Indian economy is mainly dependent upon domestic
coal as the source of energy. Coal constitutes more than 50% of commercial
energy. Indian power sector is dependent on coal based generation to the extent
of almost 75%, even though, in terms of installed capacity, coal based power
plants constitute 55% of the total capacity. Power sector and coal sector are
so much mutually interdependent that while 75% of power generation is coal
based, more than 85% of domestic coal production is consumed by the power
industry. It is precisely for this reason that the adverse performance of coal
industry, in last three years, with virtually no growth in production, has so
severely impacted the power sector, so much so that, as at present, more than
one third of 95 power plants across the country are faced with critical and
supercritical stock position. During the three year period 2009-10 to 2011-12,
almost 40,000 MW of Thermal Power capacity has been added. Unfortunately,
during the same period, production in Coal India has stagnated at around 430
million tonnes. Obviously, the crisis created is unprecedented. The problem
has got compounded because of the disproportionate amount of coal that needs to
be imported to see that power plants do not close down.
Fuel mismatches have not only severely affected
the smooth operations of the power plants, but also the investment sentiments.
In view of the similar performance in the gas sector, in the past, gas based
power plants always had the problem of shortage, resulting in reduced capacity
utilization, as low as 50 to 60%. This did affect their financial performance.
But, since the total capacity of the gas based power plants is only around 10%
of the total installed power generation capacity, it did not affect so
significantly the overall power supply. But, if a similar phenomenon is faced
by the coal based power plants, which seems to be an emerging scenario, the
adverse impact would be huge, affecting all sectors of the economy.
Power sector reform initiatives, led by
Electricity Act 2003, were indeed responded overwhelmingly by private sector,
resulting in massive capacity additions completed or underway. Based on the
understanding given by the Indian Coal Companies, large number of power plants
have been established and are being established. However, Coal India has been
reluctant to sign Fuel Supply Agreements which would commit them to supply only
80% of the requirement, fearing that they may not be able to ramp up coal
production to meet these obligations. In spite of rising import of coal, whose
price is becoming excessively high, thus making power cost unaffordable,
uncertainties about adequacies of fuel supplies for the power plants have led to
serious concerns among Developers and Lenders. Financial closures of new power
projects are faced with serious question marks. Even disbursements in cases of
those power projects, already financially closed, are also becoming uncertain.
Large capacity additions in the last few years are the outcomes of power
projects started in Tenth and early years of Eleventh Plans. Fuel mismatch
uncertainties, leading to issues of financial closures, are going to severely
impact interests of developers, and hence capacity addition programmes in the
This situation has obviously been caused
primarily on account of virtually no reform initiatives in the coal sector.
Indian power and coal industries are like two wheels of a cart - one has moved
forward, another has remained stagnant. Coal Mines (Nationalisation) Amendment
Bill 2000 was introduced in the Parliament earlier than the Electricity Bill.
Electricity Act became a reality in June 2003, Coal Bill is still pending in
Parliament. Several recommendations made in the Integrated Energy Policy (2006)
have remained unattended. It was decided almost six years back that Coal
Regulator will be put in place at the earliest. This is still to happen. On
the top of it, a lot of uncertainties have been created by the new MMDR Bill,
which seeks to allow 26% of profit to be shared to the locals at District
levels. This provision has created a large number of questions than answering
the major issues confronting the development and growth of coal sector. If a
greater degree of energy security has to be brought about, and power sector
facilitated to grow at 9 to 10%, a similar growth in the coal sector is
essential. This could be possible only through a radical restructuring of the
coal sector, just as was done in the case of power sector. Coal sector has to
be opened up, and the Bill, which has been on the back burner, for over a
decade, needs to be enacted.
The method of allocation of coal blocks has come
under debate. It is needless to emphasise that it does require a transparent
process to be followed. But, any attempt at Bidding/Auction, with the sole
objective of generating revenue for the Government, would be counterproductive.
Bidding must aim at reducing the cost of production and, accordingly, price at
which coal will be supplied to the power industry. In India, manufacturing
sector needs power at a price which will make them competitive globally just as
service sector, agriculture, and other consumers also need power at affordable
rates. This will not be possible, if the Government wishes to, through Bidding,
generate huge revenue.
Enhancing Coal Production
Production in Coal India had
been witnessing a growth of 5 to 6%, prior to 2010-11. With serious efforts we
could expect that the production could pick up to provide 6 to 7% growth. On
account of the backlog created in view of stagnation during last two years,
unless domestic coal production grows at around 9 to 10%, the crisis would
continue even though the supply is augmented through import.
In the short term, following
two steps could partly mitigate the problem - (a) Emergency Coal Production
Plan, and (b) Deployment of Mine Development Operator.
- Emergency Coal Production Plan
Each subsidiary of Coal India
may formulate Emergency Action Plan to commit a growth of more than 6.5%, which
has been the average in the last few years. During 2005-06 such an action did
lead to positive outcome.
- Mine Development Operator
Without any need for change
in Law or Policy, beyond a projected growth of 6 to 7% assigned to CIL, about 3%
additional growth could be earmarked for production through Mine Development
Operator(MDO). The following outline presents a brief about Mine Development
Coal India Subsidiary may identify investigated coal blocks with a potential of
five to ten million tonnes of annual production each. The companies could be
NCL, SECL, CCL, and MCL or any other subsidiary in which this could be easily
As much as
possible, pre-construction risks such as Geological Investigations, Land
Acquisition, Environment and Forest Clearance could be completed by CMPDI and/or
concerned CIL subsidiary.
