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Mining a solution

Cancelling all coal blocks is not the way out of the mess. Power generating stations with captive mines should be made to sell electricity at regulated tariffs

Written by Anil Sasi |
September 6, 2012 2:22:14 am

The biggest casualty of the Comptroller and Auditor General’s latest set of reports,especially the more politically damaging coal allocation audit,could be the embattled UPA government’s resolve to take day-to-day decisions.

With its back to the wall,there is a clear possibility of the Centre falling back on the only defence mechanism it knows when faced with such situations — to just sit tight in a corner and let all work grind to a halt. As a result,policy implementation could hit a brick wall and few,if any,decisions are likely to be taken in the coming months,as was witnessed in the immediate aftermath of the tabling of the CAG’s 2G spectrum report. While the allocation of coal mine blocks without auction is now a done deal,a complete roll-back of the decision might only serve to aggravate the already serious coal crunch facing key core sectors such as power,considering that generation capacity of close to 40,000 MW is in various stages of commissioning based on government-allotted coal blocks and linkages. Even as a crackdown on those squatting on these resources is definitely warranted,it is equally important to salvage the situation and move forward on the allocations made to the serious players,at least in the power sector.

Unlike the telecom spectrum scam,where the first-come-first-serve policy was deliberately tweaked to suit some players,in case of coal block allocations,no changes were made to the extant policy of allocating coal blocks through an inter-ministerial screening committee. The biggest flaw of this policy,though,was to offer blocks to a bevy of merchant project developers,who ultimately planned to sell the electricity generated from these plants at the highest possible rates. The other question mark is over the large number of first-time power and steel sector entrants who managed to corner some of the blocks on offer.

But then,on the flip side,there are equally strong views against a complete shift to the competitive bidding route for offering resources such as coal,especially in the wake of the fact that it forms a vital input to key infrastructure sectors such as power and steel. It is a given that,had the mines been auctioned,the net result would have been that the power project developers would have recovered the cost of premium paid for the mines through the price of electricity to be sold in the market.

So in order to rebut the allegations of graft in the allocations,the government should sufficiently ensure that all the generating plants producing electricity from captive blocks do not make a windfall gain by selling electricity to the discoms at market prices. This can be done by simply ensuring that all these generating stations that had gained access to captive mines should come under the purview of regulated tariffs.

Currently,the power ministry’s tariff policy mandates that post-January 2011,the distribution utilities will have to necessarily procure power from the market only through the competitive bidding route. As things stand,the competitive bidding for long-term PPA (power purchase agreement) has not gained momentum and even basic prerequisites such as the bidding documents are not ready.

Even though competitive bidding ensures that the price of electricity payable by the discoms is reasonable and competitive,yet there is some scope of mark-up in the price depending upon the level of competition. Therefore,to totally rule out any mark-up in the price of electricity vis-a-vis the cost of coal mining,the way forward could be to amend the tariff policy and specify that in case of generation plants having captive mines,it will be mandatory to get the electricity tariff determined by the appropriate state electricity regulatory commission under Section 62 of the Electricity Act,which specifies the projects offered through regulated tariffs. Section 62 has been provided alongside Section 63 of the act,which talks about competitive bidding.

While the act does not explicitly set a timeframe for a complete shift to competitive bidding for the power sector,the power ministry decided to go ahead and amend its tariff policy in 2006 to ensure that competitive bidding in power procurement was made mandatory from January 2011. This,in itself,was a recipe for market distortions. Especially so,since there was no market for fuel (coal was being offered without auctions),the adoption of the market route for the end product (auctions made mandatory for electricity procurement) simply did not make sense at a time when the demand for power far outstripped supply. So it was preordained that those who got coal for free would make windfall gains if they were mandated to sell electricity through the market route.

All this comes at a time when a move is afoot to amend the Electricity Act and remove Section 62 altogether,which is being done in the current fervour of competitive bidding being touted as a panacea of sorts. Asking the beneficiaries of coal block allocations to sell power at regulated tariffs would be akin to asking a hospital or school,which has got land at concessional rates from the government,to admit a certain number of people from the disadvantaged sections for free.

At a time when India is staring at a massive shortfall of coal that is estimated at 142 million tonnes by the end of fiscal 2011-12 and projected to rise to 240 million tonnes in five years,India can ill afford delays on the way to augment domestic coal production. So to move ahead and weed out the non-serious players,along with bringing in all the serious players who got access to coal under the ambit of regulated tariffs,could be one way out of this mess.

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