive in the retail market, have really led to more efficient operations of the industries, and in view of competitive pressures, much better benefits to consumers. Even in power sector where, though many things have happened in last few years and where the real benefit of competition has not been experienced in a significant way, the recent Ultra Mega Project initiative has led to an unprecedentedly low tariff which will be entirely for the benefit of consumers.

Coal industry has virtually remained completely untouched and isolated with hardly 5% in the private sector and that to inclusive of the coal mines of TISCO & IISCO. One fails to understand that if every sector of economy has gone in for changes. In all cases legislative initiatives were taken apart from a number of administrative actions to facilitate entry of larger number of players, to create competition and to provide for the benefits of competition to consumers, why is it that we have remained stuck up on the coal sector? After all coal constitutes more than 50% of commercial energy and for power which consumes 80% of coal produced in India, coal based generation constitutes almost 70% of the total power generated. Therefore, its significant presence in almost every segment of industry directly or indirectly influences the cost and quality of service of every industry. It has been established that whichever sectors have been opened up, with certain initial gestation and teething problems of changes that are inevitably associated with any such initiative, by and large, the results are positive and satisfying in the best interest of consumers at large.

Indian Coal Act

When it comes to coal, though the Coal Mine Denationalization Bill was introduced in the Parliament much earlier than many such other Bills including Electricity Bill, it has remained without getting consent of the Parliament. Successive governments have been unable to convince the Parliament and proceed with this legislation. A new Indian Coal Act is the only solution to coal sector reform Such an Act should recognize the far reaching changes that have taken place in all other sectors. In the last over 30 years of the old Act, it should recognize that the entire context is now different, that the premises under which the legislative changes in the coal sector have took place during early seventies are no longer relevant today. Any solution less than a comprehensive Act would only be second or third best solution, which is what has been attempted in last few years.

Captive Mining - Streamlining the Process

The Energy Coordination Committee, presided over by the Hon'ble Prime Minister, took a decision in late 2004 that while the Coal Mine Amendment Bill may take its own time, perhaps the country could benefit by going in for the next best option of using the captive coal mining route to create more players in the system. The intent of the govt. has been very clear. A status-co and business as usual approach may lead to a number of avoidable hurdles in the government's efforts in all other sectors for a rapid growth and development. In subsequent meeting of the ECC, the govt. decided to allocate as much as 20 billion tones of coal reserves (sufficient for almost 70, 000 MW of capacity) for captive coal mining. The thrust of the govt. therefore, is obvious. Necessary procedural steps to make this initiative succeed may be outlined as follows:

  1. The process of allotment of captive coal blocks is, no doubt, a complex exercise Sankar Committee has made some recommendations. Coal Ministry has started moving on right lines. All that is required is to speed up this process and bring in the required objectivity and transparency on the basis of criteria which have been identified.

  2. Any process or procedure, such as biding or auction, which has a potential to increase the cost of coal perhaps may not be the right approach. The objective of such changes cannot be anything other than bringing about competition, efficiency leading to reduced cost and price. This alone can ultimately, after providing for reasonable profit for investment, is in the larger interest of consumers. Ministry of Power Initiative on Ultra Mega Project is an example.

  3. Once the coal block allotment has happened, experience of the companies which have been allotted these blocks reveal that it has been an uphill task to secure Geological Reports (GR). This Report is the starting point for further action. There is a need to critically examine each step of this process and to see how best the delay is minimized.

  4. CMPDI (a subsidiary of Coal India) has practically been the only organization with task of investigations and preparations of geological reports. Inspite of several feedbacks in the past its sole jurisdiction on this activity continues leading to avoidable hardships and delays in the process of developing coal mines. We need to facilitate creation of new agencies. In fact we need to have capacity building on this at the initiative of the government so that new agencies come up and the process of investigation and preparation of report is speeded up.

  5. Under the Coal Mines Act land acquisition also follows a different process and procedure. There is a need to again critically examine various steps and see what can be done to compress the cycle time of land acquisition.

  6. The environment clearance mechanism has been, to a great extent, streamlined. If proper studies have been conducted it has been seen that, by and large, the delays have been reduced. However, forest clearance process has become further complex. This one issue, which is holding up not only coal projects but a number of hydro electric projects and other projects needs concerted and focused attention for quick remedy. It requires to be attended to and be addressed at the highest level in the government.

