The crippling shortages in domestic coal supply are now manifesting in the electricity markets—spot power prices are on the rise, nudged by the higher price of imported coal.
However, the situation is far beyond one of simply importing coal and making good the shortages. One of the reasons is the fragile health of the power utilities. The financial distress has reached a point where banks are unwilling to lend them any more money. In this situation, they can ill-afford additional costs.
As part of the all-hands-on-deck approach, the Union government is tossing ideas to alleviate this immediate problem. The coal ministry has suggested a reduction in import duty on coal—this will help for sure, but given that domestic coal is sold at government-controlled prices, the import option will still bump up power costs.
The Planning Commission has suggested that low hanging fruit be plucked—get owners of captive mines to produce more and supply it to public sector Coal India at controlled prices. For this, it has suggested that they be given, as an incentive, an equivalent of fourth of the controlled coal price, with the remaining three-fourths price being netted by the exchequer.
At first glance, it appears to be a rational approach for all the stakeholders—power production cost does not rise while supplies improve. However, this points to a larger question: What is the price that captive mine owners pay for mining rights, and what is the price at which they sell coal to their power companies which, in turn, is purchased by bankrupt utilities?
Private companies pay a tad more than the cost of extraction, which is a mere fraction of the market price, be it the imported coal price or even the government-controlled price. Armed with this edge, they win contracts to generate electricity, where competition has to do with supplies from Coal India or imports. As a result, captive mines bring windfall profits.
These profits are a result of the government forgoing the true value of its resource. A case in point is the Sasan ultra-mega power project. The Comptroller and Auditor General of India has claimed that coal has been diverted in this case from a captive mine to another “bid” project, resulting in losses of around Rs42,000 crore. The government must review all the captive mining leases and needs to pluck this fruit clean. Else, the rot will smell.
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