CHANDRAJIT BANERJEE
Posted: Wednesday, May 09, 2012 in Financial Express
: As per the latest core sector growth figures, coal output expanded only 1.2% in 2011-12, although it improved from last year’s negative 0.2%. Even as we move into the Twelfth Five Year Plan with an ambitious target of adding 75GW of power capacity, the continuing coal crunch threatens to trip the power sector and may impact the country’s growth story. Industry experts peg the immediate shortfall in coal supply for the power sector at 100-120 million tonnes per annum (mtpa) and the situation is only expected to worsen in the future. The incremental coal supply from both domestic as well as imported sources is likely to fuel only 45-55GW of capacity addition in the 12th Plan period, leading to a shortfall of 20-30GW.
Therefore, options to secure the supply of approximately 100-120mtpa of coal need to be urgently explored. This entails a mix of short- and long-term measures, comprising improving coal production and making bulk imports at reasonable prices sustainable.
Over the next 6-18 months, first, it is necessary to ramp up production from operating mines of Coal India Ltd (CIL). This can be done by benchmarking CIL mines with best-in-class mines to identify sources of losses (for example, labour and equipment productivity, technology gaps, etc) and the implementation of an operational transformation programme to enhance production. Increased emphasis on underground mining is another step in this direction. Monitoring progress and de-bottlenecking will lead to a 5-10% production improvement. Other steps include using private sector mine operators, amending the Contract Labour (Regulation & Abolition) Act to include outsourcing and contract works under any sphere of mining activity and eliminating illegal mining interfering with on-site production.
Second, accelerating production and supply from captive blocks should be encouraged. This can be done by incentivising mines producing less than their potential to sell excess production to CIL, creating a robust pricing methodology that helps the developer gain a reasonable premium on the extra mined coal and creating either a single-window clearance or at least a coordinated approach for clearances among various ministries. Reallocating captive coal blocks to the distribution utility of respective states where the distance between the power plant and the captive block is over 1,000 km will also help in increasing production as it will reduce infrastructure and logistic bottlenecks.
For blocks allocated to government companies and having most clearances in place but yet to start production, the introduction of a Mine Developer & Operator (MDO)-based structure, which would mine on behalf of the mine owner and get mining charges in return, would be beneficial. Coal could be sold to CIL till the commissioning of the designated end-use project, following which the coal could be diverted back to the designated end-use project.
For the other allocated blocks that are yet to start production, again, creating either single-window clearance or at least a coordinated approach for clearances among various ministries will expedite monetisation. In addition, reserving a certain proportion of coal blocks for the power sector and expediting the competitive bidding of captive coal blocks will give a fillip to coal production.
Third, strategic/sovereign sourcing of imported coal should be seriously considered. Setting up a well-capitalised procurer entity, with partners from CIL, financial institutions and other select players (NTPC, MMTC, etc) to import at scale will reduce the cost of mining by an estimated 10-20% with doubling of output, increase the likelihood of getting better contracts (and will also make it possible to make investments in infrastructure, if required). Approaching suppliers incentivised to supply over longer term through index-based contracts (price linked to a basket of international indices having individual weightage) and developing a robust allocation and pricing policy for centrally-procured imported coal are other key strategies.
Finally, infrastructural and financial implications related to coal imports must be strategically addressed. These can be eased by re-structuring tariffs to hold power companies responsible for capital costs, plant efficiency and fuel availability, but allowing for the impact of changes in laws and regulations in the coal source countries, allowing bulk coal imports for power plants located near coastal areas and allocating domestic coal to inland plants to optimise transportation availability and reduce procurement costs.
A number of steps are needed to ensure fuel security in the long term. Private participants, selected through competitive bidding, can help expand coal exploration and achieve the annual target of 15 lakh metres of drilling. Such blocks may be allocated to private developers tied up with designated power projects as end-use. A coal regulatory body is essential for transparency and pricing.
For streamlining the supply chain, the development and import of Indian-owned foreign resources must be encouraged. Port and handling infrastructure for coal imports can be expanded through the facilitation of investments in overhauling coal berths at greater sea depths, deeper ports and new coal berths. Concurrently, dedicated railway freight corridors and roads for movement of larger trucks can ensure hinterland connectivity.
A trading platform to be anchored by CIL for the sale of e-auction coal and excess coal from captive mines would facilitate trading. Finally, commercial mining must be progressively de-linked from end-use.
It is imperative to adopt these measures to ensure that the growth in the power sector is not derailed and power companies are not compelled to scale down their capacity addition targets.
The author is director general, CII
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