My views on coal block allocation rules - Published in the Power Line magazine April 2012 issue
• What according to you is the best mechanism of awarding captive coal mines--auction method, selective allotment or a combination of the two--and why?
- The objectives of the allocation of coal mines should typically determine the method of allocation, together with other factors like the market environment and risks. Hence, distinction should be made on account of the degree of exploration, elasticity of demand and impact on pricing of final products (electricity, steel, cement and such others).
- While for steel and cement sectors, which are non-regulated, auction method may seem appropriate, for electricity sector it may not, more so in the light of the fact that henceforth electricity procurements are competitive as well.
- For all these, however, the degree of accurate information available may be an important criteria. A regionally or partially explored coal block may not suit the bill for typical auction as information asymmetry is likely to distort the market. Geotechnical risks in such cases may cause auction to result in faulty price discovery – either the Government or the successful bidder would be an eventual loser. Such exploration assets may better be allocated through revenue or production sharing mechanisms like the NELP regime.
- Another important consideration is for the level of preparatory work done. In cases of coal blocks with perceived risks of land acquisition, delays in rehabilitation & resettlement, delays in environmental and forest clearances, and such others, the auction prices discovered will tend to be suppressed. In all cases, it will obviously help the Government and bidders to ensure that the preparatory works are concluded before the coal blocks are auctioned so that the asset on the block is fully comprehended by all market participants.
- For electricity sector, it is a good idea to run Case 2 type tariff based competitive bidding by packaging the coal block with appropriate power generation capacity creation. This will ensure that there are no hiking impact of coal asset bidding on electricity tariffs. However, the recently published rules for allocation seem to keep the already developed or advancing power plants in the lurch. While coal linkages for such power plants do not seem to ensure sufficient realization, the new rules seems to keep them out of the race to acquire coal block for captive consumption.
- On a different account, the mechanism of coal allocation may also be the cost of coal excavation, where selection is done for the lowest such cost. This mechanism may not have a restriction for captive consumption and allow for foreign and independent miners’ participation. Coal India Limited or any other designated agency can be the counterparty for procurement of coal from all such mines and then the distribution of such coal produced may continue to be on the Standing Linkage Committee route. Such contracts are widely used in countries like Malaysia although the scale of mining in Malaysia is smaller. Large projects can be awarded on these lines, which in comparison may look similar to UMPPs of the electricity sector and may be christened as Ultra Mega Coal Mines (UMCM).
• Should captive coal block owners be allowed to sell surplus coal in the open market?
- Competition through open markets is the need of the hour in coal sector where the policy distortions have resulted in large gap between demand and supply. While there is no deny that large number of market participants will ensure fairer degree of competition, it would be good to set the rules of the game at the beginning. For the coal blocks already allocated, the rules have been determined which do not allow for sale of surplus coal. For coal blocks attached to Case 2 type bid power projects, the bidding conditions have already been formalized. In such cases, post facto changes in rules for allowing them to sell or utilize surplus coal for thus far unspecified usages seem to appear unfair to other participants in the bid.
- However, with the new rules for allocation, through competitive bidding, it can be stipulated at the beginning that the successful bidders may have the right to produce, use or sell surplus coal. This will ensure that bidders look at the asset with potential for expansion and generating additional cash flows. This would also ensure greater realization for the government through higher commitment and for the consumers of electricity through lower tariffs.
• What needs to be done to accelerate the production from captive coal mines?
- For sure, the first and foremost is to ensure fiscal stability, else investment environment may remain uncertain. The profit share clause proposed in the MMDR hasn’t helped investments.
- There must be a state and union coordination agency for coal mining which should facilitate all approvals and clearances and assist in identification of project affected people for rehabilitation and resettlement. This coordination agency should work in collaboration with the coal mine allocattee and other stakeholders.
- If coal mining for power generation is included in the definition of infrastructure, which has been the demand of the industry for a while, it may facilitate easier financing of the projects.
- The objectives of the allocation of coal mines should typically determine the method of allocation, together with other factors like the market environment and risks. Hence, distinction should be made on account of the degree of exploration, elasticity of demand and impact on pricing of final products (electricity, steel, cement and such others).
- While for steel and cement sectors, which are non-regulated, auction method may seem appropriate, for electricity sector it may not, more so in the light of the fact that henceforth electricity procurements are competitive as well.
