Coal India and Coal Quality Conundrum

The key issue that the Competition Commission of India’s order on Coal India Limited pertains to is the discrepancies in coal quality received at the power stations of Mahagenco and GSECL and the prices charged. The power companies filed the petition in view of the prices charged for higher grades of coal while they received inferior coal; and due to alleged dominance of Coal India Limited, their grievances were not resolved.

Some of the reasons for coal quality issues are historical in nature. Earlier while the coal produced were graded on the basis of Useful Heat Value (UHV), a formula-driven measure of heat content, it dis-incentivised quality control. The UHV bands were wide, their pricing structures were skewed and the additive nature of ash content distorted the economics. Following illustration helps better comprehension:

Grade	UHV Band (kCal/kg)	Price (Rupees/Tonne)
F	>2400 to ≤ 3360	630
G	> 1300 to ≤ 2400	450

When 1 tonne of F grade coal was produced, say, with a UHV of 3200 kCal/kg, it would fetch revenue of Rs. 630. But if 1 tonne of dirt was added to it, the resultant was 2 tonnes of coal with UHV of 1600 kCal/kg which would fetch revenue of Rs. 900. Such distortions eclipsed the motive to produce good quality coal. CIL has since 2012 moved to GCV based pricing with relatively narrower range of quality parameters but persistence of the earlier practice for long may have led to a work culture of negligence if not wilful contamination of coal with ash.

The dilution of coal quality happens due to technological challenges as well. Vitrinites and inertinites in coal molecular structure due to drift origins of Indian coal cannot be helped. However, use of surface mining technologies with limited capacities to segregate waste bands may results into avoidable compromises in quality. Larger sized equipment help productivity but result in loss of thinner seams of coal available in a mine and also result in dilution of coal quality. Use of surface miners may be helpful but this technology has its own set of geotechnical parameters for suitability of application. These apart, there cannot be a substitute for active mine quality management. This necessitates high degree of exploration, predictive geological model and accuracy in technological selection.

While it may be agreed that technology and management may have a limitation owing to complex geology of Indian coalfields, there must not be any tolerance of quality compromises due to production pressures. The demand and supply gap for thermal coal has been rising and questions have been raised about CIL’s capacity to meet the demand, which translates into production pressures at coalmine level, leading to compromises wherever accountability can be evaded.

There are also the issues of management of sampling and assaying. The practices of sampling and quality measurements have been disputed and sometimes the facilities to precisely determine the run-of-mine quality of coal are found wanting. Use of independent agencies is favoured but when stakes are large these agencies may not be truly independent and quality reports may be “managed” leading to serious mismatches between recorded qualities of coal delivered at mine mouth and that at receiving end at the power station.  Use of global firms with digital online analyser technologies may be expensive but can such eliminate disputes and build trust.

While investments in technology are easier, the much needed organizational focus on quality assurance at the working faces and mine-mouths are challenging and need cultural shift. CIL leadership has shown commitment to customers in the recent past and the CCI’s decision to impose penalty will only go on to reinforce the need to translate that commitment into practices.

The other larger issues of competitiveness in the sector are tied to the legislative framework. Debate on the legal framework revolves around the efficacy of free markets. Historically, when coal sector was nationalized, the circumstances appeared to indicate that private enterprises were too profit focused to channelize their resources for safety and occupational health issues in the sector. The government ownership was viewed as a tool to improve safety records and provide appropriate work environment for the miners. Hence, the Coal Mines Nationalization Act, 1973 was promulgated and the sector came under the government ownership. Another reason cited for the nationalization of coal mines was to provide government funding for development of coal mines for meeting the energy needs of the nation, which was not sees as forthcoming from the private owners. The circumstances have changed now. The private sector participation is being encouraged even though the degree of participation is still limited. The reason for this change in the policy outlook is that the gap in demand and supply seems to be rising by the day and the government-owned companies find themselves unable to match the expectations. Pricing policies seem distorted and make comparisons with the international markets irrelevant.

Under the current circumstances, opening the sector may be better suited since continuing with the legacy system that has not been able to perform to expectations will not bridge the demand and supply gap and will add to imports. These can be done through the stepped approach such as 1) Creation of open and vibrant market with large number of suppliers; 2) Market based pricing mechanism – in the transition period and supply constrained market, regulatory mechanism to address market excesses; 3) Enabling the safety and environmental regulations to be efficient and effective in continuous monitoring and remedial measures; and 4) Enabling investment environment such that market participants and stakeholders form a cohesive eco-system.

Infusion of competition in the market therefore needs to done quickly. A comprehensive approach to competition in coal sector has to encompass the structure, conduct and performance. Regulation of the coal markets and participants must complement competition. The role of coal regulator in the transition state from monopoly to free markets can never be overemphasized. It should facilitate removal of entry barriers, inflow of capital and investments, creation of commercially prudent trade arrangements and a check on exercise of market powers by the existing players.

(*The writer is an Associate Professor in the Energy Area of Administrative Staff College of India. Views are personal.)