Why in news?
Cabinet Committee on Economic Affairs approved a methodology to auction coal blocks for commercial mining.
What is the reason behind this move?
- The productivity of Indian coal sector has improved over the years.
- But it remains below global standards.
- This can be addressed if the assets auctioned are large, accessible, and ready for development.
- The Government’s move to commercial coal mining is a recognition that developing coal blocks on end-use basis is inefficient.
- There are challenges in design and handover.
- But, mainly, the end-user industries lack expertise, scale and incentive to do anything more than source their own needs.
- This changes entirely with commercial mining where real productivity gains can be achieved and passed on to consumers.
What is the significance of this reform?
- It is the most ambitious coal sector reform since the nationalisation of the sector.
- It offers ample room for a competitive coal supply.
- The move from “an era of monopoly to competition” holds many strategic implications for an entire set of industries and companies.
- Already, large global and local mining majors have expressed interest in this landmark deregulation,
- It will allow mining and sale of coal without curbs on quantity, end-use or pricing.
What are the expected outcomes?
- The expectation is that the mining majors will set new benchmarks in terms of mechanisation, automation, mining practices, etc, and drive up productivity.
- Distressed assets, in particular, will use this option to draw up a plan for turnaround after the debt recast.
- The opportunity will get larger as new commercial miners take full advantage of deregulation.
- They can offer
- short-term contracts for seasonal needs (to serve utility demand or via the merchant market)
- adopt more flexible pricing
- supply higher quality blends to substitute imports
- It is also expected that the current coal producers too will respond with innovation and customer orientation.
- The immediate beneficiaries are power generators.
- As, they can improve utilisation and margins by sourcing commercial coal selectively.
- It makes it possible for new vertically integrated companies to own coal mining, to power generation, to distribution and retail supply.
What are the concerns?
- The downstream power utilities will gain from this, but are simultaneously faced with a major competitive threat.
- As the output from commercial coal mines comes on line, it will have a sustained, moderating influence on energy prices.
- The manufacturing sector is already diversifying its power procurement by buying from third-party sources and on the power exchange.
- They will now have access to lower cost electricity with limited price volatility.
- Similarly, as commercial miners target large energy users with captive power plants, discoms will lose the advantage of cross-subsidy.
What are the measures to be taken?
- Electricity regulators have to implement tariff reforms.
- Cross-subsidy should also be rationalised to levels at which discoms can still hold on to large energy users.
- This may not impact the smaller and lifeline consumers, as the State governments will channel the premium earned from auction of commercial coal to extend direct subsidy.
- The success of this new policy will depend on incorporating lessons from the previous auctions, and deregulating it fully to allow efficiency and competition in the primary energy sector.
- If this is ensured, there is good reason to expect the commercial coal auctions to become a success on sector reforms.
Source: Business Line