- For all these, however, the degree of accurate information available may be an important criteria. A regionally or partially explored coal block may not suit the bill for typical auction as information asymmetry is likely to distort the market. Geotechnical risks in such cases may cause auction to result in faulty price discovery – either the Government or the successful bidder would be an eventual loser. Such exploration assets may better be allocated through revenue or production sharing mechanisms like the NELP regime.
- Another important consideration is for the level of preparatory work done. In cases of coal blocks with perceived risks of land acquisition, delays in rehabilitation & resettlement, delays in environmental and forest clearances, and such others, the auction prices discovered will tend to be suppressed. In all cases, it will obviously help the Government and bidders to ensure that the preparatory works are concluded before the coal blocks are auctioned so that the asset on the block is fully comprehended by all market participants.
- For electricity sector, it is a good idea to run Case 2 type tariff based competitive bidding by packaging the coal block with appropriate power generation capacity creation. This will ensure that there are no hiking impact of coal asset bidding on electricity tariffs. However, the recently published rules for allocation seem to keep the already developed or advancing power plants in the lurch. While coal linkages for such power plants do not seem to ensure sufficient realization, the new rules seems to keep them out of the race to acquire coal block for captive consumption.
- On a different account, the mechanism of coal allocation may also be the cost of coal excavation, where selection is done for the lowest such cost. This mechanism may not have a restriction for captive consumption and allow for foreign and independent miners’ participation. Coal India Limited or any other designated agency can be the counterparty for procurement of coal from all such mines and then the distribution of such coal produced may continue to be on the Standing Linkage Committee route. Such contracts are widely used in countries like Malaysia although the scale of mining in Malaysia is smaller. Large projects can be awarded on these lines, which in comparison may look similar to UMPPs of the electricity sector and may be christened as Ultra Mega Coal Mines (UMCM).
• Should captive coal block owners be allowed to sell surplus coal in the open market?
- Competition through open markets is the need of the hour in coal sector where the policy distortions have resulted in large gap between demand and supply. While there is no deny that large number of market participants will ensure fairer degree of competition, it would be good to set the rules of the game at the beginning. For the coal blocks already allocated, the rules have been determined which do not allow for sale of surplus coal. For coal blocks attached to Case 2 type bid power projects, the bidding conditions have already been formalized. In such cases, post facto changes in rules for allowing them to sell or utilize surplus coal for thus far unspecified usages seem to appear unfair to other participants in the bid.
- However, with the new rules for allocation, through competitive bidding, it can be stipulated at the beginning that the successful bidders may have the right to produce, use or sell surplus coal. This will ensure that bidders look at the asset with potential for expansion and generating additional cash flows. This would also ensure greater realization for the government through higher commitment and for the consumers of electricity through lower tariffs.
• What needs to be done to accelerate the production from captive coal mines?
- For sure, the first and foremost is to ensure fiscal stability, else investment environment may remain uncertain. The profit share clause proposed in the MMDR hasn’t helped investments.
- There must be a state and union coordination agency for coal mining which should facilitate all approvals and clearances and assist in identification of project affected people for rehabilitation and resettlement. This coordination agency should work in collaboration with the coal mine allocattee and other stakeholders.
- If coal mining for power generation is included in the definition of infrastructure, which has been the demand of the industry for a while, it may facilitate easier financing of the projects.
posted by Dipesh Dipu @ 10:09 PM
2 Comments:
Dear Sir.
Fiscal stability is important for investment but even after that. what in my opinion is more tough is to get forest clearance in India.(for mines coming under forest). Not only the rules are getting strict day by day,but time to get the clearance is fairly very large impacting the whole project.
Coordination agency is required to reduce this timeline but it alone would not be able to accomplish its goal, until people going to be affected by mining don't give their support to the company and to the govt. They need to be bring into confidence otherwise public hearing alone could jeopardize the project.
Nikesh Shrivastava.
In my opinion, Govt should allow merchant mining in coal after starting the coal block auction process. This will help country in -
1. Ramping up the coal production so as to meet the domestic demand-supply gap
2. Conserving foreign currency which is being spent on importing coal and acquiring overseas coal mines,
3. Creating competition for CIL thus increasing its productivity
4. Realising better valuation for coal block in auction
This can be addressed by amendment in the Mining Act to allow merchant mining. We may like to protect the national interest by preventing export od coal thus using the natural resources for the growth of our economy. Competition in coal mining will also keep in check the higher coal prices as it happened in other coal sector like telecom.
Thus, I think there is no ground for preventing merchant mining.
Amol Pande
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