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In June 2020, the Prime Minister of India, Narendra Modi, announced opening up India’s coal sector for private and foreign players. As a part of this, the Coal Ministry will auction 41 coal blocks that have a capacity to produce 225 million tons of coal per year, for commercial mining.
At present, only two government-owned miners, Coal India Ltd (CIL) and Singareni Collieries Company Ltd (SCCL), produce over 90% of the coal in India. To attract private players, the government lifted restrictions on the end-use of coal, and also provided flexibility to decide on capacity utilization, sales and pricing mechanisms. Further, opening up the sector with 100% automatic foreign direct investment (FDI), will ease global players’ participation.
This would, in theory, should jump start India’s economy, which was affected by COVID-19 pandemic, and create millions of jobs.
However, several questions still linger on the policy and the timing of the announcement. Why is India ramping up coal mining when the entire world is shunning this dirty energy source? Structurally, how conducive Indian mining sector is? Is the coal in Indian mines globally competitive? What does this mean for India’s climate protection commitments?
India, with 100 billion tons of coal reserves, is the world's fifth largest in reserves.
Figure 1: Coal reserves (in billion tons)
Source: iea.org
Still, India is the second largest coal importer, globally. In FY20 alone, India imported around 243 million tons (US$21 billion) of coal, equivalent to one fourth of its coal requirements. This includes imports of about 120 million tons of non-coking coal used in power plants. Domestically produced coal can replace this demand and this could save the government nearly (US$6.5bn) in import bill.
The economics look great.
However, how much interest will be there in coal, a resource that is fast going out of favor? Many countries are retiring coal based power plants. Even in India, coal is not a strategic asset in its growth ambitions. India’s 2030 energy plan targets renewables share to be 60% in power generation.
Based on current estimates, this implies that coal-based power will increase at a compounded rate of 0.9% compared to renewables at 11% by 2030. This isn’t a right signal for investors.
Figure 2: Power generation by fuel type
Source: TERI, Renewables Power Pathways Report, and Sustangibles Estimates
Is exporting excess coal an option? So far, India has been exporting negligible quantities of non-coking coal (1.2 million tons in FY 2020) to neighboring countries such as Nepal and Bangladesh by road. In other major international markets, India’s competitiveness with this low-grade coal is still a concern.
Even in the domestic market, it is difficult for the newer players to match the competitiveness of CIL, which operates some of the best mines in the country. Nearly 90% of CIL’s mines are opencast, which has low stripping ratios and therefore gives an inherent cost advantage versus underground mining. SCCL, the other state-owned player, is not as cost efficient with stripping ratios and operating costs twice of CIL. Theoretically, SCCL could be a prey for private players, but it accounts for about only 8% of the total coal production.
Figure 3: Efficiency metrics of CIL and SCCL
Source: Annual Reports
Further, mining under stringent compliance guidelines would increase the compliance costs and reduce ROIs. So, companies appealed to the Coal Ministry to allocate a sufficient larger mine instead of many smaller mines. Else, it would be still cheaper to import than mining domestically.
Is the structural landscape conducive? The Indian mining sector is plagued with structural problems such as land acquisition, regulatory clearances, and litigation
The average time for securing licenses and land acquisition in India is about four years compared to one year for most leading coal-producing countries.
In fact, all the leading mining companies in India have appealed to the ministry to provide prior environmental clearance so that litigations do not arise during the mine development phase.
Finally, what does this mean to the environment? Several of the 41 mines are in biodiversity-rich forest areas in central India, predominantly in Chhattisgarh, Jharkhand, and Madhya Pradesh. Further, about 35% of the land falls in pristine forest areas, with some being homes to various indigenous groups and animals. The State of Chhattisgarh has already expressed its reservation against mining in this area.
Given the above factors, in a best-case scenario, India could replace some of its imports of non-coking coal from countries such as Indonesia to meet its incremental coal demand by 2030. Large-scale exports to international markets are unlikely because of lower quality non-coking coal, structural inefficiencies, and global headwinds.
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