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Eventually, we will have to import coal, Nirmal Chandra Jha, Former Chairman, Coal India Ltd

24 Apr 2012

Nirmal Chandra Jha, Former Chairman, Coal India Ltd talks about the constraints of the coal sector. In a free-wheeling chat with Infraline, he delves at length on the limitations of increasing domestic coal production and how the increasing demand would require coal to be imported in future.

Edited excerpts.

Coal shortage in India is affecting many new projects. What is the reason?

Over-dependence on coal as a means of primary energy supplier, mainly due to cost considerations, has led to increased thrust on domestic coal availability, which in turn has its own constraints, leading to its shortage. Due to domestic coal shortage and the spiraling prices of imported coal, many new power projects in the country are operating at sub-optimal capacity.

Coal deficit in India is likely to grow from nearly 115 million tonnes in 2011-12 to 265 million tonnes by 2016-17 and may further rise to 473 million tonnes by 2021-22 i.e. the terminal year of XIIIth plan period. The demand for coal is projected to rise at the rate of 6.4% (CAGR) from 696 million tonnes in 2011-12 to 980 million tonnes by 2016-17 and is likely to continue rising @ 7.3% (CAGR) to a level of 1373 million tonnes in the XIIIth plan period. CIL's contribution to all India production is projected to reach to 556 million tonnes on business as usual case and 615 million tonnes on best case scenario by 2016-17 from the level of 436 million tonnes in 2011-12.

"CIL will have to bring in the concept of pooled price mechanism and fix the prices of domestic and imported coals periodically"

In view of the widening demand-supply gap scenario, government of India had put in place a system for allocation of coal blocks to various government companies, private companies and Ultra Mega Power Projects (UMPP). As of 31st March 2011, about 216 coal blocks (including some blocks which had subsequently been de-allocated) with an aggregate geological resource of about 50 billion tonnes of coal have been allocated to attract investments in the coal sector and increase production. Out of the 216 coal blocks allocated, only 28 coal blocks had commenced production by 2010-11, contributing a meager quantity of 34.60 million tonnes, representing a dismal 6% of all India coal production (533.07 million tonnes).

What are the major constraints in increasing production?

The major constraints in augmenting coal production as per the Five year plan projection are mainly due to severe problems encountered in land acquisition and associated R&R issues. As a matter of fact, about 90% of India's coal production is obtained from opencast projects, which requires land for its continued operations. Land in effect can be considered as a basic input for the coal industry. Even though the State and Central governments have formulated Rehabilitation and Resettlement (R&R) policies for land losers, serious problems are faced in taking possession of land due to ever rising ambitions of land losers across the country.

In the recent past, obtaining environmental and forestry clearances have been perhaps the most critical issues and delays involved continue to linger on in most of the cases. Ironically, Coal in India is found in forests and places that are inhabited by tribes. Mining disturbs both and therein lies the complexity of problems, hindering the commencement of scheduled production. If the Project has both forest & non-forest land, work is not permitted even on non-forest land till Forestry Clearance (FC) is obtained for the Project. Thus, a mining project cannot commence its operation till FC for the project is obtained, even if, the forest land is not required for its operation in initial stages. The average pendency in obtaining forestry clearance at Stage -I and Stage-II levels at the States is alarmingly high in excess of 3 years each. As on date, for Coal India alone about 125 forestry proposals are awaiting Stage-I approval and 52 proposals await approval at Stage-II level. Thus, a total of 177 forestry proposals, involving about 29300 Ha of land in the name of forest, for a projected output of approx 207 million tonnes per annum, are awaiting clearances for a time period far in excess of the stipulated schedule in the FC Act.

Although coal mining has long been a part of wilderness, new projects and expansion of ongoing projects are facing increased environmental scrutiny from Environment groups. The concept of Comprehensive Environmental Pollution Index (CEPI) was introduced in the year 2010, which put on hold the EC of mining projects in 8 coal bearing areas. While the restriction has now been gradually lifted in some of the clusters, the same is still continuing in other clusters. As a result of CEPI embargo, about 17 projects have been affected that would have contributed around 39 million tonnes of coal in the last fiscal.

Plus, the desired growth in coal sector is also impeded by the lack of adequate infrastructure in upcoming coalfields. Four major up-coming coalfields which are relatively newer compared to the other coalfields that have been extensively exploited have good potential for production enhancement. However, projects in these upcoming coalfields lack availability of rail infrastructure and other logistics that needs to be further augmented. This lack of infrastructure and logistics support is restricting increase of any production from these coalfields.

What kind of policy reforms are being made?

The new National Mineral Policy 2008 seeks to develop a sustainable framework for optimum utilization of the Country's natural resources for the industrial growth in the country. It also envisages action areas for improving the life of people living in the mining areas, which are generally located in the backward and tribal regions of the country. The policy also enunciates that special care will be taken to protect the interest of host and indigenous populations through developing models on best practices. Project affected persons will be protected through comprehensive relief and rehabilitation packages in line with the National Rehabilitation and Resettlement Policy.

Further, the Mines and Minerals Development and Regulation (MMDR) Bill 2011 provides that for all exploration activities, suitable compensation shall be payable to the person or family holding occupation or traditional rights on the area of exploration. All mining lease holders will be required to pay annually into District Mineral Foundation, a sum equivalent to royalty in case of major minerals (other than coal) and a sum equivalent to 26% of profit in case of coal. Mining companies are required to allot at-least one share at par to each person of the family affected by mining so as to give a sense of ownership in the enterprise, provide employment or other compensation as stipulated under the R&R policy etc. After mining is complete, mining companies need to pay for damages, if any, to affected persons as part of the mine closure and restoration process.

