Lessons from coal crunch: Chance to revamp and revive

A court ruling this week that India’s decades-old method of granting coal mining concessions is illegal could herald much-needed reforms in a sector long dogged by the inability of state-run Coal India to raise output fast enough.

In declaring scores of coal block allocations made since 1993 unlawful and arbitrary, the Supreme Court has put investments worth billions of dollars at risk.

If it goes the next step and cancels the concessions after a further hearing due to start on Monday, India may have to import vast amounts of coal to keep the lights on.

In the long run, however, the decision could bring clearer rules to a sector that has failed to provide India with enough power because it has been so hamstrung by confusion and scandals over concessions allegedly handed to government cronies.

Coal India has a monopoly over coal that is mined for sale. The scandal, dubbed “Coalgate” by the media, concerns concessions sold to steel, cement and power firms to dig up coal for their own use. The furore erupted after a federal auditor's report in 2012 found that underpriced sales had cost the exchequer as much as $33 billion.

The court ruled that 218 coal blocks were awarded illegally. Because of the uncertainty, only 30 are operational. Their capacity is less than 10 per cent of the 565 million tonnes produced in India as a whole in the last fiscal year to March.

The government has already said it would consider allowing private firms to mine coal for sale instead of their own consumption and the court ruling may pave the way for that. “The government may convert this crisis into an opportunity and now should take all bold reforms such as permission for commercial mining, fair auction policy, regulatory reform,” said Rakesh Jain, associate director at consultancy Feedback Infrastructure.

Accusations that resources from coal to mobile telephone bandwidth were routinely allocated as backhanders plagued the government of former Prime Minister Manmohan Singh, whose Congress party suffered its worst defeat in elections this year. Singh’s successor, Narendra Modi, has pledged to tackle “crony capitalism” and provide power for all in a country that sits on the world's fifth-largest reserves of coal.

Progress, but at a cost 

Sources say that before Modi came to power that he could consider breaking up Coal India to help end its near-monopoly and bring more competition, although unions have threatened street protests to thwart such a move. Legal wrangling and investigations into the concession process meant there was a tepid response to India's first coal block auction in February. The government withdrew the auction after only two firms bid for one of the three blocks on offer.

But the Supreme Court's intervention should bring the clarity that will make future auctions more successful. “It is possible that an early resolution of the issue could pave the way for much-awaited auctioning of mineral resources in India,” said Chirag Shah, an analyst with Barclays.

If the court does reverse the allocations, several banks stand to make heavy losses. State Bank of India and Power Finance Corp Ltd are among financial institutions that have together lent $10 billion-$12 billion to the coal, power and steel sectors.

Metals and power companies Jindal Steel and Power Ltd , Hindalco Industries Ltd and Sesa Sterlite Ltd would also be badly hit, having already spent billions of dollars around blocks awarded to them.

“A clean slate will come, but with a huge cost," said G. Chokkalingam, founder of Equinomics, a research and fund advisory firm.” Legally it will be right, but practically it will be a disaster."

A mass cancellation of awards would further raise shipments of coal to India, already the third-largest importer of the fuel. Coal is used to generate more than two-thirds of India's electricity.

Australian bank Macquarie estimates that scrapping all the allocations would increase India's annual import bill by $3 billion. But Power and Coal Minister Piyush Goyal, a former investment banker, sought this week to reassure investors that the Supreme Court's ruling would remove a “shadow of uncertainty” around a sector whose troubles have contributed to a sharp slowdown in economic growth. “We’ve come with fresh thinking and an open mind," he said. 


Stocks touch nadir

Half of India’s thermal power stations have less than a week’s supply of coal on hand, according to weekly data, the lowest level since mid-2012 when hundreds of millions of people were cut off in one of the world's worst blackouts.

There was a sharp fall in power output on Thursday from a plant in Gujarat that left India more than 9,000 megawatts short of peak demand, according to two officials at the state grid operator.

Any grid collapse would cast doubt on the crisis management skills of the new government led by Prime Minister Narendra Modi, whose achievement in ensuring 24-hour power supplies as chief minister  of Gujarat helped him to election victory in May.

 Commenting on Thursday last, Power and Coal Minister Piyush Goyal said: "I don't know about the possibility of a breakdown ... There is a problem, I think, with many of the coal supplies."

The shortage has come about as a fall in hydroelectricty generation due to weak monsoon rains forced the government to ask coal-based power stations to raise output, an industry source said.

India suffered unprecedented power cuts on July 30-31, 2012, that affected 620 million people — nearly a tenth of the world's population — in 22 states across the north and east of the country. Asia's third-largest economy relies on coal to generate more than two-thirds of its electricity, but power plants are running short because state behemoth Coal India Ltd has been unable to meet rising demand.

Cautious steps to open up coal mining to competition have been thrown into chaos by a Supreme Court ruling this week that all coal block allocations since 1993 were illegal. These went to steel, cement and power firms that had to use the coal themselves. In a second ruling next Monday, the court will decide whether to scrap the awards of more than 200 of these 'captive' blocks, or instead fine licence holders, promising further uncertainty before new mines can ramp up output.

The Indian Express reported on Friday that 10 out of 13 thermal plants that have suffered forced outages are state-run, raising questions over exactly how Coal India allocates supplies. A Coal India spokesman had no immediate comment.

Alarming situation

Many of these regional state power companies have imported less than required due to financial stress, having run up losses because they must pay market prices for coal but can only sell power at regulated rates.
"The current coal stock situation is indeed alarming," said Viresh Oberoi, chief executive of mjunction, an online commodities trader that is a joint venture between Tata Steel and Steel Authority of India Ltd. India produced 565 million tonnes of coal in the fiscal year to March, making it the world's third-largest producer. Even so, it is also the fifth-biggest importer of coal and the crunch could offer a sales opportunity to exporters.

Indonesia expects to raise its shipments to India this year by 10 million tonnes to around 100 million, Bob Kamandanu, chairman of the Indonesian Coal Producers Association, told Reuters.

Central Electricity Authority (CEA) power figures for the situation on Tuesday, accessed by Reuters on Friday, showed that 50 of India's 100 thermal power stations had enough coal to last less than seven days. Taken as a whole, India's thermal power generators have six days of supplies — far short of the 15-30 days set as an operating norm by the CEA.

As well as being short on capacity, India's power network lacks the connectivity needed for areas suffering shortages to tap supplies from other regions. Utility Adani Power Ltd has reduced output at its Mundra facility in Gujarat by about 2,300 megawatts due to a shortage of coal, two senior officials at the state-owned Power Grid Corp of India Ltd said.As a result of the cut, India's total generation capacity on Thursday was about 9,110 MW less than its potential demand at peak periods of the day. That gap was nearly twice as wide as at the beginning of the week, according to Power Grid data.

An unusually hot August has meant that city dwellers have kept their air conditioners running. States that could be hit with blackouts include Maharashtra, whose capital is the financial hub Mumbai, and Haryana, one power grid official said, declining to be named as he was not authorised to speak to the media. Friday was a holiday in parts of India, including Maharashtra, easing power demand, but it is expected to ramp back up once the entire country gets back to work on Monday.