Coal is the backbone of India's energy needs. 55% of the net primary energy and 68% of the electricity generation is fuelled by coal. Given its abundance and cheapness, it is poised to be the dominant energy source for decades to come.
India is the third largest producer and consumer of coal in the world. However, the amount of coal used by India is puny in contrast to the voracious Chinese demand.
Coal is primarily used for electricity generation. However, it is also an essential fuel source in the manufacturing sectors like steel, cement and glass.
More than 80% of Indian coal is mined by Coal India Limited (CIL) which is struggling to quench the Indian coal demand. The inefficiency of CIL's operation and frequent supply disruption are the major reasons of India's thermal power plant running on inexorably low Plant Load Factor and their growing dependence on the imported coal.
The Import Burden
In India, 68% of electricity is generated using coal. However, due to the scarcity of thermal coal and chokepoints in the coal linkages, many power plants experience a shortage of fuel. Thus, India relies on the import of thermal coal to keep its power plants running.
As the imported coal is expensive as compared to domestically produced coal, it imposes a huge burden on India's current account.
Coalgate
The coal auction is definitely the hot potato in the Indian coal sector. The coal-gate scam revealed the slackness and corruption in the Indian bureaucracy. The level of ineffectiveness was the major impediment in the development of the coal sector and gave rise to coal-mafia. With the swift action of Supreme Court of India and the new Coal Ministry's design of an efficient auction system, the coal sector now seems to be clear of major hassles.
Until 1993, the Indian coal sector was primarily in the hands of Coal India Limited (CIL), a government run company since 1973. Any consumer of coal had to have a contractual agreement with CIL regarding any purchase of coal. The government realized the inefficiency of this monopoly and decided to invite coal consumers for mining of coal for their end-use in 1992. A Screening Committee was setup to facilitate the allocation of coal blocks to private players for mining. The preference was given to the power and steel sector companies.
The Screening Committee was responsible for the allocation of coal blocks from 1993-2008. The criteria set for the recommendation by the Screening Committee was merely the financial and technical expertise of the companies that showed their interest in the blocks. The selection process was non-transparent and the recommended company had to pay a nominal fee to snap the deal. Clearly, this methodology would have involved a lot of corruption and nepotism. The companies often used to end up with surfeited reserve than they would require for their end use. The cheapness of the deal also led the companies to buy the blocks and just “squat” over them. This approach aggravated by the inefficiency of CIL was reflected in dwindling Indian coal production and spurring imports.
The Comptroller and Auditor General of India (CAG) issued a report in March 2012 accusing the Government of India for inefficient allocation of natural resources leading to a loss of $33 billion in unrealized revenues and windfall profits to the private players. With the UPA-II already drowned in a glut of corruption scams, this was just another blow. The opposition party and the public outrage resulted in a Central Bureau of Investigation probe into the allegations. A Public Interest Litigation was filed in the Supreme Court against the allocation of the coal blocks on ground of illegality and public interest.
The Supreme Court in its final decision in September 2014 rendered 214 coal blocks out of 218 blocks under investigation (allocated by the Screening Committee from 1993-2008) as illegal.
The four operational blocks were relieved from the austere decision by the apex court because they were either won by competitive bidding or belonged to non-Joint Venture Public Sector Undertaking.
By 31st March 2015, the coal blocks are ought to be allocated to companies through competitive bidding. In case a block could not be allocated to any party, its operation will be taken over by CIL.
Understanding the Coal Auction Process
Since the licenses of the 214 coal blocks have been cancelled by the Supreme Court, the new coal auction process is designed to allocate the coal blocks to the new players.
Some of the key points regarding the players of the auction process are:
The auction process for the regulated sectors (like power) and unregulated sectors (like steel) are different. It is imminent that the cost of coal to the companies will increase as a result of auction process. The reverse auction is designed to make sure the higher cost of fuel is not passed onto the end-users of the regulated sector.
A two stage bidding process has been designed under which the bidders will be required to submit the technical and financial bids at the respective stages.
The figures of bid prices from the ongoing auction are as follows:
The financial terms laid down for the winner of the blocks are:
India has ~20 GW of imported coal based thermal power plants. Due to the rising costs of the imported coal, the auction is their opportunity of coming out of quagmire.
The power producers without coal linkages are also allowed to participate in the auction.