A new Land Acquisition and Rehabilitation & Resettlement (LARR) bill has recently been introduced in the Parliament which also has provisions for increased compensation to land losers and one job per affected family. Clarity on the above policy reforms (viz. Who will administer it, how & when, who will ensure that an investor will not face trouble once compensation is paid to villagers etc) which have far reaching effects on the Indian energy sector must be addressed on priority.

Addressing the production hindrances is the dying need of the hour or else the high GDP growth achieved in recent past will be severely affected, especially when the global economic environment looks bleak.

What have been the directives from the government to CIL in recent times?

In the light of the New Coal Distribution Policy (NCDP), issued by the Government of India in 2007, Coal India Ltd was directed to issue letters of assurances (LOAs) to the power projects likely to come up in future. After this CIL did not have any option but to issue LOAs, whether it had coal availability or not. Over the years, a large number of LOAs have been issued amounting to around 423 million tonnes per annum of additional coal supply commitment for the power projects alone out of a total of 490 million tonnes per annum LOAs issued. Coal India had signed the fuel supply agreements with the power projects already existing till March 2009 for the total annual commitment of 306 million tonnes. For the power projects that have come up after March 2009, Coal India Ltd, in view of acute shortage of domestic coal, had been insisting for supplying coal from domestic sources to the extent of 50% of total requirement and the balance to be supplied from imports at a price that it would be available. The power plants did not agree to sign FSAs on such terms.

The Government of India, through a presidential directive, has now directed Coal India Ltd to sign fuel supply agreements with a commitment to supply at least 80% of their requirement, even by resorting to imports.

Going by the production plan of Coal India Ltd for the next five years and also the LOAs granted for the power plants, commissioned in the last 3 years as well as likely to be commissioned over next five years, there appears to be a huge shortfall of coal availability from domestic sources in the coming years. In the face of the directives, even for meeting the minimum commitment as per FSAs, Coal India will necessarily have to import increasing amounts of coal over the years to avoid payment of any penalty to the consumers.

Considering the situation, is importing coal an option?

Coal India, being a business organization and having been listed on the Stock Exchanges, definitely cannot afford to bear this additional price of imported coal. It will have to bring in the concept of pooled price mechanism and fix the prices of domestic and imported coals periodically. With the system of coal pricing on GCV base having been adopted now, pooled price mechanism will be easier to formulate. This will help both Coal India and the consumers of coal, as both domestic and imported coals to any consumer will be available at the same price for any particular GCV band.

The above arrangement will require a lot of new initiatives to be taken up by coal India Ltd. It will have to create infrastructure for importing coal, handling the same at the ports and distributing it to the consumers from the ports. At the same time it will have to institute a pooled price mechanism and keep on modifying the same on a periodical basis, say bimonthly or quarterly. It would also require rationalization of pricing of domestic coal for the different GCV bands. The current pricing of different GCV bands are guided by the erstwhile UHV-based prices. This will have to be corrected over time to ensure that all consumers pay price for the heat value of the coal that they get.

Indian Railways will also have to increase its fleet of rakes to handle the increased coal movement from the ports to different consumers of coal and rationalize their movement. Existing Port facilities will require further augmentation to meet this increased requirement, like faster unloading of vessels, higher storage capacity and equally faster loading system into Railway rakes.

But won't the constant increase in demand for coal and limited availability of domestic coal would eventually require importing of coal?

Absolutely. Ever-increasing coal demand and increasing limitations on availability of domestic coal would spiral the need for imported coal in future years. This situation cannot be allowed to continue for long in the interest of the national economy. Production of domestic coal will have to be increased to match the growth rate of the country. This will require faster clearance of the coal projects, both environmentally as well as from the point of view of Forest land clearance and ensuring availability of tenancy land to the coal producers to enable them to mine coal from where it occurs. All stakeholders of coal need to clearly understand this and need to collectively create conducive atmosphere for the coal producers, particularly Coal India Ltd, to enable it to produce more and more domestic coal.

Equally important is the point that whatever coal is produced domestically must move out from the mines to the consumer end, for which a lot of initiatives have to come from the Indian Railways in the areas of creation of new siding lines in the upcoming relatively newer coalfields as well as strengthening the existing main lines to handle the increased transportation load of coal. For the past 5 years, even with the sluggish growth in coal production of Coal India Ltd, the pithead inventory of coal has been rising, with the latest level of more than 71 Million Tonnes in the last fiscal and the power plants have been starving of coal.

Till such time the domestic coal production capacity is enhanced and the infrastructure to handle such coal is created, the country will have to severely depend on imported coal for its additional demand, if it can afford its cost, or else live with reduced growth rate. The solution lies in the hands of the Government, given the 287 Billion Tonnes of domestic coal resource. There needs to be an integrated and unified approach to the problem of coal availability rather than leaving it on to one sector/company to meet entire coal demand of the country.

Views expressed in this article are personal view of the author and not of the company that he belong to earlier.

(InfralineEnergy thanks Nirmal Chandra Jha, Former Chairman, Coal India Ltd for sharing his valuable insights with our readers. The column 'In-Conversation', is a platform to engage experts from various sectors to share their views on the different transformations happening in the Indian energy sector.)