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Coal sector: is it time to reform?

Coal sector: is it time to reform?
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First Published: Wed, Aug 18 2010. 09 54 PM IST
Updated: Wed, Aug 18 2010. 09 54 PM IST
In the summer of 2010, the Supreme Court delivered its voluminous judgement in the well-publicized litigation between Reliance Industries Ltd and Reliance Natural Resources Ltd. Its implications are far-reaching.
The learned judges held in no uncertain terms that the Union of India had a fiduciary responsibility to manage the mineral resources for and on behalf of its people. In the backdrop of this profound judgement reside the challenges and constraints of the coal sector in India—sheltered, protected; an anomaly in a mostly market-based economy.
The government has been controlling this sector with the initial objective of ensuring availability of coal at affordable prices. Historically, coal has been the most abundant and commonly used energy resource across the world. In India, it accounts for 52% of the country’s primary commercial energy basket. The power sector is the single largest consumer of coal; 53% of India’s installed power generation capacity is coal-based and it accounts for about three-fourths of the total coal consumed in India annually.
India is bestowed with abundant coal reserves, estimated at an enormous 267 billion tonnes (of which the proven coal reserves are placed at 106 billion tonnes). The proven coal resources of India account for nearly 7.1% of the world’s proven coal reserves.
The coal sector in India is highly regulated. Until 1993, coal mining remained predominantly nationalized. Since mid-1993, private sector companies have been allowed to mine coal, albeit for captive consumption for end uses such as power generation and iron and steel production. Even today, state-owned miners account for about 95% of the 500 million tonnes (mt) of coal production.
India is emerging as a modern economy, targeting 9-10% annual growth. Realizing the underlying growth potential will largely depend on our ability to meet energy requirements. Power is a sector whose growth targets inter alia depend on coal. The Integrated Energy Policy framed by the government estimates the installed generation capacity requirement at 778Gw and energy requirement at 3,880 billion kWh by 2031-32, if the gross domestic product grows at a rate of 8%. At a 9% growth rate, the capacity requirement will be 960Gw and energy requirement will be 4,806 billion kWh. In the light of these projections, coal demand is estimated to rise threefold from 500 mt by the end of 11th Plan (2011-12) to 1.5 billion tonnes by the end of the 15th Plan (2031-32).
Growth in the coal sector has historically not been commensurate with the country’s requirements. Peak power shortages have been as high as 14% and, energy shortages, 11-12%. Coal India Ltd has delivered growth of 5% or less, which is half the desired economic growth rate. The coal sector is constrained by supply limitations, inadequate drilling capacity, absence of a progressive regulatory framework, minimal private participation, high turnaround time and long gestation periods in getting clearances for mining projects. There is a need to attract investments in making available dedicated cargo vessels and modern and exclusive deep-sea coal terminals. In addition, the sector has to embark on a phase of climate change related research and development and incorporate clean technologies.
The long-term growth of the coal sector requires a confident and renewed mindset in developing coal resources through decontrol of the coal sector, listing of Coal India on the capital markets, establishment of an independent regulator and a level playing competitive environment, which supplements the framework of the holistic energy and infrastructure sector in India.
Gokul Chaudhri is a partner at audit and consulting firm BMR Advisors.
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First Published: Wed, Aug 18 2010. 09 54 PM IST