Expanding the Meaning of Captive Mining

As mentioned, captive coal mining initiative, a major step taken by the government, no doubt has the potential to solve, to a great extent, the problem of the industry. The ultimate solution however, is opening up of the sector like other sectors has been dealt with. But, in view of the nature of political dynamics, it appears unlikely, though badly needed and highly desirable, that a new Act will see the light of the day in the near term. Therefore, a way out needs to be found out how best we can implement the existing provisions of the Act in development of coal mines for captive end use. Industrial groups working in various sectors therefore, lack coal mining competence. Therefore, questions are often raised whether they would succeed in their mining activities. NTPC and many other organizations in the power sector have been allotted coal blocks. They may succeed, some of them may not. Even those who succeed obviously will take time. Therefore, this route is no doubt a better route than keeping everything under Coal India and Coal India Subsidiaries. Yet, this is not the most efficient route. One interpretation of the present provision of the Act is that so long as coal mines are developed for captive end use, it may not be essential that these mines are developed by people who own power plant or aluminum plant and so on. This school of thought opines that any organization could develop coal mines and so long as the coal is for captive use for identified groups of customers it would still be called captive mining and therefore, permitted under the law. This interpretation holds tremendous potential for bringing about radical changes in the coal industry structure and therefore, this must be pursued.

Acquisition of Coal Mines Abroad

Another policy initiative which has been discussed for sometime but has not led to any positive outcome so far is in relation to acquisition of coal mines in other countries. This option will definitely help in a significant way in providing energy security for the country. There could be one or more combination of the following approaches:

  1. Coal India and Coal India Subsidiary could acquire coal mines.

  2. Coal India/ subsidiaries in association with organization like NTPC and other major power organizations, both in public sector and private sector, could form JV to acquire coal mines.

  3. Large private sector companies which are in power or other consuming industries could acquire coal mines.

  4. Any organization could acquire coalmines to supply coal to Indian industry.

Practically each of the initiatives needs to be pursued by the respective organizations. But since it is a very important issue, governmental support by way of coordination and by way of providing necessary assistance through our missions abroad could be of great help.

Coal Regulator / Regulatory commission is inevitable

It need not wait for the Coal Mines Amendment Act. It could either be brought in through an exclusive Act, which may not be resisted in the manner as the Coal Mine Amendment Bill is being opposed, or through an administrative process. In whatever manner this can be brought early and conveniently, the Regulator needs to put in place so as to ensure the interest of all the concerned stakeholders. Every segment of energy requires regulatory intervention and guidance, at least during the transition period till a perfect competitive market structure develops.

CMPDI be separated from Coal India

CMPDI has served the purpose of Coal India objectives and activities. When coal industry is to be moulded to go beyond Coal India, it has to come out of coal India umbrella. Then alone it can serve the purpose of entire industry. I recall, What is MECON today, used to be part of SAIL (the then Hindustan Steel). It was taken out of SAIL umbrella so that it can chart out its plans programmes for SAIL plants and for others.

Washed Coal by Coal Companies

Setting up of coal washieres should be made compulsory. Coal producers must process coal, reduce by 8-10% the ash content and then dispatch coal. If this is not done not only the coal consumers will face difficulties but Railway transportation system may be unable to handle the massive increase that is likely to take place. This could be implemented in phases - (i) for plants located 1000 KM or more away, this should be made compulsory within next year, (ii) for plants located 500 KM away to be made compulsory in next three years and (iii) for all other plants to be made compulsory in next five years. Its implication on cost and price could be examined and decided by the Regulator.

Financing Expansion

Coal companies in the government sector are highly under leveraged. They have enormous scope for raising fund. They can definitely grow at much faster rate than their planning. We do not hear anything about IPO in the public sector coal companies. Same was the story in the public sector power companies five years ago. Events have demonstrated how useful and fruitful have been the initiatives of IPO's in the power group. This should be emulated by the public sector coal companies. Both these viz. IPO and compatible debt raising, should proceed parallelly - IPO to introduce equity capital and mobilizing borrowings using the tremendous strength of net worth and highly positive ratio of net worth versus debt.

Copy right : R.V. SHAHI
______________________________________________________________

[1] Paper for Plenary Session on "Coal production - Policy initiatives and structural adjustments" in the Second Coal Summit 2007, Nov 2-3, 2007 at New Delhi, organized by India Energy Forum.

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