Indian Government Plans to Open Coal Sector to Private Players to Meet Demand Challenge

Old King Coal Not a Merry Old Soul

India's government is planning to open up the coal sector to private players to help meet growing domestic consumption from the power and steel sectors as India's economy continues on its growth path. Moves to open up the sector have been prompted by the increasing problems faced by coal companies in meeting domestic demand. India currently produces around 450 million tonnes of coal, which is almost 50 million tonnes short of what it consumes, and with domestic coal demand forecast to hit 730 million tonnes by 2011-12, while domestic supply is estimated to be 520 million tonnes, the country is estimated to have a shortage of 210 million tonnes by 2011-12.

To cope with these challenges the government is planning a number of reforms in the sector. In October 2008 the Mines and Minerals (Development and Regulation) Amendment Bill was introduced to the parliament of India. The bill aims to adopt auctioning of captive coal blocks— or blocks that supply a single user—through competitive bidding, replacing the previous nomination system, which has left a number of blocks lying idle. According to India's coal minister Sriprakash Jaiswal, under the new regime the government will evaluate the quantity of coal in a mine, set a minimum price, and offer it to the highest bidder. The move is expected to end the monopoly of state-run Coal India over domestic coal supplies and is aimed at introducing more efficiency into the sector. The Coal Ministry says that an estimated 80 coal blocks in India could be given away through the competitive bidding process, which could provide significant opportunities for private coal mining companies such as BHP Billiton and Rio Tinto to enter the sector.

To support moves towards more competitive bidding the government is thinking of setting up a new coal regulator tentatively called the National Coal Regulatory Authority. The Coal Ministry has reportedly completed the groundwork for the new regulator, which could serve a number of roles including increasing transparency in allocation of coal reserves, ensuring a level playing field between state companies and private companies during the bidding process, and fixing trading margins and formulae for price revisions in long-term coal supply contracts.

As part of its new policy drive the government also wants to reform the state-owned Coal India. The state currently owns 100% of the equity in the company but is now seeking to divest up to 10% of the company's stock in an IPO to be held next year with a further 5% reserved to offer stock options to more than 400,000 of Coal India's employees (including former ones) and to displaced persons whose land will be acquired for new coal projects. The move could ease land acquisition difficulties for the company, which has undermined attempts to boost output although it is unlikely to solve the problem. Coal India's stock offering follows others carried out in recent months by other Indian energy companies such as Oil India (OIL) and NHPC and reflects the government's increasing reliance on share markets to provide the capital needed to fund large state energy companies’ expansion plans while reducing its own expenditure burden.

Outlook and Implications

The bill to introduce competitive bidding into the sector has received support from the power and steel sectors, which are concerned to speed up allocation of blocks to ensure adequate coal supplies for their operations. The bill to enact amendments to the Mines and Minerals Act of 1957 still needs to be approved by parliament, although given the majority support the government enjoys following its victory in the recent election, changes to the bill are expected to go through without any major hurdles. India's coal minister hopes that competitive bidding for coal blocks will be in place as early as March 2010. Coal India is also expected to have its disinvestment proposal cleared early next year with an IPO scheduled for the start of the new financial year. It is hoped that the IPO will raise 15,000 crore rupees for the government, although attempts to establish a coal regulator may be complicated by the clash of interests between the law and coal ministries, not least over what sort of person should head the regulator.

The reforms suggest that after many years of procrastinating the government is starting to put in place measures that can help India to raise its coal production capacity to mitigate a rapid growth in coal imports going forward. Given that coal makes up around 52.5% of the country’s electricity generating capacity and is the largest single contributor to India's overall energy mix, a growth in imports could get expensive for the state, adding to India's already sizeable spending on crude oil imports. It could also have a significant impact on India's plans to boost generation capacity. India plans to add 78.7GW of electricity generating capacity by 2012, and a large chunk of it will be coal-fired. Indeed, India is building a number of UMPPs with generation capacities of 4,000MW each, which will rely on coal feedstock. Pushing forward domestic coal production capabilities by allowing greater private participation is vital to supplying these projects and to making the sector more efficient given the costs of importing coal from abroad. Greater private participation in the coal sector may also potentially lead to new innovative technologies being introduced to the sector, which would help India to achieve its target of reducing "carbon intensity" or emissions released per unit of GDP by 20-25% between 2005 and 2020.