GEN­ER­A­TION

COAL QUANDARY CON­TIN­UES

Power Watch India - - FRONT PAGE - (In­puts taken from ICC-PwC’s re­port: “The In­dian Coal Sec­tor: Chal­lenges & Fu­ture Out­look”)

Coal con­trib­utes to about more than 1.5% of the GDP of the coun­try. The un­avail­abil­ity of coal will have sig­nif­i­cant im­pact on the power gen­er­a­tion in the coun­try, which in turn would im­pact new pro­posed projects in the man­u­fac­tur­ing and ce­ment sec­tor in the coun­try and re­tard over­all eco­nomic growth...

Coal with a proven re­serve of 860 bil­lion tonnes is mined the most in the world. At the same time, the de­mand curve for this sec­tor is al­ways on the ris­ing side. Ac­cord­ing to the re­port of the Work­ing Group of Coal and Lig­nite for the 12th Five Year Plan, as a pros­per­ing econ­omy, In­dia faces en­ergy se­cu­rity as a grow­ing chal­lenge and the coal pro­duc­tion is ex­pected to grow at a CAGR of around 7% a CAGR of 7.1% till 2016-17 and reach 980.5 MT an­nu­ally un­der re­al­is­tic de­mand. At a CAGR of 7.0%, the de­mand is ex­pected to reach 1,373 MT by 2021-22.

The cur­rent short­age of coal stands at 84 MT and the same is ex­pected to rise to 300 MTPA in medium-term if all the let­ters of as­sur­ance is­sued by the state-owned coal com­pa­nies ma­te­ri­alise. Some of this short­fall will be met by sup­plies from cap­tive coal blocks and rest through im­ports. Also, the choice be­tween the sup­plies from do­mes­tic and im­ported coal is mainly driven by timely avail­abil­ity of coal from do­mes­tic sources, qual­ity re­quire­ments and the eco­nom­ics of landed cost of coal at the end-use plant.

To over­come this short­age, cap­tive coal min­ing in In­dia was, grad­u­ally, be­ing per­mit­ted by amend­ing the Coal Mines Na­tion­al­i­sa­tion Act, pri­mar­ily in iron and steel mak­ing, power gen­er­a­tion and ce­ment pro­duc­tion. How­ever, the ca­pac­ity aug­men­ta­tion from cap­tive coal blocks was dis­mal as only 30 mines could come online as com­pared to a tar­geted 76 mines. Hence, it be­came im­por­tant for In­dia to se­cure coal through im­ports from in­ter­na­tional mar­ket to meet their sig­nif­i­cantly ris­ing coal de­mand. How­ever, im­port is mainly de­pen­dent on avail­abil­ity of coal in global mar­ket, in­creas­ing com­pet­i­tive sce­nario and af­ford­abil­ity.

GLOBAL SCE­NARIO IN COAL CON­SUMP­TION

In the global mar­ket, China, In­dia and In­done­sia are ex­pected to ac­count for nearly 80% of the to­tal in­cre­men­tal growth in de­mand for coal. As per pro­jec­tions, by 2035, China will re­main the world’s largest con­sumer of coal, fol­lowed by In­dia, US and In­done­sia. Coal-based ther­mal power projects will be the main driv­ers of de­mand in China and In­dia. The pro­jected coal fired gen­er­a­tion ca­pac­ity in Asia will rise to 1,464,000 MW in 2020 up from 918,000 MW this year, while for In­dia it will rise from 95,000 MW to 294,000 MW over the next 11 years (a 300% in­crease).

IM­PACT OF COAL SHORT­AGES

As men­tioned in the ICC-PwC re­port, “The In­dian Coal Sec­tor: Chal­lenges & Fu­ture Out­look”, ap­prox­i­mately 57% or 118.7 GW of In­dia’s to­tal in­stalled gen­er­at­ing ca­pac­ity of 207.9 GW is coal-fired while over two-thirds of elec­tric­ity gen­er­a­tion is from coal-based plants. At a global level, coal ac­counts for 30% of the world’s pri­mary en­ergy con­sump­tion.

The av­er­age plant load fac­tor for coal plants (which is a func­tion of coal avail­abil­ity, re­pair and main­te­nance and con­nected de­mand) was 61.30%. Part of this can be at­trib­uted to the fact that only 89% of the to­tal re­quire­ment of coal (30.6 MT of coal against the de­mand of 34.4 MT) was avail­able in Septem­ber.

At the end of Septem­ber 2012, 35 coal-based power plants had less than seven days of coal stocks . This was due to the fol­low­ing: Twenty-two of th­ese oc­cur­rences is due to no, in­ad­e­quate or de­layed re­ceipt from Coal In­dia or one of its sub­sidiary firms. Ten of th­ese in­stances are due to plants run­ning at above-planned PLFs. Five in­stances are due to in­ad­e­quate im­port of coal. Sim­i­larly, for the first half of 2012-13, the av­er­age PLF of coal-based plants has been 68.27%, as op­posed to 71.20% for the same pe­riod a year ago. Ap­prox­i­mately 12.3 BU of gen­er­a­tion short­fall in this pe­riod is di­rectly at­trib­ut­able to the short­age of coal.

