Power crisis won’t be solved anytime soon: Why it’s difficult to turnaround the coal sector

coalVivek Kaul

In a column in The Indian Express published on September 9, 2014, Neelkanth Mishra, India Equity Strategist for Credit Suisse pointed out that “a large number of your power plants are running with less than four days worth of coal inventory…Even a flash strike would cripple India, let alone a prolonged confrontation.”
This when India has the third largest coal reserves in the world. Despite the enormous reserves we are unable to produce enough coal to meet the demand. During this financial year the demand for coal is expected to be at expected to be at 787 million tonnes. The supply is expected to be at 590 million tonnes.
The government of India had expected this rise in demand and in 1993 decided to give out coal blocks to public sector as well as private sector companies. The idea was that these companies will also produce coal and the country would have enough coal to meet the demand. These coal blocks had geological reserves amounting to 44.8 billion tonnes.
A bulk of these mines were given out starting in 2004, after the Congress led United Progressive Alliance came to power. The Screening Committee route which was used to give away these blocks was deemed to be fairly arbitrary by the Supreme Court in a recent judgement: “The entire exercise of allocation through Screening Committee route…appears to suffer from the vice of arbitrariness and not following any objective criteria in determining as to who is to be selected or who is not to be selected. There is no evaluation of merit and no 
inter se comparison of the applicants. No chart of evaluation was prepared. The determination of the Screening Committee is apparently subjective as the minutes of the Screening Committee meetings do not show that selection was made after proper assessment. The project preparedness, track record etc., of the applicant company were not objectively kept in view.”
Given this, the Supreme Court deemed these allotments to be “illegal”.
On September 8, 2014, the government told the Supreme Court, that it had no objection if all the 218 coal blocks that were allocated through this route to the public sector as well as private sector companies are cancelled. Around 31 coal blocks that had been allocated currently produce coal.
At close to 53 million tonnes in 2014-2015, these blocks will produce around 9% of the country’s total coal production of around 590 million tonnes. If the licenses given to these blocks are cancelled, there will be a huge coal shortage. In a previous piece I had estimated that importing this coal from Indonesia will cost around Rs 17,300 crore, pushing up the power tariffs further.
One suggestion that has been put forward is that the government owned Coal India Ltd should take over the functioning these coal mines and ensure that the production does not stop. This seems to be a sensible thing to do, once the intricacies of who gets to keep the profits made from the coal being mined out of these mines, is decided.
Further, these coal blocks are likely to be auctioned in the days to come. As the PTI reports “According to sources, the Ministry of Power and Coal is planning to auction the blocks, allocation of which may be scrapped by the apex court, by the end of the fiscal. “The entire process of coal block auction will take at least 6 months,” the source said.””
While theoretically this sounds the best way forward, auctions may not be so easy to carry out. The Coal Block Auction draft guidelines were released on April 4, 2011. And nothing has happened since then. One reason obviously is the lack of work culture that prevailed during the previous Congress led UPA government. But there is more to it than just that.
As Neelkanth Mishra of Credit Suisse wrote in a research note released in March 2014 “The government has been planning to conduct coal block auctions for close to three years now (see link), but despite repeated pronouncements of it being a few weeks/months away, there has been little progress. In our view, the challenge is inadequate prospecting—the ministry may be apprehensive of the winning private bidder in an auction managing to increase reserves estimates within a short time frame. Such a development would create negative press and possibly trigger anti-corruption investigations. Thus, blocks are unlikely to be auctioned till reserves have been updated.”
This needs to be explained in a little more detail. The Geological Survey of India first carries out what is known as promotional drilling. This gives sort of a quick and dirty estimate of the total amount of coal reserves in a block. It is followed by detailed drilling carried out majorly by the Central Mine Planning Design Institute(CMPDI), one of the subsidiaries of Coal India. The Mineral Exploration Corporation also chips in. This round of drilling gives an exact estimate of the quantity of coal in the blocks along with other characteristics like quality, depth, gradient of coal seams, the ash content, volatile matter, water content etc. These parameters are used to prepare the proect report.
CMPDI currently is understaffed to carry out this exercise quickly enough. Experts believe that in order to carry out this exercise completely, it will take many years. Also, without a proper estimate of the amount of coal that can be mined out of a block, it is risky for the government to auction the block, given that it could later lead to litigation. Hence, it is important this exercise be completed properly. The mining of coal from these blocks can take a few more years after the completion of this exercise. Estimates suggest that it takes 10-12 years to get a coal mine going.
In fact, this mess could have been avoided if the coal blocks would have been allotted through competitive bidding, from the very beginning. In August 2004, PC Parakh had proposed to Manmohan Singh (who had taken over as coal minister after Shibu Soren resigned) that the allocation of coal blocks should be done through competitive bidding.
In fact, even before Manmohan Singh had taken over as coal minister from Soren, Parekh had called for open house discussion of the stakeholders in June 2004. This included the business lobbies FICCI, CII and Assocham. Several other ministries whose companies had applied for coal blocks were invited. So were private companies.
Parakh writes that most of the invitees were not in favour of competitive bidding for coal blocks. As he writes in
Crusader or Conspirator—Coalgate and Other Truths “not many participants were enthus
iastic about open bidding. Their main argument was that the cost of coal to be mined would go up if coal blocks were auctioned.”
Due to this and other reasons, the coal sector has landed up in a huge mess. And given the lack of supply of coal, power plants are not working to their full capacity. “Plant load factors for thermal power plants have been plummeting, and would be below 60% (i.e. going back to levels seen in the mid-1990s) if one includes capacity completed but not commissioned,” writes Mishra.
It is unlikely that the coal production and hence, power production are going to go up dramatically any time soon. The least that the government can do is to prevent further damage and act quickly to get the sector up and running, over the next five years that it is in power.

