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Coal exchange to swap opacity for transparency

10 Sep 2024

 

India is the world’s second-largest producer and consumer of coal and its procurement is set for transformation with the introduction of a coal exchange. This initiative aims to overhaul the existing coal trading system by introducing a transparent, efficient and competitive market, better able to meet the needs of consumers through greater competition among suppliers.

The core of this proposal is the creation of a fully digital platform for coal trading. The current system, largely manual and often cumbersome, is fraught with delay and complexity, driving up costs for end users. The coal exchange will replace this with a streamlined, real-time trading environment, allowing easy buying and selling. This digital platform should significantly reduce the time taken to complete transactions, thereby improving the overall efficiency of coal procurement processes. By allowing real-time trading, the exchange will enable faster decision-making, ensuring that coal is available to consumers quicker and at more competitive prices.

The coal exchange will probably use standardised contracts, much like commodities exchanges. They will specify the quality, quantity, and pricing of coal, providing a clear framework within which transactions will occur. This standardisation is crucial for reducing the ambiguity often surrounding coal trading, in which disputes over quality and pricing lead to lengthy delays and added costs. With standardised contracts, buyers and sellers will have a clear understanding of the terms of trade, allowing smoother and more predictable transactions.

Substantial benefits from the coal exchange are expected. The most important is the increased transparency it will bring to the market. It will provide a platform in which prices are openly displayed and transactions recorded in real time. This will benefit not only large industrial consumers but also smaller players who often struggle to negotiate favourable terms. The exchange will foster greater competition among suppliers. A level playing field and easier access to the market mean private coal producers should emerge as key sellers and will be able to compete more effectively with larger state-run entities. This is particularly so for those who have obtained coal blocks at commercial and captive mine auctions opened up since 2020. Increased competition should drive down prices and encourage innovation in the sector, ultimately benefiting consumers.

Regulation will be crucial to the success of the coal exchange. At first, the Coal Controller Organisation is likely to be its regulator. This entity, which operates under the Ministry of Coal, is responsible for collecting and maintaining coal production data from all private and public sector coal mines. It also inspects collieries to assess the grade and size of coal, and acts as an appellate authority in disputes between consumers and mine owners regarding the grade and size of coal. As the exchange develops, it will probably require a dedicated regulatory body to oversee its operations and ensure that it functions efficiently and fairly. Alternatively, it may be regulated along the lines of the existing commodities regulator, the Securities and Exchange Board of India.

For the exchange to be efficient, it may require a customised sectoral regulatory framework. This may align with the current regulatory framework for commodities exchanges to learn from its regulation and technology experience.

In the short term, the exchange may cause shifts in pricing and supply patterns that could have implications for the energy sector. To adapt to the new market system, regulators and the industry, including the power sector, may need to modernise how contracts are structured. For example, exchange-based coal procurement may result in new ways to structure fuel pass-through arrangements in long-term power purchase agreements. Coal price benchmarking through coal exchanges may also lead to contractual innovations such as in contracts-for-differences that may help in the financing of new power generation capacity.

Modernising coal procurement is essential to India’s energy security. The coal exchange is but one of many steps required. Its success depends on the willingness of the industry to accept the change. Because the government is the largest stakeholder in the system, it must push its agencies to adopt the new system and make it a success.