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New Delhi: India may significantly reform the coal sector by allowing private firms to mine and sell the mineral since the state-owned monopoly is unable to meet demand, forcing many companies to import the fuel.

The country currently allows private companies to mine coal only for captive use, barring them from selling the fuel in the open market.

The government will pursue reforms in the coal sector “with urgency for attracting private investment in a transparent manner", President Pranab Mukherjee told a joint session of Parliament on Monday.

The proposal comes at a time when India is battling a severe shortage of coal because Coal India Ltd’s production falls short of demand, compelling the country to rely on imports despite huge reserves. Although India has estimated coal reserves in excess of 250 billion tonnes, its miners, chiefly Coal India, are unable to exploit the same because of capacity and technical constraints.

In the year ended 31 March, the state-owned firm reported a production deficit of around 20 million tonnes (mt). Although output increased, the world’s largest coal miner extracted around 462.5mt of coal in 2013-14 against a target of 482mt.

Coal India produces about 85% of the fuel mined in the country.

“The government could look at auctioning mining leases to private bidders," a person with direct knowledge of the matter said.

Certain safeguards can be built into the proposed system to ensure private mines function transparently, said the person on condition of anonymity. Geographical territories auctioned to private entities can also include coalfields that the government-controlled Coal India Ltd is unable to mine, he said.

“The government could develop a prospective plan for Coal India, say till 2030, and auction those areas that it is unable to mine," the person said.

Analysts were not too enthused.

“Privatization of coal mines is not a very new thought. It has been tried before. Also, by talking of a perspective plan, the government is trying to keep Coal India in a comfort zone, even when the company is cash-rich," said Dipesh Dipu, an energy analyst and partner at Jenissi Management Consultants.

“The real issue is who should be given the coal blocks. Just because they are being auctioned via competitive bidding, and a company is an end user, and pays upfront, does not mean that it can do the job," Dipu said. “Blocks should be given for mining to companies with the capability to mine."

For private investment to come into the coal sector, significant structural changes are required, especially with regard to ownership and trading, said Kameswara Rao, partner at PricewaterhouseCoopers, a consultancy.

“Broadly, privatization has been happening in the coal sector, but in the fringes. But structural issues have not been touched. If you work within the current legislative framework, you can take up initiatives which are of the PPP (public-private partnership) type but not much beyond," Rao said. “Right now, ownership of the mine is for a particular end-use. You need to allow private players to sell coal in the open market, as traders, and not just use it for their end-use."

The government may also permit price pooling, or the sale of coal to power plants at a uniform price based on the weighted average cost of the fuel supplied by local and imported sources, said the person cited earlier.

The coal ministry had already sought comments from the Central Electricity Authority in this regard, the person said.

The idea of pooling the price of imported and domestic coal was shelved by the previous government in April 2013.

Since imported coal on average is priced higher than domestic coal, a weighted average of the two would mean that the final uniform price at which coal is sold to power producers would be more than the current levels.

“The government would need to consider whether it is feasible to sell power at higher rates," the person said, declining to share any further details of the proposal. To be sure, no final call has been taken yet on the two proposals.

While the proposal on privatization would need to be cleared by Parliament, as it would mean amending the law, the one on pooling prices will have to be approved by the cabinet.

Analysts are sceptical on the issue of pooling prices as well.

While Rao called it a “regressive step", Dipu said price-pooling will not make much sense in the current scenario. Since last year, when the proposal was under active consideration, the cost of imported coal has seen a significant drop, and so the incremental cost of power generation will not be significantly higher, Dipu said.

“The price differential between domestic (sold via the electronic-auction route) and imported coal is down to 15-20%. This means that even if we take imported coal to be about 15% of the total supply in the country, we are only looking at a 3-4% increase in power generation costs," he said. “Expectations are that international prices would remain subdued. In that case, the fundamental premise behind price pooling goes for a toss."

The finance ministry and the Planning Commission were supportive of the coal ministry’s view that instead of pooling the price of coal, the fuel should be imported on a so-called cost-plus basis and incremental power-generation costs should be passed on to the end-consumer by the electricity producers, Mint had first reported on 6 March 2013.

In April, the cabinet had shelved the proposal.

A cost-plus price is determined after factoring in the desired profit over the full cost of a commodity. Price pooling, on the other hand, refers to the sharing of costs, in part or in full, by the users of a certain commodity. In effect, the commodity gets a uniform price throughout a region.

The international price of coal is unlikely to go up, said Chintan J. Mehta, an analyst with Mumbai-based Sunidhi Securities and Finance Ltd.

“Typically, power plants located near coastal areas import coal to make up for the deficit in supply, while those in the interiors buy coal via the e-auction route," he said.

“While the average cost of imported coal is currently hovering in the range of $45-50 per tonne (with that for the highest grade going up to $70-80 per tonne), the same is available via the e-auction route at 2,400 ($60) per tonne," he added.

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