The article originally appeared on www.Firstbiz.com on September 10, 2014.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

Why giving away coal blocks for free was never a solution


Vivek Kaul
In the year 2011-2012 (i.e. the period between April 1, 2011 and March 31, 2012) India produced around 540million tonnes of coal. This was 1.36% more than the amount produced in 2010-2011 (i.e. the period between April 1, 2010 and March 31,2011).
Of the 540million tonnes Coal India produced around 436million tonnes or a little over 80% of the total coal produced in India. The remaining was produced by Singareni Collieries Company and a host of other small companies.
This production wasn’t enough to meet the demand for coal in India. Hence, India also imported 99 million tonnes of coal during the course of the year primarily from countries like Australia, Indonesia and South Africa.
The amount of coal, India has been importing has been growing significantly over the years (as can be seen from the table below). What also comes out clearly is that the amount paid for importing coal grew at a much faster rate than the amount of coal imported between 2003-2004 and 2008-2009. This was the period when the international prices of coal were rallying and touched $190 per tonne in mid 2008.
Coal Imports In Million tonnes In Rupees crore
1999-2000 19.7 3548
2000-2001 20.9 4053
2001-2002 20.5 4536
2002-2003 23.3 5028
2003-2004 21.7 5009
2004-2005 29 10266
2005-2006 38.6 14910
2006-2007 43.1 16689
2007-2008 49.8 20738
2008-2009 59 41341
2009-2010 73.3 39180
2010-2011 68.9 41550
2011-2012 98.9 45723*
*from April-Oct 2011
Source: Provisional Coal Statistics 2011-2012, Coal Control Organisation, Ministry of Coal
Why this was not par for the course
All this would have been par for the course if India did not have enough coal reserves. Like is the case with oil. We don’t have enough known reserves of oil and hence we don’t produce enough oil to meet the demand. So we import oil.
But as numbers for the Geological Survey of India indicate as on April 1, 2012, India had 293.5billion tonnes of coal reserves. These reserves are referred to as geological reserves and are for valid for a depth between 0.9 metres and 1200 metres.
Not all of these reserves can be mined. Open cast mining of coal typically goes to a depth of around 250 metres below the ground level whereas underground mining goes to a depth of around 600-700 metres.
The amount of coal that can be extracted is referred to as extractable reserves. PC Parekh, a retired IAS officer in a presentation puts the extractable reserves at around 60billion tonnes. (You can access the presentation here). A few other experts this writer spoke to said that this number could be significantly higher.
But that’s beside the point. What this clearly tells us is that India has enough coal to mine unlike oil. Given this, India should not be importing the nearly 100million tonnes of coal that it did during the last financial year.
So then why is India not able to mine enough coal? The simple answer is that Coal India which is the biggest producer of coal in the country is not able to produce enough coal. One look at the following table clearly proves that.
Year Production (in million tonnes)
2011-2012 436
2010-2011 431
2009-2010 415
2008-2009 400
2007-2008 372
2005-2006 348
2004-2005 371
Average 396
Source: Coal India
Why coal blocks were given away for free
Between 2004-2005 and 2011-2012, the total coal production has increased by 17.5% or at a miniscule rate of 2.3% per year. The slow increase in the production of coal did not help given that India has been second the fastest growing economy in the world for a while now. Hence, the energy needs of the country have been growing as well. This meant greater demand for coal. A study published in 2011 shows that coal is used to meet 40% of India’s energy needs against the global average of 27%.
What did not help was the fact that between 2004-2005 and 2008-2009 there was a rally on in global commodity prices as China expanded at breakneck speech gobbling up commodities from all over the world. Hence, the price of coal shot through the roof. The international price of coal was a little over $20 per metric tonne in mid 2003. It shot up to around $40 per metric tonne in mid 2005 and kept rising after that. Prices shot up to around $190 per tonne internationally in mid 2008.
Given these reasons the government felt that there was a need to look beyond Coal India. In fact, the inability of Coal India to produce enough coal was the main reason why The Coal Mines (Nationalisation) Act 1973 was amended with effect from June 9,1973, to allow the government give away coal blocks for free.
The Economic Survey for 1994-95 points out the reason behind the decision. “In order to encourage private sector investment in the coal sector, the Coal Mines (Nationalisation) Act, 1973 was amended with effect from June 9, 1993 for operation of captive coal mines by companies engaged in the production of iron and steel, power generation and washing of coal in the private sector,” the survey points out.
The total coal production in the country in 1993-94 stood at 246.04million tonnes having grown by 3.3% from 1992-93. The government understood that the production was not going to increase anytime soon because the newer projects were having time delays and cost overruns. As the 1994-95 economic survey put it “As on December 31,1994, out of 71 projects under implementation in the coal sector, 22 projects are bedeviled by time and cost over-runs. On an average, the time overrun per project is about 38months.There is urgent need to improve project implementation in the coal sector”.
