Allowing pvt sector to mine and sell coal commercially is a mammoth task

India’s plans to open up the commercial mining and sale of coal to private companies took five years in the making. After it was introduced in the Coal Mining (Special Pro­vi­sions) Act, 2015, several announcements and trials were conducted before a final policy was announced as part of the Rs 20-trillion Aatmnirbhar Bharat package by the finance minister last week.

The Union Cabinet decision that followed the announcement also approved the new methodology for auctioning coal mines to private players. The government plans to auction 50 mines immediately.

Currently, only two government-owned companies — Coal India Limited and Singareni Collieries Co­mpany — mine and sell coal in India. From 2015 onwards, the Centre did auction coal mines to private players but all for captive purposes. The end-use restriction on these mines meant that private players could not sell the coal in open market.

The new proposal aims at simplifying commercial mi­ning process for all sorts of private companies, not just traditional miners. The government is also expecting foreign players to make an entry. Auctioned mines under the new methodology will be required to pay a reduced upfront fee, which, say coal ministry officials, will attract smaller players as well.

The upfront fee is a one-time payment to mine-bearing states — it used to be the bid amount multiplied by the reserves of the mine. So, the larger the mine, the higher the upfront payment, sometimes running into thousands of crores. Under the new methodology, the upfront amount will be 0.25 per cent of the value of estimated geological reserves of the coal mine payable in four equal instalments.

The new methodology also provides for bid parameters on the “revenue share” mode — that is, bidders would be re­qui­red to bid for a percentage share of revenue payable to the state government from the production and sale of mined coal.

“The methodology is oriented to make maximum coal available in the market at the earliest and it also enables adequate competition, which will allow discovery of market prices for blocks and faster development of the coal blocks. Higher investment will create direct and indirect employment in coal-bearing areas, especially in mining sector and will have an impact on economic development of these regions,” said the Ministry of Coal in a statement.

Sector experts are hopeful that this move would reduce India’s dependence on im­ported coal, which has been rising steadily over the past decade, even though India has the world’s fifth largest coal reserves.  “The government’s move to open up commercial coal mining can halve the annual expenditure incurred on importing non-coking coal because of substitution through domestic production. In fiscal 2020, India imported an estimated 180-190 million tonne of non-coking coal costing over Rs 90,000 crore,” CRISIL Ratings said in a latest note.

There are, however, concerns over the participation of the industry, starting with access to funding for coal projects as climate change commitments take centre stage. In a report last year, the US-based Institute for Energy Economics and Financial Analysis (IEEFA) said, over 100 globally significant financial institutions have divested from thermal coal. This includes 40 per cent of the top 40 global banks and 20 globally significant insurers.

 

“Since January 2018, a bank or insurer announced their divestment from coal mining and/or coal-fired power plants every month, and a financial institution who had previously announced a divestment/exclusion policy tightened up their policy to remove loopholes, every two weeks. In total, 34 coal divestment/ restriction policy announcements have been made by globally significant financial institutions since the start of 2018,” the IEEFA report stated.

In January this year, BlackRock, one of the world’s largest fund managers, announced that it will cut from its actively managed portfolios, companies that derive a quarter or more of their profits from thermal coal, by mid-2020. This is likely to see major coal mining companies in China, India and the US divested from BlackRock’s portfolio.

Leading miners across the globe are already facing the financial headwinds of these decisions. In an analyst call in April, Peabody, the largest private sector coal mining company, said it is reviewing costs and operations at its mines globally and may close sites that are uneconomic. In this situation, potential investors in Indian commercial coal mining would find it difficult to find a suitor.

At the same time, with share of renewable power increasing in India’s energy basket rising, demand for coal is likely to remain static in coming decade. The Central Electricity Authority in its latest report said India’s energy requirement would grow at a modest 5.22 per cent from 2021-22 to 2026-27. This was based on an optimistic GDP growth rate of 8 per cent during the same period. This would entail low coal demand as well.

The Ministry of Coal, however, maintains that opening up the coal sector would introduce in efficiency, competition and reduce India’s dependence on imported coal.

In an interview to this paper in January, Union Minister for Coal, Pra­lhad Joshi, had said, “Demand from power sector this year (2019-20) was low due to monsoon and more hydropower... Even if we imagine there is a slowdown, we have to plan for the future. We have to be prepared.”

Commenting on India’s reliance on coal being out of alignment with the country’s climate change commitments Joshi said, “We are building coal washeries and all are in fast track to reduce the ash content and improve the quality of coal. Through reforms in its transportation also, we are reducing the environment impact. We have done sapling plantation drive of 1.5 million.”

Last week, however, the Centre abolished the mandatory washing of coal supplied to thermal units, on grounds that washing does not bring down ash content and thereby emission from thermal units.

Reconciling such contradictory forces will be key for the long-awaited privatisation of coal mining to be successful.