Closing the gap

The Ministry of Coal has recommenced the process of allocation or auction of coal blocks. In the meanwhile, the government has approved FDI in coal mining recently. These initiatives together have the potential to end the decade-long coal shortage. It may be useful to ascertain the gap between coal consumption and domestic availability as well as the pace of fresh allocation of coal blocks required to make this happen.

In FY2019, India consumed 965 million tonnes (mt) and produced 730 mt. The gap of 235 mt, equivalent to 32 per cent of domestic production was met by import. Out of this, roughly 125 mt was thermal coal import for non-coastal consumers, that is replaceable by domestic coal. This avoidable import took place despite CIL recording a robust production growth of 40 mt during the year. Import in this category was near zero in 2007. Since then, accelerated capacity addition in power generation not matched by commensurate addition to coal mining capacity led to exponentially growing import. The economic consequences are substantial - a forex outgo of 10 bn US$ and 25-30 per cent higher cost of coal, negating to an extent, the goal of affordable power generation.

The situation can be reversed by fast-tracking capacity addition in coal mining. Allocation by auction or otherwise of coal blocks to players with core competence in mining and project execution is the need of the hour. The size and number of blocks to be allocated can be derived as follows.

Assuming a 30-year life of a mine, creation of 125 mtpa capacity will require allocating 3.75 bn tonne of proven extractable reserves. Considering 150 per cent factor ususlly adopted to account for the fact that not all coal resources are proven & extractable, this translates to the allocation of 5.6 bn tonne of coal resources. Thus, replacing avoidable import of 125 mtpa by domestic production requires allocation of at least 5.6 bn tonne coal asap.

A forward-looking assessment of the gap should also include additional coal demand likely to arise from power sector reforms, namely:

4Isolating Discoms from bearing the burden of subsidy for the supply of power to agriculture through DBT or otherwise. This is likely to become imperative to enforce the recent directive of opening of LC by Discoms for drawing power from gencos. This will infuse the ability to Discoms to buy & sell more power. As a result, the avg PLF currently languishing at a low of 60 per cent can easily move to 70 per cent. This will result in additional coal demand of 100 mtpa that has to be met by creating additional mining capacity. The coal deposits required to be allocated for mining to bridge this gap is estimated at 4.5 bn tonnes.

4The stranded power assets estimated at 40GW is expected to be operationalised as structural/ownership issue get resolved through NCLT proceedings or bilaterally. This will generate a potential coal demand of 200 mtpa. Meeting the gap will require allocation of 6 bn tonne of extractable coal reserves or 9 bn tonne of coal resources.

In other words, a fast track allocation of around 19 bn (5.6+4.5+9) tonne of coal resources to competent players is imperative for the Nation to eventually come out of the continuing coal crisis in a time span of 5/6 years.

The recent Cabinet approval of 100 per cent FDI in coal mining needs to be leveraged to attain this goal. The core competence of coal mining and execution of coal projects in India is restricted to Coal India Limited, SCCL and of late with NTPC. A few MDOs have acquired some capacity over the years, more as a contractor than a mining leaseholder. The gap of 425 mtpa is despite these players operating in the market. Among these only NTPC is set for fast track growth over its current base of around 11 mtpa production.

Enhancing domestic coal capacity by 425 mtpa will, therefore, require international mining companies to step in. Expectedly, they shall bring in best practices in coal mining, man management and environment management, provided proven track record in these areas are adopted as eligibility criteria for bidding.

Mechanised Under Ground (UG) mining has not received the required focus any time since nationalisation. As a result, UG production is currently at a low of 7 per cent of the total coal produced although around 25 per cent of coal resources occur at depths that are accessible by UG mining. In countries like the US, Australia and SA where coal mining is advanced, the share of UG production is significantly higher. Participation of International mining companies will enable allocation of coal blocks at greater depths for eco-friendlier mechanised UG mining.

Some of the international giants have had painful exits in the past. Admittedly, initial hesitation to participate is likely. However, the brighter side is that India is currently the only market where coal consumption is witnessing robust growth and coal mining continues to be profitable. Hence, identifying large commercially meaningful blocks and offering those through a transparent auction process together with facilitating a single-window service to secure clearances, can possibly attract international mining companies. Prior engagement with potential bidders through one-on-one discussions or in groups can make the much-needed difference.

Coal India Ltd is likely to benefit in terms of efficiency gain through competitive pressures and the adoption of best-in-class processes for mining and environment management.

These measures should eventually enable the country to witness the development of a matured coal market that offers multiple choice of domestic sourcing to buyers and choice of marketing in domestic as well as export market to the sellers.

(The author is former Chairman, Coal India Ltd. The views expressed are strictly personal)