Even though the decision to give away coal blocks for free came into effect in 1993, nothing much happened till 2004. Between 2005 and 2009, the government of India gave away 149 coal blocks for free. This was also the time when the global rally in coal prices was on and the Indian demand for coal was also on its way up. The conclusion that one can draw from this is that before 2004 it was cheap for a company to import coal because international coal prices were low. But after that things changed and it made more sense for companies to have direct access to coal.
But giving away the coal blocks for free did not solve any problem. As per the report prepared the Comptroller and Auditor General of India, as on March 31, 2011, eighty six of these blocks were supposed to produce around 73million tonnes of coal. Only 28 blocks have started production and their total production has been around 34.6million tonnes, as on March 31,2011.
Why Coal India cannot increase production at a faster rate
In all this, the question that nobody seems to be asking is that why is Coal India not able to produce enough coal? It has probable reserves of around 18.9billion tonnes, but is still unable to expand production at a higher rate.
If I was a television journalist I would say that Coal India has been unable produce more simply because it is inefficient like most Indian public sector companies. But the truth is a lot more complicated than that. And it to a large extent explains why the government’s decision of giving away coal blocks for free hasn’t worked.
India’s coal reserves are largely concentrated in the middle of the country in the states of Jharkhand, West Bengal, Odisha, Madhya Pradesh, Chattisgarh, Maharashtra and Uttar Pradesh. There are some reserves in the North East as well, but they are at best miniscule. It does not help that the states that have the biggest coal reserves are also dealing with naxalite problem. Hence operating in these regions isn’t very easy.
A lot of the coal reserves are also in regions categorized as forest areas and getting clearances from the state governments isn’t always easy. What also has not helped is that the Ministry of Environment and Forests which gives the overall environment clearance isn’t known to be terribly efficient. As NC Jha told Times of India at the beginning of the year “Our 168 projects are pending environment and forest clearances at the Centre and State levels. Sixty-seven of these projects are greenfield and we are unable to make any investment in these. Remaining are ongoing expansion schemes, which too have been stalled.” Jha was the Chairman of Coal India at that point of time.
But these are small problems. The biggest problem facing Coal India is acquisition of land. The right to property is not a fundamental right in India. And over the years the government of India has acquired land forcibly from the citizens of this country at rock bottom prices. In the city of Ranchi, where this writer grew up, original landholders have still not been paid after their land was acquired to set up what was then one of the biggest public sector units in India.
Attempts to rehabilitate people whose land is acquired by the government, is rarely made. The homes built for this people are unlivable to say the least in a lot of cases. Hence, people resist to hand over their land, their only source of income.
Given this attitude of the government of India over the years the issue has become politicised. Hence, the state governments are not interested because by forcibly acquiring land they are likely to lose votes.
Due to these same reasons giving away coal blocks for free hasn’t worked and will not work. 193 out of the 195 coal blocks that government has given away for free are in the states of Jharkhand, West Bengal, Odisha, Madhya Pradesh, Chattisgarh and Maharashtra. All these states have a naxalite problem and that will effect the private and other government players as much as it has been impacting Coal India. The government’s environmental policy and the land acquisition policy continue to remain in a mess.
What also does not help is the fact that the expertise required to get a coal mine up and running is largely limited to Coal India. Mining coal isn’t exactly as easy as digging a tube-well.
In order to get a block up and running, companies need to prepare a mine plan, carry out the environmental impact study (EIS) of the area etc. The EIS essentially looks at what the current environment of the area is like, how mining coal will change that and what can be done to ensure that the current environment can be maintained. For Coal India this planning is done by Central Mine Planning and Design Institute (CMPDI), a 100% subsidiary. Such expertise is not easily available in the private sector.
To conclude
Coalgate is not a problem that emerged overnight. It is a problem created by the various Congress governments (given that the party has ruled the country for the most part since independence) over the years. This led to the Congress led UPA government giving away coal blocks for free to ensure that India produces more coal. But that is a problem that remains and will remain.
All data unless otherwise stated has been sourced from Provisonal Coal Statistics, 2011-2012, Coal Controller’s Organisation, Ministry of Coal.
(The article originally appeared on www.firstpost.com on September 11,2012. http://www.firstpost.com/business/why-giving-away-coal-blocks-for-free-was-never-a-solution-450915.html#disqus_thread)
(Vivek Kaul is a writer. He can be reached at [email protected])