Where's the coal?

The binding constraint has shifted from power generation to coal availability

The developments relating to the issue of licences for coal mining during the United Progressive Alliance regime's first term have trained the spotlight on the weaknesses and inadequacies of the process that was followed. Almost seven years after the exercise began, the most visible outcomes are the resignations of a Cabinet minister and a senior government law officer. But a fundamental question remains: after seven years of trying to dramatically change the coal supply situation, where's the coal?

It obviously wasn't supposed to happen this way. The policy establishment has learnt a large number of lessons from its experiences with private investment in infrastructure. Many of the hurdles are yet to be eliminated, but, broadly speaking, over the past decade, there has been significant progress in a number of sectors.

 

Power was perhaps the most constrained of the infrastructure sectors until a decade ago. Restrictions on interstate flows, large price distortions and a variety of other factors combined to deter any investment in new generation capacity by the private sector. A series of reforms since then dramatically changed the landscape. The freeing of generators from the captivity of the "single-buyer model", which held them hostage to the whims and finances of state electricity boards, provided a major impetus to the setting up of ultra mega power plants. These plants could take advantage of large scale by setting up close to coal sources, thus saving significantly on transportation costs. They could also sign agreements to sell to with multiple buyers. In return, consumers got the benefit of a fixed tariff contract (with fuel costs being the only significant variable component of the tariff), giving the producers every incentive to maintain high efficiency levels.

The impact of the change in the overall incentive framework was dramatic. Looking just at capacity increases in coal-fired generation, between 2002 and 2007, the average annual increment was about 1,424 MW. Taking all sources together, the average annual increment was about 4,239 MW. Coal-fired plants, therefore, accounted for just about one-third of incremental capacity. However, the picture changed dramatically over the next few years. In 2007-08, the increment in coal capacity was 5,620 MW. It fell to 2,010 MW in 2008-09, but surged after that to 6,655 MW in 2009-10, 9,725 MW in 2010-11 and even more rapidly to 19,079 MW in 2011-12 and 20,122 MW in 2012-13. Over this six-year period, coal-fired capacity accounted for close to half of the average annual increment. But in the last two years, it was virtually the exclusive contributor.

Now, obviously, no one would undertake these kinds of investments without some assurance that coal would be available to fuel the generators. Somewhere along the line, questions would have been asked about the capacity of the coal supply system to meet the enormous new demand that these capacities would make. And perhaps they would have been reassured by the large number of licences that the government had issued to private entities who would mine enough coal keep the new power capacity going. On paper, there was perfect synchronisation between the push to invest in power generation and the push to invest in coal mining. Both sets of capacities were expected to come on stream about the same time. The economy was poised to make a huge leap forward in terms of power availability.

In reality, as we are discovering, one side of the equation worked according to plan, but the other didn't. In the five-year period 2002-07, the annual production numbers for non-coking coal (in million tonnes) were, respectively, 311, 332, 352, 376 and 399. In the following five-year period 2007-12, the numbers were, respectively, 423, 458, 488, 483 and 488. There was obviously some increase, but nowhere close to the increment in generation capacity. And in the most recent years, while generation capacity soared, coal production apparently stagnated.

Well, we now know why the coal promise was not fulfilled. The people who were issued the licences were apparently not particularly interested in mining coal. Government functionaries may have paid the price for that betrayal. But that leads us back to the fundamental question: where's the coal? The impressive investment in power generation capacity, which was the tangible outcome of a whole series of power sector reforms, cannot solve power shortages if there is no coal to burn. From power availability being the binding constraint to growth, we have moved one step back along the supply chain to coal becoming the binding constraint.

All aspirations to a significant acceleration in growth will be frustrated if this problem is not quickly resolved. Imports provide a temporary solution but leave us at the mercy of monopolistic suppliers, both in terms of pricing and availability - not to mention their impact on the current account deficit. Besides, it is strange to see power plants that were built close to domestic coal reserves fuelled by coal that is shipped from other countries and then carried by rail from the ports to the plants.

What can we do to quickly increase domestic production? Clearly, given the experience with licences, no one would want to risk another experiment with private mines. Can the public sector rise to the occasion? The fact that private concessions were considered in the first place reveals the government's lack of confidence in the public sector's capabilities. So, it appears that we are caught in the classic "between a rock and a hard place" dilemma. But governments do not have the luxury of inaction in the face of dilemmas; it is their mandate and responsibility to resolve them.

Under the circumstances, the proposal to allow other public enterprises to mine coal is a positive step and one can only hope that the decision is made quickly. But judging from the requirement, this is not going to be enough. There has to be a way to bring private resources into mining while ensuring delivery and accountability. Perhaps a form of contract mining, in which the private contractor extracts the coal but the public sector procures and distributes, can be considered. Whichever way, some combination of private and public roles is unavoidable. To achieve this, a robust contract needs to be designed and the relevant capacities need to be built up in the public sector - in the short term, this probably means within Coal India.

Without this push, we can add another item to our list of "so near, yet so far" for the Indian economy.

The writer is Director of Research, Brookings India, and former Deputy Governor, Reserve Bank of India. These views are personal