Efficiency in the coal industry, which fuels 70% of the country’s power, is something we have been lacking at no mean cost to the economy. For a vital resource estimated to last no more than four to five decades at current count, the price signals have been market-distorting.
The situation now seems set to change—partially though. The government plans to allow competitive bidding for captive coal blocks which may well, in time, lead to the development of a more open and transparent market. But it seems doubtful whether even this limited reformist initiative for now will be truly an effective one—will the same institution (the coal ministry) that has been centre stage of the mess seen so far, oversee the entire process for competitive bidding?
Coal mining has for long been a near monopoly for the state-run Coal India Ltd (CIL), which enters supply contracts with various buyers at artificially low prices under the government’s control—despite deregulation a few years back. CIL gets the cream of the country’s coal blocks—in terms of size of mine and quality of reserves. The captive blocks are, primarily, the residues. The public sector enjoys priority over the private. And the latter are allocated blocks by a screening committee in the coal ministry in a process that has lacked credibility—several large, established private firms have complained in the past.
Indeed, the system is long known to be entirely arbitrary— one which has led to unhealthy politicization and large-scale corruption perpetuated by substantial coal shortages. Hence, the competitive bidding proposal for the captive segment.
What will be the impact?
Captive power plants are set up by companies that don’t source power from the national grid—a highway of transmission lines across the country. Instead, they produce electricity for their own industrial manufacturing activities. This segment gets low priority in coal linkages from CIL, and captive coal is their better bet.
So far, some members of the industry have been able to grease the palms of officials and politicians to secure mining leases. They get coal at the controlled low prices and generate cheaper power—power from the grid would be much costlier, as industrial consumers subsidize farmers. The point is that while going off-grid to overcome the problem of poor (unreliable) quality of power supply and its higher costs is fine, not paying a market price for that coal is not. But this is what the system has allowed.
Now, with competitive bidding by companies, the price of the coal in question would become market-driven, and thus higher. Another outcome will be that the demand-supply mismatch (reflected in the huge number of applicants per block) will then translate into a premium for government rather than individuals running it. More money will enter the exchequer’s books, and while industry will not be allowed arbitrage benefits, it will be far better off with a transparent process with lesser political risk in securing coal for its use.
There’s one caveat though. Since the coal ministry’s credibility to broker coal supply is suspect, how can it oversee the bidding now? To make the initiative truly effective, we need: one, a third party audit of the reserves in the block on bid, given possible contentions over their quality and quantity; and two, a regulator, or a body akin to it, to set out the technical and financial terms.
The larger question, especially if we want to encourage private investment, is: why should the principle of competitive bidding of coal blocks not be extended to the entire sector? Captive forms only 20% of it. This will also help break the vice-like grip of the powerful coal mafias on the business.
A move towards full-fledged market-based coal pricing will meet strong resistance thanks to poor political appetite. But only the right price signals driven by demand and supply conditions will ensure that new power capacities—gas, coal, hydel—would come up on the basis of their true relative costs.
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