A dysfunctional enmeshment
In psychology, enmeshment describes a relationship where boundaries are permeable and unclear, resulting in a lack of autonomy for the individuals, leading to dysfunction. There are strong parallels in the relationship between coal and power sectors in India. Boundaries between the sectors are unclear with policy goals in one sector being pursued by tinkering with pricing in the other sector, obscuring inefficiencies. While such intertwining of the two sectors may have been appropriate in a command and control economy, it is inconsistent with the current policy of introducing greater competition in these sectors.
There are multiple channels by which power plants get coal, with a bewildering array of pricing regimes. The price that a power plant pays for the same grade of coal at the same location could be very different depending on several factors: public or private ownership; commissioning date of the plant; having or not having a power purchase agreement (PPA) with a distribution company (discom); having an allotted coal block; or winning an auctioned coal block. Such a deeply fragmented coal market makes it almost impossible to have real competition in the power sector.
We focus on just one of these channels for procuring coal—auctioning of coal blocks for captive use—to show how deep the enmeshment is and the problems it creates. Cancelled coal blocks that are designated for power generation by private plants are allocated through auctions using reverse bidding. The power plant must either already have a PPA or sign a PPA later. The bid amount plus a fixed amount of Rs100 per tonne determines the fuel charge on a per kWh (kilowatt hour) basis the plant owner can include in its PPA. Lower bids are preferred because it lowers the cost of electricity the plant will charge. In the case of negative bids, the fuel charge, per kWh, is calculated using only the fixed amount of Rs100 per tonne, but the winning bidder has to pay the state government the absolute amount of its bid plus Rs 100 per tonne. It is not clear how bidders recover the premium paid in such cases.
Merchant plants and other power plants without PPAs cannot participate in the auctions with reverse bidding, but instead may be able to participate in the auctions for the non-regulated sectors with forward bidding, resulting in much higher cost per kWh. This is highly discriminatory against merchant generation capacity. Because a vibrant power market requires some merchant capacity, this approach works against the creation of competition in the power sector. Even for plants that hope to enter into PPAs in the future, requiring a plant owner to participate in two separate auctions—one for power and the other for coal—adds unnecessary complexity. The plant owner will have to adjust his bid for a PPA to account for his bid for a coal block.
Requiring PPAs is at odds with the government’s interest in bringing in greater competition and allowing consumers choice of electricity supplier. Large consumers already have choice through open access, and the government would like to broaden choice through the separation of carriage and content. Both measures require merchant capacity. Moreover, handling existing PPAs will be a major challenge if separation of carriage and content is implemented, and linking the price charged for coal and the tariff in the PPA would greatly exacerbate that problem.
Administering this process will not be easy. For existing PPAs, revision of tariffs resulting from winning a coal block can only be done after the state government issues a directive to the regulatory commission. No state government, except Madhya Pradesh, has given such a directive. The West Bengal Electricity Regulatory Commission, on its own, modified the tariff to reflect a discom’s winning bid for a coal block.
Lowering the tariff for consumers is a laudable goal. But this approach distorts the coal market and masks the real cost of coal. All consumers are subsidized, even those who can pay the full cost of electricity. The government intends to introduce direct benefit transfer (DBT) to provide a direct and targeted subsidy to the vulnerable without distorting the market, making reverse bidding to lower electricity tariffs unnecessary. Implementing DBT may take time; until then direct subsidy can be given to the discom. Price of coal may increase after reverse bidding is removed. But the additional revenue earned by the government from coal sales can be used to fund any subsidy.
Both coal and power sectors should operate on a commercial basis and the interaction between the two should also be on commercial terms. Restructuring of Coal India to bring about greater efficiency and responsiveness needs a separate discussion. At a minimum, all users should compete for coal on the same platform.
Allocation of captive coal blocks for power was started because it was expected that Coal India would not be able to cope with the increased demand. However, parcelling of coal fields into captive blocks is sub-optimal, because of 1) loss of economies of scale, 2) power plant owners not having expertise in mining, and 3) block boundaries not being congruent with geological boundaries, resulting in loss of mineable coal. One option is to absorb the blocks back into Coal India. This may be relatively easy for blocks allocated to government entities. The number of blocks allocated for private plants is small; these can be re-acquired through negotiation or grandfathered.
Daljit Singh is director of research at the Centre for Energy, Environment and Resources.