Con­sid­er­ing the above facts, it is clear that the short­age of coal has lead to in­stalled ca­pac­ity re­main­ing unutilised and short­fall in power gen­er­a­tion. On the other hand, elec­tric­ity be­ing a ba­sic and nec­es­sary pub­lic ser­vice, any na­tion want­ing to grow in eco­nomic and so­cial terms must be able to pro­vide suf­fi­cient and ef­fi­cient power gen­er­a­tion. Nei­ther man­u­fac­tur­ing, in­dus­trial pro­duc­tion, fi­nance nor com­merce can func­tion with­out elec­tric­ity.

Coal con­trib­utes to about more than 1.5% of the GDP of the coun­try. The un­avail­abil­ity of coal will have sig­nif­i­cant im­pact on the power gen­er­a­tion in the coun­try which in turn would im­pact new pro­posed projects in the man­u­fac­tur­ing and ce­ment sec­tor in the coun­try and re­tard over­all eco­nomic growth.

COAL PRICES

Like in ev­ery other com­mod­ity, the price of do­mes­tic

coal is de­ter­mined by the level of sup­ply and de­mand. How­ever, the re­sponse of over­all de­mand and sup­ply to price vari­a­tions is slow due to the struc­ture of the coal in­dus­try as well as the na­ture of the user in­dus­tries. The two gov­ern­ment-owned com­pa­nies of In­dia, namely Coal In­dia Ltd and Sin­gareni Col­lieries Com­pany Ltd, work­ing in dif­fer­ent ge­ogra­phies, see their roles as one of ful­fill­ing the pro­duc­tion tar­gets fixed by the gov­ern­ment and take up plans and projects to meet the tar­gets, with very lit­tle sur­plus to serve any unan­tic­i­pated or sud­den in­crease in de­mand. Do­mes­ti­cally, coal prices in com­par­i­son to in­ter­na­tional prices are as fol­lows:

PRESENT IS­SUES AND PRO­POSED RE­FORMS

Post na­tion­al­i­sa­tion, the coal in­dus­try is mo­nop­o­lised by a sin­gle pro­ducer. A bill was in­tro­duced in the par­lia­ment in 2000 to amend the acts per­tain­ing to pri­vate par­tic­i­pa­tion and al­low pri­vate par­tic­i­pants in coal min­ing and pro­duc­tion but the bill failed to gain the nec­es­sary sup­port. Other ma­jor leg­is­la­tion af­fect­ing coal min­ing and pro­duc­tion are the Mines and Min­er­als (De­vel­op­ment and Reg­u­la­tion) Act, land ac­qui­si­tion laws, and en­vi­ron­ment re­lated leg­is­la­tion.

The re­port on ‘Com­pet­i­tive­ness in the Coal Sec­tor’, by the Min­istry of Cor­po­rate Af­fairs, high­lights that the poli­cies and prac­tices of the Min­istry of Coal and Min­istry of Power also have a di­rect bear­ing on the pro­duc­tion chain, pri­or­ity of sales, price, etc.

The ab­sence of leg­isla­tive amend­ments re­quired to in­duct com­pe­ti­tion make the sec­tor vul­ner­a­ble to the ill ef­fects, viz. lack of qual­ity tech­nol­ogy and pro­duc­tion meth­ods, lack of trans­parency in coal block al­lo­ca­tions, fall­ing pro­duc­tion, price in­creases, etc. Within the last three years, there have been three price in­creases no­ti­fied by Coal In­dia Ltd. (the most re­cent on 1 Jan­uary 2012, re­sult­ing from a re­cat­e­gori­sa­tion of coal on the GCV method), lead­ing to a sig­nif­i­cant in­crease of do­mes­tic prices. Pro­duc­tion on the other hand has re­mained largely stag­nant com­pared to the last fis­cal. The up­shot of th­ese fig­ures shows a pro­jected gap of ap­prox­i­mately 200 MT of coal by the end of the 12th Five Year Plan.

Re­cently, the gov­ern­ment has taken ini­tia­tives to bring re­forms in the le­gal sys­tem gov­ern­ing the min­eral sec­tor. The lat­est MMDR Bill, 2011 (as in­tro­duced in the par­lia­ment) has at­tempted to ad­dress the key in­dus­try con­cerns of trans­par­ent con­ces­sion sys­tems, sci­en­tific min­ing, sus­tain­able de­vel­op­ment and curb­ing il­le­gal min­ing by re­peal­ing MMDR, 1957. The Draft Act in line with Na­tional Min­eral Pol­icy 2008 aims to achieve speedy ap­pli­ca­tion pro­cess­ing by del­e­gat­ing power to the state gov­ern­ment for award of min­eral con­ces­sions with prior con­sent of cen­tral gov­ern­ment re­quired only in case of coal and atomic min­er­als.

