Commercial Coal Mining Reforms

Why in news?

Cabinet Committee on Economic Affairs approved a methodology to auction coal blocks for commercial mining.

What is the reason behind this move?

The productivity of Indian coal sector has improved over the years.
But it remains below global standards.
This can be addressed if the assets auctioned are large, accessible, and ready for development.
The Government’s move to commercial coal mining is a recognition that developing coal blocks on end-use basis is inefficient.
There are challenges in design and handover.
But, mainly, the end-user industries lack expertise, scale and incentive to do anything more than source their own needs.
This changes entirely with commercial mining where real productivity gains can be achieved and passed on to consumers.

What is the significance of this reform?

It is the most ambitious coal sector reform since the nationalisation of the sector.
It offers ample room for a competitive coal supply.

The move from “an era of monopoly to competition” holds many strategic implications for an entire set of industries and companies.
Already, large global and local mining majors have expressed interest in this landmark deregulation,
It will allow mining and sale of coal without curbs on quantity, end-use or pricing.

What are the expected outcomes?

The expectation is that the mining majors will set new benchmarks in terms of mechanisation, automation, mining practices, etc, and drive up productivity.
Distressed assets, in particular, will use this option to draw up a plan for turnaround after the debt recast.
The opportunity will get larger as new commercial miners take full advantage of deregulation.
They can offer

short-term contracts for seasonal needs (to serve utility demand or via the merchant market)
adopt more flexible pricing
supply higher quality blends to substitute imports

It is also expected that the current coal producers too will respond with innovation and customer orientation.

The immediate beneficiaries are power generators.
As, they can improve utilisation and margins by sourcing commercial coal selectively.
It makes it possible for new vertically integrated companies to own coal mining, to power generation, to distribution and retail supply.

What are the concerns?

The downstream power utilities will gain from this, but are simultaneously faced with a major competitive threat.
As the output from commercial coal mines comes on line, it will have a sustained, moderating influence on energy prices.
The manufacturing sector is already diversifying its power procurement by buying from third-party sources and on the power exchange.
They will now have access to lower cost electricity with limited price volatility.
Similarly, as commercial miners target large energy users with captive power plants, discoms will lose the advantage of cross-subsidy.

What are the measures to be taken?

Electricity regulators have to implement tariff reforms.
Cross-subsidy should also be rationalised to levels at which discoms can still hold on to large energy users.
This may not impact the smaller and lifeline consumers, as the State governments will channel the premium earned from auction of commercial coal to extend direct subsidy.
The success of this new policy will depend on incorporating lessons from the previous auctions, and deregulating it fully to allow efficiency and competition in the primary energy sector.
If this is ensured, there is good reason to expect the commercial coal auctions to become a success on sector reforms.

Source: Business Line