On a global
basis Expression of Interest could be invited, as a parallel exercise, to
shortlist such potential mine developers as have the capacity to render atleast
five million tonnes of annual production and have commensurate financial
pre-qualification, during the commercial Bidding process, the only criterion to
evaluate may be the extent of reduction in prices for similar grades of coal,
with reference to Coal India prices, that the Bidders could offer (this exercise
proved to be very successful in case of DVC selecting the mine development
operator in 2004-05).
- In order that
the Bidders make required investments in plant and machinery, the Contract could
be for a period of, say 25 years.
In the short term, one of the
actions to increase coal production could be to allow additional production, to
the extent of 25 to 30%, from the present coal mines for which Ministry of
Environment and Forest and other authorized agencies would have given
clearances. There are several instances in which it is feasible to
substantially enhance production, but that is not permissible. In view of the
fact that several other mines in the area may not have started production, even
though environmentally cleared, such increases in the existing mines may not
interfere with the environmental limits that might have been stipulated. This
initiative could lead to increased availability of coal in the shortest possible
The announcement by the
Ministry of Environment and Forest, couple of years back, putting embargo of
"No-Go-Area", which meant almost 50% of coal reserves declared untouchable, has
been the single most important factor causing coal crisis in the country. It is
good that this decision has been neutralized in principle. Its outcome,
however, needs to materialize in ground realities, because even now the Forestry
Clearance process is unduly long. A significant dent on the problem would be
possible only if Coal India and other Companies are facilitated to secure faster
clearances (both environment and forest). The present uncertainties on Land
Acquisition Policies are also impacting the opening up of new mines. A
reasonable formulation in Policy and commensurate cooperation from the State
Governments would be essential, if these important projects have to move
forward. The present thinking in the Government to shirk the responsibility of
land acquisition and leaving it to the Companies, Private or Public Sector,
would only mean hurdles and delays in commencement of projects.
Captive Coal Block Allotment
Policy was streamlined as a part solution to the problem caused by inordinate
delays in consideration and passage of the Coal Mine Amendment Bill. However,
the outcome of these allotments has not been as expected. It would be essential
that the mines development under this category is closely monitored. Those who
have valid reasons for delays could be allowed extensions, and in cases of those
where delays are attributable to the developers, the allotments should be
cancelled. This would send a strong signal and all others would make serious
efforts to develop mines and add to overall coal production in the country.
Problems of Imported Coal
We may classify
the problems into three categories - (a) Coal companies not being able to supply
as per committed linkage, (b) Captive coal blocks not taking off, (c) Imported
coal based plants being unable to buy imported coal due to steep rise in prices
not adequately covered in Power Purchase Agreements.
- Domestic coal supplies by coal companies have suffered because of zero
growth in production in last two years. This is partly because of draconian step
of "No-Go-Areas" declared by Ministry of Environment and Forest, and partly
because of internal inefficiency of coal companies. Slight mismatch in linkage
and supply was always there, but what is causing a challenge is that this
mismatch is reaching a point of supply not more than 60 to 70 percentage of
linkage in some cases 50 percent. Import of coal has become inevitable.
solution is that, if a power plant has to import to substitute the shortfall of
supply by coal companies, the additional cost burden may be allowed to be a pass
through just as it is being allowed in case of Central and State public sector
Wherever a power plant was given Captive Coal Block, and it has not been
possible to start production on account of reasons attributable to Government
agencies including Ministry of Environment and Forest, it would necessitate
substitution of supply either through tapered linkage, e-auction coal, and/or
imported coal. In such cases, a mechanism will need to be worked out in
consultation with CERC and Forum of Regulators to allow pass through of
additional cost burden.
- The most tricky situation is in relation to the power plants which have
been developed and are being developed based on imported coal. In view of
radical increases in coal prices abroad the economics of power generation do not
entirely match with the commitments in the PPA's. The problem is most acute in
cases of power plants which have sourced coal from Indonesia because of a major
change in Indonesian Law. A highly technical and simplistic view, which buyers
of power and also authorities seem to be taking, is that it is the Contract
which should be binding. Obviously, Law changes requiring such drastic increases
in the prices of Indonesian coal were never anticipated. The 4,000 MW Tata's
Ultra Mega Project at Mundra has thrown a real problem which needs to be solved.
The plant is ready to operate and deliver power. Obviously, they will not do at
a loss. The unprecedented change in Law, even though outside India, needs to be
recognised and appropriately dealt with. No doubt, it is a big challenge how to
analyse the issue, bring out the actual adverse impact, reconcile with the
provisions of the PPA, and yet, see that a viable solution emerges, so that the
plant is allowed to operate and the developer gets its return on investment.
relating to the first two categories are such that they require just a decision
followed by action. Such pass throughs have been in practice in most cases, and,
therefore, it should not be difficult to accept them. The third category of
problem would need a deeper analysis, but it should be possible to come out with
workable solutions in next two months or so. In absence of clear cut approaches
in respect of any of the above three categories of problems, power sector has
put itself into the riskiest category of investment. Domestic lenders are all
scared and have put on hold many of the financial closures, in many cases put on
hold disbursements even when financial closures exist. In the last one year
among all sectors, power sector stocks have suffered maximum decline.