Some of the key re­forms pro­posed by the gov­ern­ment are as fol­lows: Auc­tion of coal li­censes/non-coal min­er­als via com­pet­i­tive bids: This will lead to ro­bust li­cens­ing process and will boost the in­vestor con­fi­dence. Auc­tion­ing of coal blocks only af­ter ex­plo­ration and prepa­ra­tion of the ge­o­log­i­cal re­port will pro­vide bet­ter clar­ity of as­set base. MMDR Bill, 2011 guar­an­tees as­sured an­nu­ity to the lo­cal pop­u­la­tion ei­ther through a 26% share of prof­its (post tax paid) earned by the miner in case of coal or an amount equal to min­eral roy­alty in case of non-coal min­er­als, re­set­tle­ment and re­ha­bil­i­ta­tion of the lo­cal pop­u­la­tion through em­ploy­ment and skill en­hance­ment as out­lined by the con­cerned state gov­ern­ment. The cur­rent bill’s tenets re­sem­ble the in­tent of the Black Eco­nomic Em­pow­er­ment (BEE) Act, 2003 which re­quired hold­ers of min­ing rights to achieve 26 % own­er­ship par­tic­i­pa­tion by his­tor­i­cally dis­ad­van­taged South Africans in their min­ing op­er­a­tions by 30 April 2014, of which 15 % were needed to have been achieved by 30 April 2009 pur­suant to the min­ing char­ter. This pro­vi­sion of MMDR Bill, 2011 is aimed at in­creas­ing the in­clu­sive­ness of the host pop­u­la­tion in en­sur­ing the suc­cess of the min­ing project. This could also bring down the rate of il­le­gal min­ing as lo­cals will ben­e­fit with­out il­le­gal min­ing. Draft­ing the na­tional sus­tain­able de­vel­op­ment

In the global mar­ket, China, In­dia and In­done­sia are ex­pected to ac­count for nearly 80% of the to­tal in­cre­men­tal growth in de­mand for coal. As per pro­jec­tions, by 2035, China will re­main the world’s largest con­sumer of coal, fol­lowed by In­dia, US and In­done­sia. Coal-based ther­mal power projects will be the main driv­ers of de­mand in China and In­dia. The pro­jected coal fired gen­er­a­tion ca­pac­ity in Asia will rise to 1,464,000 MW in 2020 up from 918,000 MW this year, while for In­dia it will rise from 95,000 MW to 294,000 MW over the next 11 years (a 300% in­crease).

frame­work for min­ing ar­eas: This will en­cour­age sci­en­tific min­ing, en­hance­ment of per­cent­age ex­trac­tion of nat­u­ral re­sources and will also help to im­prove so­ci­ety as a whole. Thrust on ex­plo­ration on min­eral re­sources by AMD, GSI, CMPDIL and MECL and clas­si­fi­ca­tion of min­eral re­sources as per the United Na­tions Frame­work Clas­si­fi­ca­tion (UNFC) code; Cre­ation of a min­ing ten­e­ment sys­tem util­is­ing web-based GIS ap­pli­ca­tions for min­eral at­las to be used by cen­tral gov­ern­ment agen­cies, state gov­ern­ment agen­cies and ap­pli­cants for min­eral con­ces­sions Set­ting up of coal reg­u­la­tory au­thor­ity/na­tional min­ing reg­u­la­tory au­thor­ity: It will re­view sus­tain­abil­ity, pric­ing and sup­ply agree­ments. This will help in en­sur­ing timely al­lo­ca­tion of min­eral li­censes and check­ing il­le­gal min­ing. Changes in re­con­nais­sance per­mit/prospect­ing Li­cense which are ex­pected to in­cen­tivise in­vest­ment and tech­nol­ogy flows, fa­cil­i­tat­ing the fol­low­ing: Open sky pol­icy with non-ex­clu­sive RPs to be al­lowed i.e. open to all in­ter­ested. As­sured tran­si­tion of li­cences; trans­fer of RP/PL al­lowed. New com­pos­ite li­cense for high tech­nol­ogy RL/PL to ex­plore deeper de­posits. Safety Con­fer­ence rec­om­men­da­tion im­ple­men­ta­tion: This will help in in­creas­ing safety in open-cast mines and un­der­ground mines in light of mech­a­ni­sa­tion. Pro­posed re­forms are pos­i­tive sig­nals for the fu­ture of min­ing sec­tor. The suc­cess of th­ese could only be mea­sured in terms of in­crease in in­vestor con­fi­dence to in­vest in min­ing projects and ad­dress­ing the im­me­di­ate needs of lo­cal com­mu­nity and pro­vid­ing for sus­tain­able de­vel­op­ment of the com­mu­nity over the long run.

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