"Generators without PPAs have been in a dilemma for some time. This was because states are unlikely to enter into PPAs with generators that do not have coal linkage and Coal India would refuse to give linkage to generators without PPAs. We have tried to correct the situation by allowing such generators to enter into the auction fray." – Coal Ministry
According to Barclays, the auction of 101 coal blocks will generate an annual revenue of US$3.7bn in addition to US$5.7bn of upfront payment (including royalty spread over the first year) to the states. This will be a significant jackpot for the four states - Jharkhand, Chhattisgarh, Orissa and West Bengal - where almost all the coal blocks are concentrated.
Modi-fied
India's Energy Minister, Piyush Goyal recently announced ostensibly that India will be bringing its coal imports to a complete halt in the next 2-3 years. This is an ambitious statement that requires instilling vigor in its coal infrastructure. Wood Mackenzie predicts that India will be responsible for 40% of the 123 MT rise in the global coal trade. The plethora of upcoming UMPP projects which are obligated to secure supplementary supply on the international market clearly indicates that the coal import is not going to stop anytime soon.
The ministry has asked CIL to double its coal output to 1 billion metric tonnes by 2020. The Coal Ministry has sought intervention by the Railway Ministry to hasten up the three railway linkage project which was due to be completed in 2005. The completion of this project would accrete the Coal India output by 300 million tonnes per year. However, Reuters impugns this blatant assertion by the ministry.
To keep the expected fiscal deficit to 4.1% of GDP on track, the government has sought for disinvestments in PSUs to generate revenue. The divestment in Coal India in February 2015 generated Rs 24,557 crore to the Indian government.
The coal auction has helped the state and central government to raise substantial revenue which could be used in improving the rickety infrastructure. The conditions of Minimum Work Program and relinquishment of excess reserve embedded within the new block allocation regime will ensure a surge in coal production. The reverse bidding for the power companies is designed to bring down the electricity tariff paid by the end user.
These are sanguine indications to reinforce the coal sector given the fact that CIL is unable to ramp up its production which is at par with the nation's growing demand for coal.
The 2015 budget has increased the railway freight rate and doubled the duty on coal to Rs 200/ton. Although the decision would be chafing for the power companies, the government's intention for the thermal power companies is to increase their efficiency and move towards alternative fuel. We should hope the revenue generated from excess duty is directed towards the development of clean energy.
The Future and Social Cost of Coal
According to World Resources Institute (WRI), 1199 new coal fired power plants are being proposed to be set up around the world, with 76% of this coming from India and China alone.
This is clearly not aligned with the IPCC's warning on inhibiting the coal usage. Coal is the dirtiest of all fuels known to us, not only significantly contributing to the global warming by releasing greenhouse gases, but also degrading the air by releasing mercury and other particulates.
According to WHO report, 13 Indian cities are amongst the top 20 cities with worst air quality. Another research by Centre for Science and Environment says the Indian coal based thermal power plants are the most inefficient and polluting in the world.
GlobalData envisages the incipience of Clean Coal Technology implementation in Indian Thermal Power Plants through the Ultra Mega Power Projects (UMPP). They expect the CCT technology to produce 103 GW of thermal power by 2025.
To make sure that India's growth is sustainable and doesn't vex its environmental efforts and resident's well-being, it should invest in improving the technology, internalizing the environmental costs and innovating in the fields of Carbon Capture and Sequestration (CCS). The improving ties with the US and its expertise in Clean Coal Technology should be employed to move forward in this direction.
Bibliography
Data Sources
India is the third largest producer and consumer of coal in the world. However, the amount of coal used by India is puny in contrast to the voracious Chinese demand.
Coal is primarily used for electricity generation. However, it is also an essential fuel source in the manufacturing sectors like steel, cement and glass.
More than 80% of Indian coal is mined by Coal India Limited (CIL) which is struggling to quench the Indian coal demand. The inefficiency of CIL's operation and frequent supply disruption are the major reasons of India's thermal power plant running on inexorably low Plant Load Factor and their growing dependence on the imported coal.
The Import Burden
In India, 68% of electricity is generated using coal. However, due to the scarcity of thermal coal and chokepoints in the coal linkages, many power plants experience a shortage of fuel. Thus, India relies on the import of thermal coal to keep its power plants running.
As the imported coal is expensive as compared to domestically produced coal, it imposes a huge burden on India's current account.
