Bewildering Indian policies fuel needless coal imports

By Matthias Williams and Malini Menon

NEW DELHI (Reuters) - Tata Power's 1,050 Megawatt power station in Jharkhand is a textbook case of the absurd results that India's 1970s-era coal supply laws can produce, and why power utilities are lobbying the government to change them.

The Maithon power station is located in the heart of India's vast coal belt, but a shortfall in local fuel supplies has forced Tata to import some of the coal for the plant all the way from Indonesia - an expensive and cumbersome alternative.

The company has a coal mine nearly ready in the neighbouring state of Odisha, which is meant to feed another power plant whose construction has been held up by government red tape. Tata wants, but has so far not got permission, to use coal from that mine to fire the Maithon plant.

The case underscores how restrictive supply policies helped push up India's coal imports to a record high of nearly 138 million tonnes in the last fiscal year. India sits on top of the world's fourth-largest reserves of the fuel, but it has become the third-biggest coal importer after China and Japan, an estimate by the World Coal Association showed.

That is an anomaly India can ill afford, as the government fights to tame a current account deficit (CAD) that hit a record high last year and helped knock the rupee currency to record lows in August.

"At current import prices, we are talking about around $14 billion of coal imports, which is likely to go up to $25 billion by 2016/17," said Rahool Panandiker, principal at The Boston Consulting Group. "In this context, when there is a focus on reducing the current account deficit to $70 billion, every bit of increased coal production contributes to decreasing the CAD."

Amid lobbying from private companies, the government set up a committee to look into how to free up supplies of domestic coal, and is due to publish its findings this month. However, interviews with government and company officials suggest that no consensus has emerged about how best to proceed.

"There is a very strong need to augment domestic coal supplies and reduce our dependency on imports," said the Association of Power Producers (APP), a powerful lobby group that gave a closed-door presentation last month to the power ministry's top civil servant.

"The need of the hour is a forward-looking policy to maximise domestic coal supply while ensuring adequate incentive for the developer to mine additional coal," it said in a paper seen by Reuters.

COAL SHORTAGES

Prime Minister Manmohan Singh's administration has pledged to tackle chronic power shortages that hobble the growth of Asia's third-largest economy. But power companies are saddled with debt. Power stations do not have enough coal or gas to run at full capacity, and state-run distribution companies are too broke to pay for the power that utilities produce.

As a result, despite two decades of rapid economic growth, Indians consume only 900 kilowatt hours (kWh) per capita, compared to 7,000 in Europe and 14,000 in the United States, according to a recent note by consultants Bain & Company.

Most of the coal is dug up and doled out to power companies by state-run Coal India Ltd , the world's largest coal miner, which has struggled to modernise, raise its output and root out corruption within its ranks. Its dominance is a legacy of the socialist policies of Prime Minister Indira Gandhi's government in the 1970s that nationalised coal mining.

Such policies have been partly relaxed since that time. For example, instead of buying from Coal India, power producers can be allotted a coal mine of their own, known as a "captive mine", that they must specifically use for a particular power plant.

But the construction of such plants, such as Tata Power's plant in Odisha, can snag for years on red tape. That leaves a coal mine that no-one is able to use, while the same company has to buy coal from abroad to make up for shortfalls elsewhere.

SEEKING CONSENSUS

One policy under discussion in the government committee is to allow companies that have a mine for a power plant that is still under construction to dig out the coal and park it with Coal India, and then take it back later when the plant is ready.

The aim is to help power producers build up a "bank" of coal stocks that would guarantee them a steady supply once the power plant is built. At the same time, Coal India could lend the coal on to another company that is suffering shortages.

Ashok Khurana, director general of the APP, says the policy, known as "Coal Banking", would reduce companies' reliance on imports by 25 million tonnes by the fiscal year 2016/2017. That is equivalent to nearly a fifth of India's total coal imports.

Another proposal under consideration is allowing power producers to mine coal and sell it to Coal India, which would then be able to dole it out to other companies. A further idea, along the lines of Tata's request, is allowing companies to use coal from private mines to fire power stations elsewhere.

Conversations with stakeholders suggest arriving at a consensus for all policies under consideration could be hard. Officials at both Coal India and at the Coal Ministry said the "coal banking" concept was impractical.

Sceptics question how Coal India could efficiently store and keep track of the coal it would "bank" for power companies.

"Operationally it's going to be quite challenging," said a senior official at a large Indian power company that is suffering acute coal and gas shortages.

"At what rate do you bank (the coal)? At what rate do you take it back? What is the time when you get it back? What happens if at that point of time there is an additional shortage? Would Coal India then deprive its existing customers and give it to them?" the official said.

Allowing companies to sell surplus coal to Coal India is simpler to implement and more likely to see the light of day, sources told Reuters.

However, some - such as Amit Sinha, a partner at Bain & Company - would like to see the government take a back seat rather than act as a go-between in supplying coal. He compared the prospect of more state involvement to India's notoriously inefficient system of storing and handing out subsidised food.

"My belief is that government-supported mechanisms tend to have limited impact. They need to be market-facing initiatives where the government provides the framework and then steps away," Sinha said. "If the government starts to play an active role ... my issue is that it will be very slow, and there will be lots of implementation hurdles that we'll face."

(Additional reporting by Jatindra Dash in BHUBANESWAR; Editing by John Chalmers and Ed Davies)

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