Reorganising India’s coal sector

India is pursuing an ambitious, yet inclusive development agenda, which primarily includes 24/7 access to electricity for everyone by 2020. India’s current per capita power consumption of 930 units is a third of China’s and much lower than the world average. At this level of consumption, roughly 35% of the population (400 million) does not have access to power. Those who are lucky, access it for less than 24 hours a day – in some cases as low as 8 hours or less. Estimates indicate that attempts to correct both these inadequacies, by making power available to all and on a 24/7 basis at the current level of average consumption, will move per capita consumption up from 930 to 1800 units. Achieving this objective by 2020 would require the integrated development of thermal, hydro and renewable power.

There has been an increasing focus on renewable power and its ability to meet India’s power demand in recent times. The possibility of solar and wind power becoming affordable is progressively apparent. However, five years may not be enough for a substantial capacity addition to these segments. This is because even now the cost of renewable power is hovering around levels that can only be sustained for meeting peak demand.

Thermal power will, therefore, continue to remain at the centre stage in the next five years. The continuing unavailability of domestic gas combined with the higher price of Regasified Liquefied Natural Gas (RLNG) shall restrict the increased use of natural gas for power generation. In other words, the required rise in the generation of thermal power will depend on coal.

The current annual thermal coal consumption (FY 14-15) is approximately 750 million. Of this, 550 million is produced domestically and the balance met by imports. At this level of consumption, the coal requirement of all generation capacities is not fully met. Besides, significant stranded capacities are awaiting coal linkages to become operational. Hence if all generation capacities in the country, including those that are in advanced stage of construction (in the next 12 months or so) have to acquire the full complement of coal requirement, the additional demand would be of the order of 250 million tonne. In other words, the full demand of coal in a year from now would be to the tune of 1000 million tonne. This is slated to rise further to around 1500 million tonne by 2020 to realise 24/7 access to electricity for everyone by the end of that year.

India is rich in coal resources. The aggregate resources already explored through regional drilling are estimated at over 300 billion tonne, of which the proven reserves established through detailed drilling are of the order of 120 billion. Another 35% of the coal-bearing area is waiting for regional drilling. With an appropriate institutional structure in place, it should be possible for resources of such magnitude to support the production of the full requirement of 1.5 billion tonne domestically.

In essence, the country needs domestic coal production to step up from 550 million tonne per annum (MTPA) currently to 1500 by 2020, if it has to meet the entire demand from domestic production and cut imports of thermal coal. This translates to a five-year compound average growth rate (CAGR) of over 22%.  The best CAGR achieved so far is around 7% (2009-10 & 2014-15). The magnitude of the task before the India can be well appreciated by these numbers.

With the Ministry of Coal intensely engaging with other relevant ministries like Rail, Power and Ministry of Environment & Forests, as well as with the coal-bearing States, a remarkable improvement in coordination has occurred. Environmental and forest clearances for coal projects have picked up the pace. Land acquisition in the States for coal projects is becoming easier than before. Action in laying the crucial railway lines in coal belts has gathered momentum. Admittedly, the scope exists for further simplification of procedure and pace. Building an institutional framework to bring in the desired coordination, as part of a larger governance process, rather than through direct engagement of top officials, is necessary for the sustained efficiency of the system. As of now it may be logical to expect the emergence of such a framework in due course of time.

Even with the intense engagement for better coordination, the best growth rate achieved in recent times is 12% for the first quarter (Q1) of FY15 for Coal India Ltd (CIL). Sustaining the best quarterly growth throughout the entire year and thereafter for five years is unreasonable to expect, particularly keeping in view the aspects of seasonality. Achieving an annual growth of 10% by CIL on a sustained basis is most probably the best case scenario. CIL produced 494 million tonne in FY15. At 10% CAGR, it is expected to grow to 800 million tonne in FY20. Singareni Collieries Company Limited (SCCL), the other Public Sector Unit, has limited scope for growth and may achieve a production level of around 70 million tonne by that year.

The end user segment, though have regained over 60 blocks including the 38 blocks that were operational prior to March 15. However, they are yet to stage a significant comeback. The bids offered to acquire the right to mine coal have in some cases become as high as the price of coal itself! The insatiable urge to secure coal supply for end use has produced bid prices that do not appear to stand the test of rationality. The sharp decline in the international price of coal has aggravated the possibility that mining the allotted blocks could become infeasible. In other words, it may not be prudent to expect the end <g data-gr-id="116">use</g> segment to grow even at the overall asking rate of 22%. A 10 to 12% growth in that segment may be a safe assumption. The FY15 coal production from this segment was around 45 million tonne. One can expect the production to settle at 80 MTPA in FY20.

The resultant gap between demand and production staring the country in FY20 is therefore of the order of 500 – 550 million tonne. Left unaddressed, it may only lead to doubling of imports from current levels – undesirable for a coal-rich country. The only way to bridge the gap is to provide access to multiple players with core competence in coal mining. Not many domestic players have the desired competence for mechanised mining. Therefore opening up the sector to global players through a transparent mechanism is imperative.

In the first stage, the residual schedule III coal blocks that have not been auctioned out may be earmarked for opening the sector to commercial mining. Incidentally, the delineation of coal deposit into blocks was done keeping in mind the requirement of end users for a prescribed period. Typically the blocks can sustain production of 1 to 3 or in some cases 5 MTPA for 30 odd years. Such quantum of reserves and production potential is unlikely to attract globally competent miners. It is hence imperative that services of competent geological consultants are requisitioned to merge the blocks wherever feasible and create a smaller number of large sized blocks that can ideally sustain coal production of 40 to 50 MTPA. This process will also help avoid considerable coal deposits being lost to maintain inter-block boundaries.

In the next step a few globally acclaimed mining consultants with capability to provide software driven mine plans should be selected through a transparent QCBS (Quality & Coast Based System) model to develop the optimal mine plan, technology and equipment configuration for each block. 

Thereafter an Expression of Interest (EOI) may be sought closely associating the concerned mining consultant to select the allottee from among coal mining companies with requisite technical and commercial capability.

A QCBS process widely adopted by multilateral funding institutions to determine the best suited. It is a transparent selection process that places due weight on technical competence and price. Typically a larger weight is placed on determining technical competence. Respondents securing the cut-off score in a technical evaluation are allowed to participate in the price bid opening. The lowest price is given the highest score assigned to price with others getting a pro rata score. This is then added to the score obtained in technical evaluation to select the best bidder.

Adoption of such a process will remove the uncertainties associated with only price based bidding. The imperative need is to add multiple players with core competence in mining to meet the emerging demand-supply gap. The outcome of the ‘only price’ based bidding adopted among end users may not be conducive to meet the national objective of attaining self-sufficiency in coal and eventually realising the ambitious agenda of 24/7 electricity for everyone by 2020.

The opening up of the coal sector to commercial mining through the process mentioned above does not dilute the importance of Coal India Ltd and its subsidiaries. It only allows other players to complement CIL in meeting the nation’s coal demand. The market situation post opening up will be similar to the situation that prevails in banking, insurance as well as in other economic sectors such as oil, fertilisers mining of minerals, etc. It should be therefore possible for the political leadership to address any concerns that may be voiced by trade unions and other political parties. The new statutes brought in by the new government have enabled it to statutorily implement these measures.