Finance Minister Nirmala Sitharaman’s announcements over the weekend to allow commercial mining in India’s coal production and remove the government monopoly is unlikely to provide an immediate relief to stressed thermal power companies even as they benefit from improved coal linkages in the long run.
Analysts say that since the earliest coal evacuation that is possible under the new policy is in FY26-27, stressed thermal power plants won’t be able to financially hold out long enough to benefit from the change in policy.
Sitharaman said that the government will permit a revenue-sharing mechanism instead of regime of a fixed rupee per tonne in commercial coal mining, allowing any company to bid for a coal block and sell in the open market without end-use restrictions. The government plans to place 50 coal blocks on auction with no eligibility conditions for players except the auction value. Sitharaman said that even though India has the third-largest coal availability within its untapped mines, India still imports coal. These changes were originally proposed in January through the Mineral Laws (Amendment) Ordinance, 2020. The government also said it would invest ₹50,000 crore to improve coal mining-related infrastructure which will help in achieving Coal India’s target of 1 billion tonnes of production by FY24.
However, the auction and revenue sharing model for coal mines would likely lead to high production cost of coal, which in turn would result in higher tariffs for the developers. “The current stress in the power sector is largely due to ailing health of power distribution companies’ (discoms) financial strength and subdued power demand and not due to fuel supply constraints," a research report by brokerage firm Emkay said.
“Power demand has taken a huge knock during the lockdown period falling by about 25% year-on-year in April and by 18% during May. Furthermore, the combined coal stock of 119.24 million tonnes at power plants and at pitheads of Coal India is highest ever, dispelling any notions of coal shortage in the near future," it added.
Land acquisition, environmental and forest clearances, rail/road connectivity, rehabilitation and resettlement of locals generally takes 4-5 years period and then, overhead excavation takes another one year before coal productions at mines can begin. News reports suggest the government will offer rebates on the revenue sharing model if mining can begin 1-2 years ahead of this timeline. So, even if bidding happens in FY21, the coal excavations is unlikely to happen before FY26 at least, unlikely to offer any medium term relief to stressed thermal power plants. Additionally, corporate groups with underutilised plants will be unwilling to nurse a 5-6 year gestation period to power up their stations again. India has about 40GW of coal-based power capacity, of which less than 10% has seen any financial resolution so far.
“The assumptions that the commercialisation of coal mines would address the requirement of fuel-starved assets could just be a myth," the report added. Besides this, the reliance on renewable sources of power - such as wind, solar and hybrid - and new technology in energy storage may disincentivise further private investment into supporting ageing thermal plants.
“Given the low utilization of coal based power stations, no new major thermal capacity addition by private players and strong addition of renewable capacities, the coal requirement across the power stations is unlikely to see a major pick-up in the coal demand," the report said. “Furthermore, Coal India intends to ramp up its coal production capacity to 1 billion tones by FY24 as against 602 million tonnes in FY20," making state-owned production adequate to meet the country’s needs.