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Rajiv Agrawal, Secretary General, Indian Captive Power Producers Association

19 May 2017

In an attempt to keep Infraline Energys’ readers abreast with the key issues and challenges engulfing the sector, Infraline Energy tries to bring forth the opinion of key personnel whose decisions and opinion play a vital role in shaping the sector. Please find below excerpts from the interview that Infraline Energy conducted:

Rajiv Agrawal, Secretary General, Indian Captive Power Producers Association shares his views on the draft policy on commercial coal mining and how it is likely to impact the coal industry. Excerpts:

Infraline Energy is keen on knowing, what are your views on recent draft policy by coal ministry seeking stakeholder comments on Commercial Coal Mining?

The idea of commercial coal mining existed from the very time coal blocks auction process started in 2014. It is only a matter of time to actually implement it. The first round of forward auctions for already operating mines, saw over heated quotes beyond logical values due to desperation of survival. Large investments made in the plants linked to the cancelled coal blocks were at stake and were to affect livelihood of lacs of people.

However, lukewarm response to subsequent rounds of coal block auctions showed that the forward auction was not the appropriate method. As a result, subsequently, these blocks were handed over “Free of Charge” to PSU for captive mining and to states for giving linkages to its own industries. It defeated the very purpose of policy i.e. to involve private sector and maximize government’s profit.

Knowing these facts and pitfalls of Forward Auction Model, coal ministry should consider alternate models that are transparent, give additional revenue to government and support “Global Indian Competitiveness”. If draft is adopted as policy, it will permanently snatch away opportunity from India to reduce national conventional-energy cost. Once a “High National Benchmark Price” is created, all subsequent commercial mine allocation can only be to “Increase-Price”, forever snatching away opportunity “to reduce coal cost”.

How do you view this policy in light of planned “National Energy Policy” of Niti Aayog?

Niti Aayog hasn’t put policy in public domain for stakeholder views. However, media reports do indicate element of Market-linked pricing and ministry’s efforts to retain control of CIL prices. Thus, instead of commenting, I would sound a word of caution about absence of “Definition of Coal Market”, absence of free “Indian coal market” and repercussions on linking Indian coal prices to import landed price parity under this vacuum.

For example, with 80% import of crude, 20% Indian production is also pegged to International benchmarks. The lower domestic production cost helps in lowering the average cost of crude-basket for refiners and OMC.

On the contrary, thus I am yet to find logic in linking price of 85-90% domestic production with import landed price of mere 10-15% quantity. Moreover, unlike crude, forward auction of Commercial Coal Mining is attempting to maximize the domestic coal-cost for producer.

In that case, Infraline would want you to elaborate as to how you would like to define Coal Market?

Coal is crucial for global competitiveness and energy security of the country. The draft is silent on defining the market or creation of free market. Thus, ad-hoc start of “Commercial Mining” may adversely affect nation in long term. It’s a policy without “holistic national goal” and merely try to define an action i.e. “Forward Auction”. One can only expect long term chaos from “actions without stated goal”.

The draft-policy can only create monopoly market or at best monopolistic-oligopoly market because “output from these mines” is linked to CIL’s Existing monopoly-market price. Thus freedom to charge any lower price by commercial coal can only be on paper. Government itself is resorting to profiteering through CIL by allowing only high-priced forward auction for industries. It also discriminates against Captive Power Producers by charging 35% higher for coal to produce power. The profit and reserves of CIL are then transferred to government through dividends and share buy-back.

The draft will force the industry to buy coal at highest price even form private and multinational entities under the “pseudo-unregulated market”. Thus “process of selling coal” is going against “goal of free market” and “lowest energy cost for nation”. Thus it can’t be and shouldn’t be a policy of welfare government.

A free market is defined where buyers are able to negotiate price and even hold “Reverse Auction” for buying an item at most optimum market price. Whereas, under a monopoly or a monopolistic-oligopoly, the suppliers only conduct “forward auction” to maximize profits. No doubt that draft for Commercial Mining falls in this bracket .Due to historical reasons, cost of production and manpower is high for CIL. The same inefficiency-costs should not be extended to “Commercial Mining” to justify CIL price. Rather it is an opportunity for the nation to ask CIL to compete in reverse-auction for at least a part of their output.

On the other hand, don’t you think that government also needs revenue for its functioning?

At one end government is cutting Corporate Income Tax rates so that India is more attractive for manufacturing and business. On the other hand MoC is increasing the indirect Tax (revenue share by commercial miner)on already highly taxed Coal. Till the time affordable power storage solutions are available for renewables, coal is the only hope as cheap energy source. With just 20% domestic production, high tax on petroleum products create disincentive for its excessive use and forex-outflow. Vice-versa holds true for domestic coal.

“Indian private pit-head coal cost” is half of CIL’s selling price (for most available G-10 grade). On purchase price parity (PPP) basis, Chinese pit-head cost is also half of CIL’s selling price .Adding all state & central Taxes; green cess equal to production cost; discriminatory 20-35% extra price; forward-auction premiums etc. make CIL coal price 4 to 5times of private pit-head cost. Thus, taxing the largest energy source so heavily is bound to be counterproductive for growth and Indian global competitiveness.

Last Question from Infraline Energy, can you suggest what should be done in this situation?

India needs to work really hard to come out of this grim situation where today no free coal market exists in India, all auctions (Forward, Spot & Linkage) by CIL seek to maximize revenue over its price-list and no global benchmark exists for coal similar to Indian coal. From decades, many global agencies are trying for Indonesian export benchmark but have failed and the government levied export taxes while keeping domestic coal cheap.

Therefore, this is the sole opportunity for India to create a benchmark for domestic free market that is governed by “national goal” of “maximizing production and cost efficiency ”and “minimum energy price”.

In the run-up to first Captive Coal Block Auctions, I presented a comprehensive model using Reverse Auction. MoC did not want reworking because they were working against deadline set by H’ble Supreme Court. Secretary said that similar model will be useful for commercial mining.

Thus, a most suitable solution will be reverse auction to explore “highest mining efficiency” with discovery of “least selling price” to work as “lowest price national benchmark”. Following are its advantages:

(i)The Reverse Auction will discover "minimum selling-price” with highest technical & financial efficiency.

(ii)All such auctions will set a “Minimum Bench-marks” for future.

(iii)If strongly felt by government, may seek a justified Revenue-Share (fixed or slabs) from profits above “Quoted Selling Price” .Anyway government will continue to earn Taxes / Royalty.

(iv)The earning from the National natural resources should not be withered away in the hands of coal bearing states but should be invested for benefit of the whole nation.

(v)To an extent possible, risks related to such large project should be taken over by the government

(vi)To encourage latest technology, technical bids should seek production & technology matrix etc.

(vii)Bidders should tie-up with equipment manufacturers with a commitment of “Make-in-India” component. Government can facilitate & influence it.

(viii)Supplementary Model:

a. In place of curtailing CIL Production, government should ask each CIL subsidy to bid against each other for “un-sold coal quantity” on Reverse Auction

b. Alternate method can be Blind Mark the Market, where

consumer quote secrete minimum price for specific “Mine-Source” & Grade

Similarly all CIL subsidiaries also put secrete minimum price for source & for Grade

If there is match, quantity is allocated

Else for 2nd round, CIL subsidiaries will reduce quoted price and buyer increase their quote. The iteration can continue.

Buyer gets option to bid for any other additional source in next round if he finds other subsidiary quote favorable on Landed basis.

Many parallel / alternative logic can be built for system efficiency

Infraline Energy would like to thank the contributor for his/her valuable time and opinion shared on the topic.