Opening Up Coal

Government allows commercial mining by private players

In a major policy move, the central government has allowed commercial mining of coal by private players. So far, the private sector was allowed to mine coal only for captive use in the power, cement and steel industries. This move, which is being viewed as one of the biggest reforms in the coal sector since its nationalisation in 1973, is expected to improve coal availability and bring efficiency into the sector with an increase in competition, enhanced investment and the deployment of latest technologies.

The much-awaited approval came on February 20, 2018, when the Cabinet Committee on Economic Affairs approved the methodology for the auction of coal mines/blocks for the sale of coal under the Coal Mines (Special Provisions) Act, 2015 and the Mines and Minerals (Development and Regulation) Act, 1957. The methodology largely seeks to open up coal mining for commercial purposes. The same was notified by the Ministry of Coal through a circular dated February 27, 2018.

Power Line takes a look at the guidelines, challenges and expected impact…

The methodology

The modalities for the allocation of coal mines for commercial mining are largely based on a discussion paper that was issued by the Ministry of Coal in March 2017. As per the approved methodology, the auction of mines for commercial purposes will be through the ascending forward auction, whereby the bid parameter will be the price offer in rupees per tonne, which will be paid to the state governments on actual coal production. Earlier, forward auctions were used for mines providing coal only to captive power plants and to the steel and cement industries, while reverse auctions were used for mines that supported power generation.

Further, there will be no restriction on the sale and/or utilisation of coal. The successful bidder will be free to sell coal in any manner, including sale to affiliates and related parties, utilise coal for captive consumption and even export it. However, it is highly unlikely that there will be any exports given the high ash content of Indian coal.

Miners will also have a certain degree of flexibility in managing their production, depending on the market scenario, and will be allowed to reduce their production below the peak rated capacity of the coal mine, which was not allowed earlier. The guidelines also allow foreign direct investment (FDI) of up to 100 per cent in coal mining activities, including associated processing infrastructure. The Department of Industrial Policy and Promotion will be the nodal agency for the same.

Likely impact

The opening up of commercial mining is likely to be a game changer for the sector. While it will provide operational flexibility to coal consumers, it will provide a new market to private players. It is also expected to lead to an increase in domestic coal output, which, in turn, will help in meeting the ever increasing demand of coal and in reducing imports. Further, it will attract international players to the Indian coal market, which will lead to the adoption of the latest technologies in mining operations, thereby increasing operational efficiency. The higher investment will create direct and indirect employment in coal-bearing areas and have a positive impact on the economic development of these regions.

For various coal-consuming industries, the move will mean lower energy costs. Power generators can improve the utilisation of their plants by sourcing commercial coal. Stressed power plants that do not have fuel supply linkages will also have a new source for procuring coal. And industries like steel and cement, which depend largely on imports and e-auctions for meeting their coal requirements, now stand to save on price and exchange rate risks.

That said, it is uncertain as to how many plants will procure commercial coal. As per ICRA, power plants that already have fuel supply agreements (FSAs) with state-run miners are unlikely to switch over to commercial miners in the medium term to meet their requirement as such FSAs have been contracted at competitive rates.

The way forward

Overall, the industry seems to have welcomed the decision, which is expected to not only increase the availability of coal, but also reduce its prices. However, various worker unions and the Centre of Indian Trade Unions have criticised it on employee safety and security grounds and announced a joint strike to be held on April 16, 2018.

Going ahead, the success of this initiative will depend on a number of factors, including the attractiveness of the blocks on offer, infrastructure preparedness, environmental and other regulatory clearances, and the willingness of private players to participate in it. While the reform was long overdue, it remains to be seen if it will be able to achieve the desired objectives.

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