Since the onset of the pandemic and over the past few months, after the Ukraine-Russia war, commodity prices, especially that of energy, have surged worldwide. With inflation at unprecedented levels in many countries, concerns over energy security have gained centre stage.
Recently, there have been several policy initiatives in the coal sector in India. One which has gone largely unnoticed is the introduction of the national coal index (NCI). This index was created to provide a benchmark for revenue-sharing contracts being executed after the auctions for commercial mining of coal.
The NCI had to be introduced as the wholesale price index (WPI) for coal has no component of imported coal. For the last six months, the WPI for Coal has been stable at around 131. Over the same period, the NCI has jumped from about 165 to about 238 reflecting the sharp increase in international coal prices. The domestic coal industry has responded to this situation with an increase of over 30 per cent in coal production from April to June this year. This has helped reduce inflationary pressures in the economy.
This development shows the importance of increasing domestic coal production to reduce the exposure of the domestic economy to the price volatility of international markets. Anticipating these problems, a big effort toward permitting commercial mining has been made to get the private sector to produce more coal. After taking preparatory action, about 50 contracts have been finalised in the last two years. Several other steps have been taken to increase domestic coal production.
However, much more needs to be done to make these measures more effective. First, and most importantly, the financial community has to be sensitised to the need of increasing domestic coal production to meet the growing energy demand. The Ministry of Power recognised the need to increase coal-based generation in the country in its draft National Electricity Policy released in May 2021, before the present crisis erupted. This policy has not yet been finalised. It should clearly articulate the importance of domestic coal-based generation. Apart from the government, the industry should also take up this issue with the financial community in adopting a more holistic approach toward environmental, social, and governance (ESG) criteria.
Second, is the need for a regulator to address the issues arising from a greater role of the private sector. The current arrangements were put in place at a time when the public sector dominated. There are several issues where new private commercial miners would need help. A single point of contact for the industry in the form of a dedicated regulator would give great comfort to private players and would help to overcome problems that could arise in due course.
Third, increasing domestic production of coal and diversifying the production base are both needed. This must be complemented with efforts to improve the quality of the coal produced. And fourth, the undue financial burden on the coal sector due to various cross subsidies needs attention. The regime needs to be reformed.
High prices of coal and coal-based generation will only encourage imported coal and expose the country to price risks from international energy prices.
Looking at coal from a singular focus on GHG emissions will give a myopic view of energy requirements for a growing economy like India. The path to achieving 500 GW of renewables needs to be gradual, ensuring an orderly transition as coal is unavoidable in the near future. Reducing coal imports and increasing domestic production of coal needs focused attention. The changes in the coal industry in the last few years are in the right direction. These were long overdue. Action on the issues discussed above will only help to deepen and strengthen these reforms which are needed to overcome the challenges that have resurfaced over the past few months.
Kacker is a former secretary, Government of India, and Srivastava is a PhD scholar at Energy Studies Programme, JNU