Is commercial coal mining really transformative?

The government can help by choosing coal blocks that promise scalability, lower risks and short gestation periods

The Cabinet Committee on Economic Affairs, chaired by Prime Minister Narendra Modi, has approved the methodology for auction of coal mines for commercial mining. Earlier, the ministry of coal had published a white paper on the policy initiative, which purports to bring in private participation in coal mining. The stated objectives of this reform are four-fold: greater efficiency in the sector through competition; transparency; ease of doing business; and use of natural resources for national development.

The term “commercial coal mining” is a bit of a misnomer, as all coal mining activities by definition are commercial, but in India it has come to define the right of a coal miner to sell products in the open market. This ideally should imply freedom to price products based on market demand and supply. The proposed reform provides this freedom and allows commercial miners to price their products. However, this flexibility gets restricted by the lower bound of Coal India Limited’s (CIL’s) notified prices and the upper bound of import parity prices, which is quite likely to remain narrow in future.

Commercial coal mining itself is not a new concept either. Prior to de-allocation of coal blocks by the Supreme Court, and indeed even after the Coal Mines (Special Provisions) Act, 2015 was approved by Parliament, several coal blocks were allotted to state-owned entities for commercial mining. A closer look at these entities and their strategies for coal mine development indicates that private contract miners operate the coal mines and these state-entities then bargain with potential buyers of coal for a piece of rent from the price of coal they sell.

Even CIL’s expansion plans hinge on the strategy of outsourcing. Thus, contrary to public perception, the private sector, through contract mining of varying scope and tenure, is already dominant in the coal sector. So, essentially, the reform is only to the extent of allowing direct ownership in coal mines, combining this with permission to sell in the open market and freedom to price.

Let’s examine the policy initiative on the basis of its stated objectives, the first being bringing efficiency to the sector through competition. CIL together with its governmental cousin Singareni Collieries Company Limited accounts for more than 90 per cent of India’s total coal output and has plans to produce one billion tonnes by 2020. While the target looks steep and may not be achieved, there is hardly any evidence that captive coal miners, who have a head start of three to four years over commercial miners, will be able increase their share.

Knowing the long gestation period that mine development entails, it is unlikely that CIL will witness any dent in its dominance in the medium term. Also, given the premium that commercial miners are expected to charge their customers, CIL with its lower notified pricing may still find favour in spite of concerns about the quality of service. With negligible impact on the competitive landscape, this policy initiative may have limited impact on the efficiency front.

On the transparency front, the auction method has proved its reliability in several rounds of auctions of coal and other mineral assets. There may not be much to complain about the process, which now is largely electronic. However, questions persist about the qualification criteria.

There have to be coalmine-specific qualification criteria which need to go beyond the quantum of minerals produced and specifications of mining equipment owned, and focus on the sustainable development of coal mines. Parameters relating to environmental and social impact need to be adequately weighed. This would mean making inclusive development an objective of the selection process and presenting this process transparently enough to build confidence among all stakeholders that the objective is being met.

The other two objectives — those of energy security and national development — may have to be evaluated in light of the bigger picture. There is a revolution that is sweeping the energy sector globally and in India as well. The balance now seems to be conclusively tilting towards renewable energy. And, this development is not entirely due to government support, but because these sources of energy are financially viable on their own.

Of course, there are some concerns about quality of supply and back-up, but there again large investments are being made, for example, in developing grid-size storage technologies for solar power. The next three to five years are likely to witness an epochal shift in the way energy is generated and distributed. Coupled with these developments, coal mining in India has witnessed lower than expected demand. CIL was struggling to meet demand just a few years ago, but is now finding it more difficult to dispatch the coal produced, leading to build-up of stockpiles.

The pertinent questions, therefore, are whether commercial mining indeed fits into India’s energy security puzzle; and, whether the development of more coal mines, with its inherent environmental and social costs, will further the cause of national development.

From a pure play margins and returns on investment perspective, a lot will depend on location, size of resources, and the geo-technical features of coal blocks, which impact the costs of mining. To attract investors, it is therefore important that the government chooses coal blocks that promise scalability, a higher degree of geological information, lower risks of stakeholder management and shorter gestation periods to get the first tonne of coal to market.

These, coupled with a view on demand and certainty of prices, will dictate investor interest in coal blocks on offer for commercial mining.

All said and done, it is the market that really tests an idea. It would therefore be wise to wait and watch before deciding whether commercial coal mining is such a transformative idea.

The writer is an energy and resource sector consultant based in Hyderabad