Coal and power shortages are dominating the headlines. States are being asked to import coal. The common understanding is that electricity demand has suddenly surged with a robust post Covid economic recovery and an unexpected heat wave. This has caught key players — Coal India, the Railways, thermal power plants and Discoms (distribution companies) — on the backfoot. They are now getting their act together on a war footing. But going further back would give a better understanding of how we have got into the difficult situation we are in.

Having the fifth largest reserves, thermal coal demand was being fully met from domestic production. Then about 15 years back, India began to import thermal coal and has gone on to become the second largest importer. These imports would have been around 125 million tonnes in 2021-22. This would be lower than in the earlier two-three years as Coal India has been increasing production. This illustrates what is called the phenomenon of ‘unintended consequences’ in public policy.

Private investment

After the reforms of 1991, getting private investment into sectors where only the public sector existed became a goal. With private investment, capacity constraints would be overcome it was thought. The private sector was also ipso facto supposed to be more efficient. Coal nationalisation had been undertaken by Indira Gandhi in 1973.

The NDA government at the turn of this century introduced legislation in Parliament for private coal mining, then developed cold feet and did not pursue it. The UPA government which followed took the pragmatic view that private coal mining through legislative change was not feasible. However, the same net result could be achieved by liberally allocating coal blocks for captive use.

Thermal power plants and other industries such as cement and steel were given coal blocks for the asking. These were coal blocks which had been investigated, reserves established and were in the pipeline for mining by Coal India. As these were given for captive use, the pipeline of new mines for Coal India was reduced. This would not pose a problem as future demand would get correspondingly reduced through captive mining. Captive mining would lower costs and liberal allocation in a competitive industry structure would result in the benefits of lower costs being passed on to downstream users and increasing their competitiveness.

There was, however, a different view within government then that price maximisation through auctions should be the way to allocate scarce resources. This was picked up by the then CAG in a public campaign mode with the use of the creative notion of “presumptive loss.” The presumed loss figure of ₹10.67 lakh crores declared by the CAG naturally created a storm.

Supreme Court intervenes

The matter went to the Supreme Court. The government was unable to successfully assert that policy is its prerogative. Even if it should change at the behest of the court, a questionable proposition, it can only be done prospectively. If in some individual cases of allocation, there was a prima facie case of corruption, these could be investigated and the guilty punished.

The Supreme Court cancelled the allocation of 214 (all but four) coal blocks in 2014. These allocated coal blocks with reserves of about 28 billion tonnes could have achieved a production capacity 500 million tonnes per annum by now. Coal supply would not have been a constraint today.

In the meantime, thermal power investment by the private sector grew rapidly and this gave India adequate generating capacity at the national level for the first time. But faced with inadequate domestic coal production, imports became unavoidable. The practice of a thermal plant getting coal linkage from a dedicated mine to meet its full requirements was no longer sustainable. For new plants that were fortunate in getting linkage, Coal India provides what it can, and they have to import the rest of their requirements.

Some private plants came up, which were designed to use only imported coal. This seemed feasible initially as the price of thermal coal in the international market had been low and stable. This changed and international coal prices started to move in tandem with oil and gas prices. Many plants needing to use only imported coal became non-competitive and could not find buyers for their expensive electricity.

The worst affected were plants set up near the captive coal mines allotted to them which were cancelled by the Supreme Court. The logistics for bringing imported coal to these mines did not exist. Many of these power plants became NPAs (non-performing assets).

Coal India importing coal in bulk and meeting full demand at a pooled price with the higher cost of imported coal being equitably shared by all was an option which was not considered. It could have obviated the stranded asset and their NPA problem. If these plants were running smoothly there may not have been a crisis today.

Looking ahead

Increasing coal imports now would have a lead time. Following the Ukraine war, international spot market coal prices have soared to over $400 a tonne from around $50 a tonne in 2020. These are not expected to fall significantly in the coming months. Electricity prices from imported coal would, therefore, be so much higher. Equitable allocation of such expensive power going forward could be quite contentious.

Increasing domestic production to reduce and even avoid imports altogether is imperative. The key enabler for this would be to dispense with the requirement for fresh environment clearance (this takes a long time) if the annual production is raised substantially, only the annual production in the approved mining plan would change with the reserves getting exhausted earlier.

Coal India and others could be directed to raise production from their operating mines to the extent technically possible. This could even be a multiple of the present production in some cases. Mining blocks allocated to the private sector, private commercial mining now being legal, may be helped to get into production at the earliest. The requirement for higher coal imports and the consequent onerous financial burden would get moderated.

The writer is is a Distinguished Fellow at The Energy and Resources Institute (TERI), and former Secretary, Department of Industrial Policy and Promotion, Government of India