Coal and power shortages grab the headlines. States are being asked to import coal. The common understanding is that demand for electricity has suddenly increased with a strong post-Covid economic recovery and an unexpected heat wave. It took key players – Coal India, railways, thermal power stations and Discoms (distribution companies) – off their backs. They are now pulling themselves together on a war footing. But going back further would help to better understand how we got into the predicament in which we find ourselves.

Having the fifth largest reserves, the demand for thermal coal was fully met by domestic production. Then, about 15 years ago, India started importing thermal coal and became the second largest importer. These imports would have been around 125 million tonnes in 2021-22. This would be lower than the previous two or three years as Coal India increased production. This illustrates what is known as the phenomenon of “unintended consequences” in public policy.

Private investment

After the 1991 reforms, attracting private investment in sectors where only the public sector existed became an objective. With private investment, capacity constraints would be overcome, it was thought. The private sector was also ipso facto supposed to be more efficient. The nationalization of coal had been undertaken by Indira Gandhi in 1973.

The NDA government at the turn of this century introduced legislation in Parliament for private coal mining, then developed cold feet and did not pursue it. The subsequent UPA government took the pragmatic view that private coal mining through legislative change was not feasible. However, the same net result could be achieved by generously allocating coal blocks to captive use.

Thermal power plants and other industries such as cement and steel received coal blocks on demand. These were blocks of coal that had been studied, reserves established and were in the process of being mined by Coal India. As these were for captive use, the pipeline of new mines for Coal India was curtailed. This would not be a problem as future demand would be reduced accordingly by captive mining. Captive mining would reduce costs and liberal allocation in a competitive industry structure would have the effect of passing on the benefits of lower costs to downstream users and increasing their competitiveness.

There was, however, a different view in government at the time that maximizing prices through auctions should be the way to allocate scarce resources. This was echoed by the then CAG in a public campaign with the use of the creative notion of “alleged loss”. The alleged loss figure of ₹10.67 lakh crore declared by the CAG naturally created a storm.

The Supreme Court intervenes

The case went to the Supreme Court. The government has failed to assert that politics is its prerogative. Even if this were to change at the request of the court, a debatable proposition, it can only be done prospectively. If in individual cases of attribution there was a At first glance cases of corruption, these could be investigated and the culprits punished.

The Supreme Court overturned the allocation of 214 coal blocks (all but four) in 2014. These allocated coal blocks with reserves of approximately 28 billion tons could have reached a production capacity of 500 million tons per year nowadays. Coal supply would not have been a constraint today.

In the meantime, private sector investment in thermal power has increased rapidly, giving India adequate generation capacity domestically for the first time. But faced with insufficient national coal production, imports have become unavoidable. The practice of a thermal power plant sourcing coal from a dedicated mine to meet all its needs was no longer viable. For the new factories that have been lucky enough to get links, Coal India supplies what it can, and they have to import the rest of their needs.

Some private factories have been designed to use only imported coal. This seemed feasible initially because the price of thermal coal on the international market was low and stable. This changed and international coal prices began to move in parallel with oil and gas prices. Many power plants that had to use only imported coal became uncompetitive and could not find buyers for their expensive electricity.

Worst affected are the factories located near the captive coal mines awarded to them and which were struck down by the Supreme Court. The logistics to bring imported coal to these mines did not exist. Many of these plants have become NPAs (non-performing assets).

Coal India imported coal in bulk and met full demand at a common price, the higher cost of imported coal being shared equally by all was an option that was not considered. This could have avoided the blocked asset and their NPA problem. If these plants were working well, there might not have been a crisis today.

Look forward

Increasing coal imports now would have a delay. After the war in Ukraine, coal prices on the international spot market soared to over $400 per ton, from around $50 per ton in 2020. They are not expected to drop significantly in the coming months. Electricity prices from imported coal would therefore be much higher. The fair distribution of such costly power in the future could be quite controversial.

It is imperative to increase domestic production to reduce and even completely avoid imports. The key enabler for this would be to dispense with the requirement for fresh environment clearance (this is very time consuming) if the annual production is increased substantially only the annual production in the approved mine plan will change with reserves depleted earlier.

Coal India and others may increase production at their operating mines to the extent technically possible. It could even be a multiple of current production in some cases. Mining blocks allocated to the private sector, with private commercial exploitation now legal, can be helped to enter production at the earliest. The requirement for higher coal imports and the resulting heavy financial burden would be moderate.

The author is an Emeritus Fellow of the Energy and Resources Institute (TERI) and former Secretary, Department of Industrial Policy and Promotion, Government of India.

Published on

May 05, 2022