Taking coal to private players

Opening up the coal sector to private participation is a welcome reform

The approval of the Cabinet Committee on Economic Affairs to open up commercial coal mining for the private sector is a much-awaited reform. India has large proven coal reserves and 70 per cent of power generated in the country is coal-based. This essentially indicates that there is a strong demand for coal as well as strong supply growth possible. However, India has continued to rely on imported coal, though coal imports have come down to 43.6 million tonnes in nine months ended December 2017 from 49.9 million tonnes in nine months ended December 2016.

Even in a blue sky scenario where India adds 18GW of solar capacity every year, coal-based power will still continue to contribute more than 70 per cent of the overall generation even in FY22 and would require around 700-750 million tonnes of annual coal production, which implies a coal production CAGR of around 4-5 per cent. Currently, bulk of the coal requirements for the power sector is met by Coal India Limited (CIL). Though CIL has seen an increase in output, its output growth has not been in line with targets, and growth rates yearly have seen wide variations.

Given this, it was imperative that the government open up the sector for private participation and brought in competition. The methodology for ascending forward auction, whereby the bid parameter will be the price offer in rupees/tonne payable to the State Government on the actual production of coal, is fair and transparent. If the size of the coal blocks under auction is large, it would also see strong participation from even international players.

For one, CIL monopoly is likely be broken and dependence on one entity for meeting 80 per cent of domestic coal requirements has its own perils. Moreover, CIL, in the past, has faced challenges with labour, weather, among others. Sectors where private participation has been allowed have seen improvements in operational efficiencies and competitive price discovery with the notable one being the distribution segment and renewable space.

As new bigger better players enter the sector, the reliability and quality of coal production could increase. Besides, as the usage of imported coal declines, the overall cost of power production will see a decline. Though the developers will be free to price the coal produced, it is an absolute certainty that it would be priced at a healthy discount to international prices after gross calorific value adjustment and, hence, a further substitution or blending of domestic coal will result in overall cost savings.

Power plants which have hitherto been stranded for want of domestic coal and demand for electricity could see a pick-up. If the coal is made available by the new developers, these stranded capacities could see revival. Before the opening of the sector, a mine allocated could only be used for captive use for a specific purpose; now, it can be used for any purpose. Thus, it is likely to support emergence of vertically integrated players with presence across the value chain from mining to generation to transmission to distribution.

Risks

However there are certain risks. For instance, the coal pricing from these blocks would depend upon the bidding done by the developers and, in case the developers bid aggressively, coal prices from these blocks are expected to remain high. Consequently, the offtake might be restrained from these blocks leading to compression on return on investments.

The other risk is the competition from the imported coal prices. In case the global demand for coal keeps declining in view of the growing share of renewable energy globally, the imported coal prices may decline, providing competition to the private mine developers.

The writers are Associate Director - Corporates and Analyst - Corporates respectively, India Ratings & Research

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