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Policy
 
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COAL: EXPANDING DEMAND-SUPPLY GAP
Is there an alternative?
To meet the growing demand of electricity in the country, the approach paper of 12th Five year Plan (2012-2017) targets to set up 100 GW of capacity. However, if the government wants to achieve this desired growth, it certainly needs to undertake immediate reforms to augment domestic coal supply.
Issue Date - 27/10/2011
 
At a time when over 50% of the country’s energy demands are met by coal, India is still struggling with issues related to its production and supply. Every year, the Planning Commission comes out with an estimated target of coal production and, interestingly, every year the figure is scaled down considerably. Even the final output lies nowhere near the revised estimates. What’s more? Coal or black gold, as it is often called, is about to become dearer and the ramifications are certainly going to be felt all around. The reason is simple. A risk of shortfall in production targets, the proposed pay revision in the sector, and an increased share of washed coal may put an upward pressure on coal prices and place energy companies at the losing end.

When it comes to a change in policy regime, there have been visible attempts to liberalise the statutory & regulatory framework in order to promote investment in the coal sector. These policy initiatives have come in the form of allowing captive mining by power, steel & cement industries; allowing foreign direct investment (FDI) of 100% for the power sector, 74% for the steel, cement & coal washing; creating a competitive market for sale of coal; progressive reduction of customs duty on coal & the import of Heavy Earth Moving Machinery (HEMM); and the introduction of contract mining. Despite all this, there really hasn’t been too much forward movement in the sector. In fact, since 1993, over 208 coal blocks holding around 50 billion tonnes reserves have been allocated for captive users. However, still only about 30 blocks have started production, mining just about 40 million tonne (MT) of coal against the potential of over 200 MT. This indicates that the domestic production has never been able to meet the industry demand. Even for the current Plan (2007-12), the Commission had earlier estimated that coal production will reach 680 MT by 2011-12, but the figure was later revised to 630 MT in a mid-term appraisal, and was further scaled down to 554 MT. In fact, production shortfall in the current fiscal is projected at 142 MT, with domestic output likely to touch 554 MT.

No doubt, as per Planning Commission estimates, domestic coal production will grow to 770 MT by 2017 (on the basis of projected annual growth of around 7%), but by then the demand too would soar to 1,000 MT, requiring companies to import 200 million tonnes. For the uninitiated, over 60% of India’s commercial energy need is met by coal (India’s proven reserves of coal currently stand at 110 billion tonnes). Although, as per estimates, the share of coal in terms of India’s total energy needs would drop by 2024-25, the fall would be marginal 4-5%.

 
The issue of coal availability also assumes significance because to sustain the economic growth rate of 8-9% over the next few decades, India has to invariably depend on coal. While demand for coal from the power sector is set to grow by around 10% (driven by new capacity additions), the supply through domestic production is seen at around 7-8%. However, it is still difficult to understand who is to be blamed. And if analysts are to be believed, coal demand and, hence, coal prices are only going to rise because the existing demand-supply mismatch is only going to get worse. According to the BP Statistical Review of World Energy 2011, while global coal production grew 6.3% between 2009 & 2010, consumption rose by 7.6%. In India too, the rapidly rising demand is seeing an increasing dependence on imports. Coal imports this year are estimated to be a whopping 84 MT, a figure likely to double in the next two years. In fact, as per data available with the Commerce Ministry, $8,183.38 million was shelled out in FY2010 for importing coal. Well, this figure has already reached $6,993.69 million in FY2011.

In view of growing mismatch between demand and supply, the government is said to be in plans to allow private companies into commercial coal mining. Mining giants like BHP Bilton, Rio Tinto, and Sesa Goa are expected to be allowed access to captive coal blocks reserved for cement, steel and power sectors. Having faced stiff opposition to this proposal from the Left in Parliament earlier, the government is now in plans to achieve the same without having to face the Parliament. Under the captive mining policy, coal blocks are offered to private players in approved end-user segments like cement, power, steel, syngas and liquefaction. These firms, in turn, are free to form joint ventures in mining. Even under the auction route, only these sectors are eligible to participate. As per sources, the coal ministry has already sought legal opinion on its plans to allot captive coal blocks to private miners on the condition that they tie up with approved end users for supply. There are also plans to review the current coal distribution policy to ensure that priority sectors get adequate fuel. Capacity addition in India’s electricity sector in the 12th Plan (2012-17) too runs the risk of getting derailed due to uncertain domestic availability and volatile international prices of coal, unless immediate reforms are undertaken to augment coal supply, warns a paper by industry chamber FICCI and consultant in energy sector ICF. In fact, the paper asks for allowing captive mines to sell surplus coal at market prices to incentivise additional production and full-scale commercial mining at market prices through amendment in the Mines & Minerals (Development & Regulation) Act.

          

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