The setting up of a national coal exchange, according to recent report on this newspaper, is a major priority for the government. There are several reasons why India needs one. The demand for coal is rapidly exceeding what has been stitched up through long-term fuel supply agreements (FSA), and from the power sector in particular.
The power sector accounts for about 90 per cent of the coal demand. While more than 70 per cent of this demand (about 550 million tonnes) is met through FSAs with Coal India Ltd in particular, this leaves the public sector behemoth with about 250 million tonnes to spare, which can be efficiently allocated to independent power producers and non-coal users such as steel. Commercial mines account for over 120 million tonnes. So, at least 35 per cent of India’s domestic coal output (about one billion tonnes now), besides imports of over 200 million tonnes, awaits better price discovery through a coal exchange mechanism.
As the document issued in November 2020 to appoint a consultant for the exchange points out, six types of coal auctions and linkages are already operational. A ‘national coal index’ arrives at a floor price for the sale of coal after periodic assessment of production and import data, on the basis of which the government collects a minimum revenue share. Yet, the coal supplies, particularly their quality, are plagued by lack of transparency. There is no convincing system to check for calorific value. On the demand side, the power sector’s requirements have been on the rise in summer, as well as in the post-monsoon period of September and October when the temperature rises and the stocks are at a low due to a dip in output in monsoon months. The demand for spot coal will rise in the coming years as FSA quantities fall short. Another factor is at work to raise the significance of exchange traded coal – the rising share of renewables in the energy mix. As a result of this factor, long term FSAs may, and indeed should, be phased out for smaller periods. If the existing coal index sets a floor price, the exchange could potentially arrive at some sort of a ceiling price. Efficient pricing will result in correct transmission of downstream costs to the electricity and industrial sectors. To achieve this however, the proposed national coal exchange needs a truly independent regulator – especially in a market where one entity accounts for 80 per cent of the domestic output.
Contracts, deliveries and payments must proceed in an orderly way, with penalties kicking in if the contract is not adhered to. All trade information should be openly available on the exchange platform (there should be just one independent exchange), be it the kinds of instruments on offer, the terms of contract and the quality and quantity of coal traded. An independent agency should ascertain coal quality. India has the regulatory experience to implement such reforms, even as coal production and trade are mired in complexity.