Coal truths

With India finally voting for a strong government at the Centre, expectation is rife about sweeping reforms in the coal sector. Topping the agenda is ending state monopoly over commercial coal mining.

Previous attempts to sidestep the issue by encouraging backdoor entry of the private sector through the captive route have done more harm than good, as was evident in the ‘Coalgate’ controversy. A straightforward repeal of the Coal Mines (Nationalisation) Act, 1973, should make the system relatively transparent, liberals would argue.

They demand free play of private capital to step up domestic production — especially from the much neglected, yet relatively environment-friendly, underground mining activities — to eliminate import dependence.

Despite having the third largest reserves of coal in the world, India currently imports nearly 140 million tonnes of costly thermal coal used in power generation. The problem, however, lies on the pricing front. The pro-reforms lobby thinks the Government should deregulate coal prices to attract global majors in mining. That should bring an end to the current practice of forcing the national miner to fuel the electricity generation sector at rock bottom prices.

But liberals argue that encouraging competition on the mining front will help India discover a free market price of coal that should be cheaper than global prices. The argument is largely inspired by the growth story in China. Having opened the sector in 1978, Chinese coal production increased nearly four-fold from about 600 million tonnes to 3.5 billion tonnes.

There are many fallacies in this proposition. First, though mining was opened up, coal prices were not entirely deregulated in China till about 2007. Second, a large part of the early production growth was managed through unbridled small-scale mining activity, at high environmental and human cost, and in a command economy where both labour and capital are artificially priced. This cannot be replicated in India.

More interesting is China’s interface with market economy since 2007. Taking advantage of a global commodity price spike, coal miners took the power generation sector for a ride. Annual supply contracts were of no help, as miners defaulted to exploit spot market opportunities. Fuel cost rose so sharply that Beijing backtracked from its promise to deregulate electricity tariff.

Worse, with power generation companies bleeding profusely (the top five companies lost $2.4 billion in 2011), the government imposed a cap on coal prices in end 2011. Coal prices were freed again in December 2012, in the face of a global meltdown, but only after setting up “local price watchdogs” in coal producing provinces. The monitoring agencies collect monthly data on settlement prices, output and production cost.

The same holds true for major coal producing nations such as South Africa and Indonesia. Like China, the Indian growth story is coal-driven.

Considering India’s cost inefficiency there is not much room for rise in electricity tariffs at this stage. So, even if coal mining is opened, coal prices must be regulated. Else, we will end up with a bigger mess than in the oil or gas sector.

The proposed move to offer a notional market price to natural gas producers may have a cascading impact. Gas-based power generation capacities will turn idle, as there are no takers for such high cost electricity. It has created a case for a higher subsidy bill on fertilisers. These are ominous lessons for the coal sector.