Rebooting coal block auctions

India’s coal sector remains under stress despite a raft of policy changes in the past three years, including the introduction of e-auction for captive blocks in early 2015.

Of the five rounds of auctions held till date, response to three has been tepid, with the last one (or Tranche V) getting cancelled.

Also, of the 72 coal blocks auctioned and allotted so far, only a handful have started operations.

Of the mines allotted to government undertakings on nomination basis, many are still finalising mining plans and appointment of developers-cum-operators.

Many cases have also been filed in courts on the auction method, the compensation to be paid to prior allottees, and modification of auction rules after bidding.

So far, policy focus has been to get the allotted blocks on stream at the earliest, and increase production by allotting more coal blocks for both captive and commercial mining.

The current design of coal-block auctions for the non-power sector is an ascending system where the government sets a floor price and bids escalate in line with the wholesale price index.

The first two auctions saw exorbitant bids and then the price of imported coal plunged, which rendered these mines unviable — even as the process of transferring the mines to new allottees ran into glitches.

Contrastingly, in the power sector, a reverse auction method was followed. It saw negative bidding whereby the allottee bears the mining cost and also pays a forward premium, which means that the energy charges at which power is sold to discoms do not allow for recovery of such costs.

Blended under-recoveries on that account are 50-80 paise per kWh. And this increases as mining costs and forward premiums rise along with the wholesale price index.

Yet another impediment has been the lack of power purchase agreements.

All this casts doubt on the Government’s target of producing 1.5 billion tonne per annum (btpa) of coal by 2020. Of this goal, 1 btpa was to be produced by Coal India, 0.1 btpa by Singareni Collieries (SCCL), and the remaining by captive and commercial mines.

Coal India’s production grew just 3 per cent to 554 million tonnes last fiscal, compared with 7 per cent and 9 per cent in 2015 and 2016, respectively, as inter-alia plant load factors (PLFs) at thermal plants plunged to 60 per cent last fiscal from 77 per cent in 2010.

To boot, the company was asked to increase supplies to tide over the alarming shortage at thermal plants between August and October 2017.

What that means is, while there are a number of variables shaping demand for thermal power — such as the push to renewables and falling tariffs thereof, increased electrification, and expansion in evacuation infrastructure — any increase in PLFs and capacity will put pressure on coal supplies.

If Coal India were to increase production by 10 per cent annually, it would end up producing ~700 mtpa, while SCCL can contribute 80-90, by 2020.

That means a huge chunk of the 1.5 btpa goal, after adjusting for imports, will have to come from captive and commercial mining.

This would require significant policy, pricing and institutional reforms.

Clearly, an overhaul of the current auction design is the first priority. As in the case of mineral auctions under the Mines and Mineral (Development and Regulation) Act, where premium is a percentage of the prices notified by the Indian Bureau of Mines, there should be a price index for coal, too, for such linkage.

There are many price benchmarks already available, including Coal India and SCCL prices, the spot e-auction and linkage auctions, from captive mines and from imported coal.

And as and when commercial mining fructifies, there will be another.

The Government can use all these and come up with an overall price index to link the auction premium for captive coal blocks for non-power sector and commercial blocks. Such a mechanism would ensure the bidder pays as per market conditions — a higher premium if the index price is high, and lower when it is low.

The assumption is that market conditions in the end-use sector will get reflected in the coal price index, so high demand for end-use products will push up demand for coal and the index, and vice versa.

Similarly, for the power sector, instead of a base price plus escalation method, the forward premium can be linked to such a coal price index.

In addition, clear guidelines are needed regarding preparation of coal blocks before bidding. Fully explored ones with clear demarcation of boundaries and all approvals in place will go a long way in attracting bidder interest.

And last but not the least, a nodal agency at the State level, with representation from all stakeholders, could be set up to facilitate land acquisition.

It must complete identification of land for compensatory afforestation, enumeration of trees and cost-benefit analysis before auctions begin.

The writer is Director, Energy, CRISIL Infrastructure Advisory