Global coal prices have doubled since last year because of demand-supply mismatches. What does this mean for India, where the power sector’s ability to add capacity for sustaining the growth pace is crucial? Seventy-five percent of the country’s coal usage is by this sector.
Despite huge untapped reserves, our imports are rising with demand outpacing supply. Indian firms are striving to acquire stakes in overseas mines, say, in Indonesia or even Mozambique. But they lag China, which has been contracting large quantities, making the entry ticket expensive. However, an equity stake still means assured supplies at a contracted price. Tata Power’s 30% stake in an Indonesian mine for its Mundra ultra mega power project (UMPP) is a case in point.
It is argued by some that since coal at home is cheaper, UMPPs must not import. This misses the larger point. Pithead-based Sasan’s tariff is cheaper due to, among other reasons, it being free from the inefficiencies in our coal sector, given its captive mine. UMPPs are not the full solution for electricity shortages. Capacity has to come up in small and medium sizes across the country, too.
But our coal market is far from competitive, and the dice is loaded against those who don’t get a captive mine. More than 90% of it is dominated by the state-owned Coal India Ltd (CIL), which has little incentive to improve thanks to cost-plus pricing in practice, still dictated by the government—which gives it around 30% return on investments. Private firms are not free to sell coal in the open market, though they could well better CIL’s efficiency record by as much as 30%.
The changes in law needed for private commercial mining have been hanging fire since 2000 due to lack of political will and strong coal unions. Even captive block allocation is still not transparent, and plans for bidding out blocks are pending. Thus, the shortages, the growing need for imports, the pressure on global prices.
Finally, the issue is of developing the fuel market in totality. Coal rules since the day’s demand for electricity is taken as constant. If the reality—varying demand—is factored in, plants’ ability to switch on and off will be at a premium. Natural gas and hydro power fit this bill. For these to make significant inroads, we need “time of the day” tariff systems. Ushering in market forces in fuels thus holds the key to powering the economy.
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