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Policy Challenges in Coal Mining

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December 15, 2017

What is the issue?

  • Many policy changes were introduced in the past 3 years including the introduction of e-auctions for captive coal blocks in early 2015.
  • But the coal sector continues to remains reel under stress – which calls for a design overhaul to ensure viable allotments.

What is the present scenario?

  • Of the 5 rounds of auctions held till date, response to 3 has been lukewarm, and the last one (Tranche V) got cancelled.
  • Of the 72 coal blocks auctioned and allotted so far, only a handful have started operations – which has resulted in severe coal shortage.
  • Even for the mines allotted to government undertakings, many are yet to finalise mining plans and appoint operators.
  • Alos, severeal cases have been filed regarding various aspects of the auction.
  • So far, policy focus has been to get the allotted blocks on stream at the earliest and increase production by allotting more blocks.

Is shortage affecting the power industry?

  • Coal India’s production grew just 3% to 554 million tonnes last fiscal, compared with 7% and 9% in 2015 and 2016, respectively.
  • The company was recently asked to increase supplies to overcome the alarming shortage at thermal plants.
  • Notably, the plant load factors (PLFs) at thermal plants plunged to 60% last fiscal from 77% in 2010.
  • Any increase in PLF or capacity enhancement by addition of newer plants will put pressure on currently poor coal supplies.
  • Significantly, a number of variables like in “increase in renewable & increased electrification” are shaping demand for thermal power.

What are the present challenges?

  • Commercial Mining - The current design of coal-block auctions for the non-power sector is an ascending system and the government sets a floor price.
  • The bids then escalate in line with the wholesale price index – which was noticed in the exhorbitant bids of the first 2 auctions.
  • Subsequently, as the price of imported coal plunged it rendered these mines unviable and disincentivsed production.
  • Power sector Mining – In captive power sector mining, a reverse auction method was followed, where sealing prices for output coal is set.
  • The block allocation went to any miner who offers the most discounted price from CIL’s coal output prices – thereby facilitating a negative bidding.
  • Here, the allottee power generation company bears the mining cost and a forward premium, which can’t be reflected in its output pricing to the discoms. 
  • Blended under-recoveries on that account are 50-80 paise per kWh and this increases as mining costs and forward premiums rise.
  • Also, the lack of power purchase agreements has been an impediment.
  • Failing Targets -  If Coal India were to increase production by 10% annually, it could producing ~ 700 mtpa & Singareni Collieries can add about 100 mtpa.
  • This means that the huge chunk of the 1.5 btpa goal by 2020, will have to come from captive and commercial mining through private entities.
  • This would require significant policy, pricing and institutional reforms.

What is the way forward?

  • Under the Mines and Mineral (development & regulation) Act, the premium for mineral auctions is a percentage of the prices notified by ‘Bureau of Mines’.
  • Pricing Reforms - On similar lines, an overall ‘Coal Price Index’ could be created by hormonising the currently available benchmarks like Coal India prices, spot e-auctions & imported coal.
  • The Government can then link the auction premium for captive coal blocks for non-power sector and commercial blocks using that index.
  • Such a mechanism would ensure the bidder pays as per market conditions — i.e. a higher premium if the index price is high, and lower when it is low.
  • The logic is that this will ensure demand and prices reach market parity and will conbsequently ensure the health of the mining sector.
  • Streamlining Procedures - Clear guidelines are needed regarding preparation of coal blocks before bidding.
  • Fully explored ones with clear demarcation of boundaries and all approvals in place will go a long way in attracting bidder interest.
  • Also, a nodal agency at the State level, with representation from all stakeholders, could be set up to facilitate land acquisition.
  • It must complete identification of land for compensatory afforestation, enumeration of trees and cost-benefit analysis before auctions begin.

Quick Facts

Captive Mining

  • It is a concept where blocks are allocated dedicatedly for a specific industry.
  • Any excess production arising out of such blocks needs to be sold to ‘Coal India Ltd’ at pre-determined prices.
  • This is practiced to secure supplies for critical sectors like thermal power plants. 

Commerical Mining

  • Such mines aren’t restricted in their sale of output and the miner is free to sell their produce to the most profitable buyer.

 

Source: Businessline

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