The recent policy declarations of the central government opening up coal mining to the private sector, along with the ambitious projections in increasing the production levels of coal in the country, has raised renewed interest of the industry on the future of coal mining sector in India.  Commercial coal mining has been opened up for the private sector since 2018 but has received lukewarm interest from private players. The initiatives taken by the central government for opening up private sector to coal mining for boosting coal production needs to be seen in light of other policy developments.

The coal found in India is called drift coal, which is different from the high quality in situ coal found in many of the other coal producing regions of the world e.g. Indonesia, Europe or Australia. Indian coal is high in impurities (ash content) and moisture and low in volatile matter. To sum up, it is not the best grade top quality coal, and therefore, is not suitable for some major industrial uses e.g. steel manufacturing, which require high grade coking coal.

About 85% of the coal in India is used for generation of power. The Indian power sector has been historically dependent on coal as a major input for generation. Majority of the generation capacity in the country (about 60%) consists of coal based thermal generating stations. However, there has been a steady decrease in the proportion of coal based generation in total power generation in the country, due to the continued focus of the central and state governments towards development of renewable energy based power generation. In fact, coal based generation witnessed a decline in terms of actual generation for the first time in 2019, since 1973.

India is a signatory to several international treaties that require India to aggressively reduce its carbon foot print and increase the share of green renewable energy, and reduce polluting energy sources. There has been a sustained policy thrust to encourage increased setting up of alternate renewable sources of power generation e.g. solar, wind, hydro, biomass etc. India has seen a tremendous increase in renewable energy generation, which, presently makes up about 25% of the installed generation capacity in the country. However, the overall demand of electricity has not kept up. In fact, the country had been witnessing weakening demand for power since 2019. This has resulted in reduced demand of power from thermal plants.  

In the recent past, there had been an en masse de-allocation of captive mines under the judgment of the Hon’ble Supreme Court in Manohar Lal Sharma vs Union of India. By the same judgment, the Hon’ble Supreme Court had also imposed an additional levy of rupees 275 on every ton of coal that any captive coal mine owner had raised, from their mines.

Some of these de-allocated mines had been bid out through the system of reverse bidding, wherein companies have offered to pay substantial royalties, in the form of additional premium to the central government as part of the bidding, for every ton of coal mined. The power generation companies have been forbidden from adding such costs as part of the energy charges that they can charge from distribution companies. One may wonder at the utter stupidity of these power plant owners to take upon themselves, the onus to pay additional premium as a cost without any possibility of recovery of such cost. For those who have some understanding of boiler designing, boilers are fuel specific and designed having regard to the chemical and other characteristics typical of the coal to be used for such boiler. Therefore, generating stations tied up with a particular captive mine, felt a sense of desperation to regain these mines at any cost.

These two events i.e. the payment of additional levy under orders of the Supreme Court, and the payment of additional premium as a yardstick for bidding, has caused significant distress to the power sector as major consumer of coal. The de-allocation of coal mines coupled with additional levy and additional premium, has not only caused huge and irreversible stress on the affected power companies, but also on the financial sector, the effects whereof are reverberating till date. This, along with the perennial bankrupt position of distribution companies due to lack of tariff correction and other aspects including political interference and free power, has resulted in general hesitation amongst financial institutions to lend to power utilities. Further, the average plant load factor for coal based plants remain less than 60% with many plants in the IPP sector having closed down in the absence of fixed contracts or sustained demand. These factors further complicate the scenario and suggest a write-off of the power sector as a major consumer for incremental coal production.

One of the other concerns for use of coal is the large volumes of fly-ash created from burning of coal. Disposal of fly-ash has been a matter of grave environmental concern. The Ministry of Environment, Forest and Climate Change (MoEF&CC) has issued circulars for the disposal of fly-ash, which are being enforced in all seriousness through governmental and judicial supervision. Increased use of coal will only add to the management and disposal challenges of fly-ash. The requirement of installation of flue-gas desulfurization equipment for coal based plants at significant costs, will add to the cost of conventional power, which may have an adverse impact on mid-term and short term demand.

In this background, while drawing up policies and measures to boost domestic coal production, the government should prepare a clear roadmap on how to optimize usage of coal, to align it with the increased focus on renewable energy. Clearly, thermal generation will not be in a position to support any incremental production of coal. It then remains to be seen how the present levels of coal production, let alone incremental production through policy push, can be accommodated and used efficiently.

Any incremental coal production in India will not be in a position to substitute imported coal. India has limited reserves of high quality coking coal. Such coal has to be necessarily imported. Moreover, imported coal is also required for mixing with Indian coal to increase the proportion of volatile matter in domestic coal for more efficient burning.

The heightened activity of coal mining without identifying the consumption sectors and a steady pipeline for supply of coal, can have severe environmental and safety concerns. Coal India has been increasingly concerned with the rising coal stocks in its mines on account of the recent slump in demand from the power sector, coupled with the approaching monsoons. While this may be a temporary phenomenon on account of the COVID-19 pandemic, unplanned and excessive coal production will result in similar issues. Coal once mined, is self-combustible if it is stocked up beyond a certain period. Unplanned mining and inventory management, can result in serious fire hazards.

Further, in case of fire, the mined coal or a part of it will be reduced to ashes, which one the one hand cannot be delivered to consumers and on the other, would need to be disposed of at further costs. Having extracted coal at a cost, the value of such coal would not be recoverable unless there is a secured demand of such coal and no possibility of inventory build up. Monsoons would be a further additional hazard both in terms of the commercial value of coal and the environmental hazards caused by rainwater carrying impurities from coal stacks.

One must not lose sight of the fact that coal is a valuable national resources and the objective of its exploitation should be maximization of public welfare through optimized usage, and not as a tool of maximization of revenue for the government exchequer – and this is a challenge in introducing competitive bidding for natural resources. Awarding coal mines to private companies based on royalty, revenue share or annuity payments, will result in financial pressure on the companies. The success of the bidding process would, to a great extent depend on the visibility of demand for the incremental coal produced by the mining companies. The size of the mines allocated for private mining is yet another aspect to be considered. The total yield from the mines for the entire period of the contract, should be sufficient, to adequately meet the huge costs in terms of machinery, labour and compliances involved in mining. The smaller mines may find interest for supply to local industries. However, disorganized mining in the smaller mines can result in health and safety hazards for the miners, and environmental concerns. Unless the mines are allowed to be exploited in a systematic manner with modern equipment and remunerative returns, we won’t see too much of interest from established mining companies.

It is of utmost importance to prepare a blueprint of the future of coal industry in India. Apart from the importance of coal as a source of energy, the coal mining industry provides means of livelihood to more than half a million people. The exploitation of coal needs to be carried out in a well planned manner so that it can be preserved as an important mineral resource for future generations, while at the same time, finding more efficient and effective ways of converting coal into energy.