Coal news and updates

Power shortage is the real coal story

Last week Prime Minister Manmohan Singh defended the controversial decision to allot a coalfield in Odisha to Hindalco Industries Ltd. If only in a perverse sense, this is a positive step. Ongoing investigations by the Central Bureau of Investigation on coal mine allocations in the last decade show there is more than what meets the eye and these must be probed threadbare. The economic and policy effect, however, has been negative.
 
The actual impact of the controversy is not on the coal sector but on the most important consumer of coal in India: the power sector. Currently, power utilities account for roughly 70% of the coal consumed in India. Estimates show that the figure is unlikely to change in the years and decades ahead. By 2031-32, electricity generation will still require 60% of the coal consumed. One reason for this high demand for coal is that India’s hydropower sector has not taken off. Even in states best suited for hydropower, projects are not implemented. In Arunachal Pradesh, for example, of the 25 or so ambitious projects, none are anywhere close to implementation. The country has no choice but to depend on thermal power generation.
 
Normally, this should not have been a problem for India. The country boasts of roughly 7% of the proven global reserves of coal. At roughly 60 billion tonnes, these reserves are sufficient to fuel the country’s needs for a while at least. Yet, it is dependent on countries with far lesser reserves of coal—Indonesia and Mozambique for example. The main reason is that state-owned Coal India Ltd, which has a near monopoly on production, is unable to ramp up production. By the end of 2012, the gap between production and consumption has touched 70 million tonnes of oil equivalent, up from 55 million in 2011. If the present trend continues, the situation is likely to only worsen.
 
It is easy to blame the botched allocation of coalfields in the last decade for this problem. And at one level, it is. The real issue, however, is the failure of policymaking. The problem was evident even as early as the start of the century when consumption and production estimates showed a divergence. This was evident in a growing economy hungry for electricity. What India needed at that time, and still does, is a roadmap that undid the nationalization of coal. Effected in the 1960s, a nationalized coal sector had outlived its utility by 1990s.

The Planning Commission and the coal ministry should have got together to take a hard look at the demand and production scenario and thought hard about allocation priorities. They did not do so. By the 2000s, ad-hoc measures—the allocation of coal mines by a screening committee is one example—were in vogue. While these could have served short-term needs, they in no way represented a solution either from the point of view of efficiency or need. Squatting on allotted blocks, resale to other buyers and all manner of illegitimate deals became the norm.

The result is twofold. On the one hand, Coal India cannot increase production, and on the other, power generators—both public and private—are being systematically starved of coal. Wherever the latter try to meet the demand for coal by importing it, other problems kick in. For example, raising power tariffs remains a cumbersome and politically vitiated process. There is no solution in sight at the moment.
 
What should India do?
 
First, the country needs to devise the right allocation mechanism. This needs to be strictly use-based and not any illusory need-based allotment. If a power generating company needs coal, it should have the freedom to buy any amount it wants at market prices.

The second issue is of price determination. This is the rub of the problem. If prices were determined solely by demand and supply, there would be no issue. But in any democracy it is hard to get rid of so-called social obligations.

This issue can be sorted out by creating an empowered coal sector regulator. Such a regulator can carry out economic studies to ensure appropriate pricing. All this will take time and, even if the right mechanisms are put in place, they will take time to implement. Creasing out of problems in any system takes time. But in the melee surrounding the allocation mess, policymakers have lost sight of these objectives

Source: livemint