Coalgate
The coal auction is definitely the hot potato in the Indian coal sector. The coal-gate scam revealed the slackness and corruption in the Indian bureaucracy. The level of ineffectiveness was the major impediment in the development of the coal sector and gave rise to coal-mafia. With the swift action of Supreme Court of India and the new Coal Ministry's design of an efficient auction system, the coal sector now seems to be clear of major hassles.
Until 1993, the Indian coal sector was primarily in the hands of Coal India Limited (CIL), a government run company since 1973. Any consumer of coal had to have a contractual agreement with CIL regarding any purchase of coal. The government realized the inefficiency of this monopoly and decided to invite coal consumers for mining of coal for their end-use in 1992. A Screening Committee was setup to facilitate the allocation of coal blocks to private players for mining. The preference was given to the power and steel sector companies.
The Screening Committee was responsible for the allocation of coal blocks from 1993-2008. The criteria set for the recommendation by the Screening Committee was merely the financial and technical expertise of the companies that showed their interest in the blocks. The selection process was non-transparent and the recommended company had to pay a nominal fee to snap the deal. Clearly, this methodology would have involved a lot of corruption and nepotism. The companies often used to end up with surfeited reserve than they would require for their end use. The cheapness of the deal also led the companies to buy the blocks and just “squat” over them. This approach aggravated by the inefficiency of CIL was reflected in dwindling Indian coal production and spurring imports.
The Comptroller and Auditor General of India (CAG) issued a report in March 2012 accusing the Government of India for inefficient allocation of natural resources leading to a loss of $33 billion in unrealized revenues and windfall profits to the private players. With the UPA-II already drowned in a glut of corruption scams, this was just another blow. The opposition party and the public outrage resulted in a Central Bureau of Investigation probe into the allegations. A Public Interest Litigation was filed in the Supreme Court against the allocation of the coal blocks on ground of illegality and public interest.
The Supreme Court in its final decision in September 2014 rendered 214 coal blocks out of 218 blocks under investigation (allocated by the Screening Committee from 1993-2008) as illegal.
The four operational blocks were relieved from the austere decision by the apex court because they were either won by competitive bidding or belonged to non-Joint Venture Public Sector Undertaking.
- Moher, MP owned by Reliance Power for Sasan Ultra Mega Power Project (UMPP) (allocated by competitive bidding)
- Moher Amlori, MP owned by Reliance Power for Sasan UMPP (allocated by competitive bidding)
- Pakri Barwadih, Jharkhand owned by NTPC (non-JV PSU)
- Tasra, Jharkhand owned by SAIL (non-JV PSU)
By 31st March 2015, the coal blocks are ought to be allocated to companies through competitive bidding. In case a block could not be allocated to any party, its operation will be taken over by CIL.
Understanding the Coal Auction Process
Since the licenses of the 214 coal blocks have been cancelled by the Supreme Court, the new coal auction process is designed to allocate the coal blocks to the new players.
Some of the key points regarding the players of the auction process are:
- The PSUs (like SAIL, NTPC) consuming coal in any form will be given preference for the new allocation of the coal blocks.
- The private companies bidding for the coal blocks should be the end-users of the similar variety of coal. This includes the Iron, Steel, Power, Cement and Coal Washeries companies.
- The new allotte of the coal blocks can use the mined coal for any of its plants engaged in the similar end-use.
- The company will be eligible to bid only if the coal extractable per year from the mine is below 150% of the annual requirement of the end use plant. The small companies are given provision to form JVs.
The auction process for the regulated sectors (like power) and unregulated sectors (like steel) are different. It is imminent that the cost of coal to the companies will increase as a result of auction process. The reverse auction is designed to make sure the higher cost of fuel is not passed onto the end-users of the regulated sector.
A two stage bidding process has been designed under which the bidders will be required to submit the technical and financial bids at the respective stages.
The figures of bid prices from the ongoing auction are as follows:
The financial terms laid down for the winner of the blocks are:
- The bid price in Rs/T at which the block is won will be applicable for the base year, with a yearly rise linked to a reference index.
- Upfront payment of 10% of the intrinsic value of the mine calculated using Discounted Cash Flow (DCF).
- 14% royalty to be paid on an annual basis.
- A bank guarantee totaling the equivalent of the value of coal at peak production.
- A performance security (Minimum Work Program) would require the company to achieve specified milestone within stipulated timeframe.
