Coal news and updates

One question left hanging in the air after the Supreme Court decided on 25 August that all allocations of coal blocks from 1993 onwards were illegal is this: how will coal blocks be allocated in future? Since the court's primary reason for frowning at the allocations was their non-transparent and arbitrary nature, making future processes transparent will cover only the question of illegality, not rationality of pricing.

 

So apart from making the process clean and transparent, the government must have a philosophy on its pricing. It has three basic options: giving it away free, giving it at low cost for captive use; and hawking it at market-determined prices through competitive bidding or auctions of blocks.

 

In the post-1993 allocations, blocks were given free for some industries like power, steel and cement - while other industries paid the prices fixed by the government, and yet others bought the coal at market prices (through e-auctions). This is inherently iniquitous for it favours some users over others - and also discriminates against exports of coal in raw form.

 

It creates three sets of prices for coal based on who is going to use it. When you have differential pricing, it builds an incentive for corruption and misuse of coal. The person with access to free or cheap coal will be tempted to divert at least some of it to the market to obtain money for jam. Clandestinely, if not legally.

 

The Supreme Court stamped on this by banning the sale of coal from captive mines allotted to the ultra mega power projects to other power plants. But this still will do nothing to stop clandestine sales of coal - which could be rampant not only in captive mines, but also in Coal India. It is simply not possible to police all output from all mines all over India, especially in forest areas that are anyway fairly inaccessible.

 

The idea of giving power plants captive mines is purportedly to keep power tariffs low, but this logic is inadmissible when power plants have been set up with imported coal bought at market prices. Why should some domestic power plants get "free" coal (or, rather, coal at the cost of mining it) when others have to pay a market price for it?

 

This is nothing but indirect subsidisation of power which, again, leads to corruption and wastage. Also, there is a more fundamental problem: if you have to bid for coal mines based on power tariffs, it creates two kinds of imbalances or uncertainties: one, you have to produce power at low, fixed rates for years even when global prices of coal make be going through the roof. This means you will be producing power for skimpy profits when selling coal in the raw can get you more moolah. And two, your own tariffs stay low even when power tariffs in general may be going up.

 

This does not make business sense on either the coal production side or even power production.

 

The only sensible and foolproof way of dealing with the allocation of coal blocks is to auction them - either on the basis of royalties payable or a fixed total payment spread over the potential tenure of the mining lease.

 

This way power plants can bid for the blocks, or cement makers, or steel plants, or coal exporters, or any user. There should be no restriction on who buys the lease and who the coal is sold to. All consumers can hedge their coal costs by either entering into long-term supply contracts (linked to global prices) and/or buying rights to supplies from various sources for a premium.

 

The benefit of free pricing would be that the country will be able to raise coal production quickly and bring down imports. This, in turn, will bring down global coal prices once India shifts from being a net importer of coal to a net exporter over four to five years. In fact, global coal prices will become more stable if India is a supplier rather than just an importer.

 

Will domestic power costs go up as a result? They may, but it should be possible to offer a direct subsidy to poor customers (or by fixing a low tariff for consumption upto, say, 200 units) financed by a special windfall tax on miners payable whenever the price of coal exceeds, say, $80 a tonne (or whichever is the relevant price at which mines can make big profits).

 

Transparency alone is not enough. Coal blocks must be allocated freely on the basis of market-oriented bids and allottees should be free to sell the coal to anybody at the best price the market can bear. This needs an amendment, or abrogation, of the Coal Mines Nationalisation Act.

 

Depleting, polluting fossil fuels should not be sold cheap.

 

 

Source: http://firstbiz.firstpost.com/