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JUN 04 2012

Looking beyond Coal India

  • Economic Times, ET Bureau / Hyderabad
  • Created: Mon 04th JUN 2012

Old equipment and technology limiting excavation potential

Inefficiencies of Coal India Ltd (CIL) have ensured that India, despite geological reserves of 286 billion tonnes, produces only 550 million tonnes per annum (mtpa) of coal. To meet the shortfall, the country has to import about 100 million tonnes of coal each year.

In the 1980s, the telecom sector was not very different from today’s coal sector. The state’s monopoly in telecom was exercised through Mahanagar Telephone Nigam Ltd, Videsh Sanchar Nigam Ltd and department of telecom.

Not surprisingly, it was the consumer who bore the brunt of high call charges, poor service quality, wrong billing and frequent dead connections. A new telephone connection often took over few years to acquire, until reforms happened.

The coal sector can also be revolutionised through reforms, if there is a political will.

Old mining equipment and technology employed by state-run organisations allow mining only up to depths of 200-300 metres in open cast mines. This leaves 60% reserves untouched. When benchmarked against global standards, the size of operations is also small. To make matters worse, about 10% of CIL's annual production is earmarked for e-auction sales, while it remains unable to meet its contractual coal sale obligations.

This builds pressure on the large users of coal, primarily power plants, to ramp up their coal imports. Imports are subject to price fluctuations and policy changes in the exporting country. Increasing imports will push up the tariff for the consumer. If a coal-based power plant that imports 30% of its requirements, with fuel price being a complete pass-through, the consumer pays about 75 paise to R1 extra for each unit of power. On 800 billion units of coal-based power consumed in India each year, unwarranted import of coal would impose around R50,000 crore of additional expenditure on the power consumers.

A pioneering step toward introducing transparency and competition in the sector was the allocation of coal blocks under the Union government’s ultra-mega power projects (UMPP), awarded on transparent international competitive bidding. The power tariffs discovered in this bid process established the efficacy of competition in the power sector.

Another outcome of these massive coal blocks being handed over to the private sector is the availability of surplus coal. With such low tariffs, the developer is encouraged to deploy modern technology and equipment in the mines to ensure increased fuel production much in excess of the requirements of the power plant.

To appreciate the impact of advanced technologies, consider this—the annual capacity of the Pakri-Barwadih coal block, which has reserves of 1.4 billion tonnes, is 15 million tonnes per annum while a nearby block allotted to a UMPP, by a private developer, with lower reserves of 1.2 billion tonnes, has an annual production capacity of 40 million tonnes per annum.

This translates to an increased potential of producing around 6,000 MW per annum which would cater to the annual electricity needs of 6.5 crore Indians. This higher coal production is a boon for the country’s dwindling balance of payments, power deficit and inadequate coal import infrastructure.

There are three clear options before the government on this surplus coal. First, it could advise the developer to limit the mined quantities to match the requirements of the allotted captive plant, which would mean coal reserves remaining unutilised for the entire plant life. This option does not benefit anybody.

The second option is to force the developers to hand over surplus coal at pre-determined prices to CIL, which would in turn allocate them to others. Here the issue is at what price coal would be passed on to CIL: if passed on cost of production, the developer has no incentive to produce additional coal. Further, the original end-use plant always has over-riding priority on the coal produced from allotted mines, and the developer would be unduly handicapped by being asked to give this coal to a third party. Therefore, the only option for the government is to permit the usage of this coal in the developer’s own plants, supplying power either through regulated tariff or discovered through competitive bidding. This would ensure the surplus coal is converted to power rather than lying buried.

This would encourage usage of cutting edge technology in coal mining and reduce the country’s power deficit.

Therefore, this decision, taken by the empowered group of ministers recently on the case of Sasan UMPP, is a well-considered practical solution.

The government’s decision would now be whether to take this forward-looking policy applicable to all coal blocks, or let the coal be buried underground and lose it forever, and stay clear of controversies.


Coal Coal India Limited Import Ultra Mega Power Project CIL Sasan Ultra Mega Power Project

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