- If the company produces more coal than it actually requires, it will be sold to CIL at a notified price.
- The old allotte can sell the land and other immovable infrastructure to the new allotte at the original sale amount with 12% simple interest from the date of purchase.
- The old allotte can also sell the movable infrastructure, but in case the new allotte is not willing to buy them, it has to be removed.
- The liability of the old allotte cannot be transferred to the new allotte.
India has ~20 GW of imported coal based thermal power plants. Due to the rising costs of the imported coal, the auction is their opportunity of coming out of quagmire.
The power producers without coal linkages are also allowed to participate in the auction.
"Generators without PPAs have been in a dilemma for some time. This was because states are unlikely to enter into PPAs with generators that do not have coal linkage and Coal India would refuse to give linkage to generators without PPAs. We have tried to correct the situation by allowing such generators to enter into the auction fray." – Coal Ministry
According to Barclays, the auction of 101 coal blocks will generate an annual revenue of US$3.7bn in addition to US$5.7bn of upfront payment (including royalty spread over the first year) to the states. This will be a significant jackpot for the four states - Jharkhand, Chhattisgarh, Orissa and West Bengal - where almost all the coal blocks are concentrated.
Modi-fied
India's Energy Minister, Piyush Goyal recently announced ostensibly that India will be bringing its coal imports to a complete halt in the next 2-3 years. This is an ambitious statement that requires instilling vigor in its coal infrastructure. Wood Mackenzie predicts that India will be responsible for 40% of the 123 MT rise in the global coal trade. The plethora of upcoming UMPP projects which are obligated to secure supplementary supply on the international market clearly indicates that the coal import is not going to stop anytime soon.
The ministry has asked CIL to double its coal output to 1 billion metric tonnes by 2020. The Coal Ministry has sought intervention by the Railway Ministry to hasten up the three railway linkage project which was due to be completed in 2005. The completion of this project would accrete the Coal India output by 300 million tonnes per year. However, Reuters impugns this blatant assertion by the ministry.
To keep the expected fiscal deficit to 4.1% of GDP on track, the government has sought for disinvestments in PSUs to generate revenue. The divestment in Coal India in February 2015 generated Rs 24,557 crore to the Indian government.
The coal auction has helped the state and central government to raise substantial revenue which could be used in improving the rickety infrastructure. The conditions of Minimum Work Program and relinquishment of excess reserve embedded within the new block allocation regime will ensure a surge in coal production. The reverse bidding for the power companies is designed to bring down the electricity tariff paid by the end user.
These are sanguine indications to reinforce the coal sector given the fact that CIL is unable to ramp up its production which is at par with the nation's growing demand for coal.
The 2015 budget has increased the railway freight rate and doubled the duty on coal to Rs 200/ton. Although the decision would be chafing for the power companies, the government's intention for the thermal power companies is to increase their efficiency and move towards alternative fuel. We should hope the revenue generated from excess duty is directed towards the development of clean energy.
The Future and Social Cost of Coal
According to World Resources Institute (WRI), 1199 new coal fired power plants are being proposed to be set up around the world, with 76% of this coming from India and China alone.
This is clearly not aligned with the IPCC's warning on inhibiting the coal usage. Coal is the dirtiest of all fuels known to us, not only significantly contributing to the global warming by releasing greenhouse gases, but also degrading the air by releasing mercury and other particulates.
According to WHO report, 13 Indian cities are amongst the top 20 cities with worst air quality. Another research by Centre for Science and Environment says the Indian coal based thermal power plants are the most inefficient and polluting in the world.
GlobalData envisages the incipience of Clean Coal Technology implementation in Indian Thermal Power Plants through the Ultra Mega Power Projects (UMPP). They expect the CCT technology to produce 103 GW of thermal power by 2025.
To make sure that India's growth is sustainable and doesn't vex its environmental efforts and resident's well-being, it should invest in improving the technology, internalizing the environmental costs and innovating in the fields of Carbon Capture and Sequestration (CCS). The improving ties with the US and its expertise in Clean Coal Technology should be employed to move forward in this direction.
Bibliography
- Barclays Research
- Bloomberg
- Reuters
- Reuters
- Wood Mackenzie
- Indian Express
- Financial Express
- The Hindu
Data Sources
- World Bank
- BP
- EIA
- Barclays
- WRI
- Platts