Monday, January 16, 2012

Coal – Opportunities and Challenges in India

A research by KPMG in 2007 suggested that the rapidly growing Indian economy would require an investment of around USD 120 to 150 billion, from 2007 to 2012, in the energy sector. Research from McKinsey Global Institute reveals that the global energy needs are set to increase at a pace of around 2.2% till 2022. This is a clear indication that the energy sector would be looking for a high level of the investment. For this, however, strong private sector participation would be required to complement the public sector, set standard for performances, and bring in newer technologies. Private players have been showing interest in development of captive coal mining, oil and gas exploration. It can be deemed from their interest that they would be equally interested if the coal sector was to become an open market as well. It is also expected that once the INDO-US nuclear deal is finalised, the private players may be set to enter the nuclear sector as well.

Furthermore, there is an inclination towards market mechanism for greater transparency. This change, though, would have to be gradual seeing as already the supply is continuously lagging behind the demand. To this extent, both public sector companies as well as private players are competing abroad for energy blocks.

Opportunities also exist in the supporting energy transport infrastructure such as ports, railways, pipelines and power transmission networks. These segments need significant investment and are witnessing private participation. However, for private players to be interested in entering the sector, tariff reforms are needed to phase out subsidies and bring efficiency in the power sector. Also, the government would need to come out of its mentality to support the government enterprises over private players, regardless of the fact how sub-standard the government organizations may be performing. Thus, the government should take a back seat and not the driver’s seat and let the free market take the reins.


India is well-endowed with coal. However, 71% of its oil needs are met by crude imports. Rural India is predominantly dependent on traditional fuel sources like firewood, animal dung and biomass, estimated at around 143 Mtoe per annum or approximately 44% of total primary energy use.

The majority of India’s energy requirements are met by coal; which is largely mined in the Eastern and the Central regions of the country. In 2008-09, the total coal production in the country was around 400 - 450 MMT with major customers in the steel, power and cement sectors.

The graph shows a trend between the domestic coal production and the demand. This is an indication of how the demand is always exceeding the supply, thereby resulting in a continuous, never ending demand for the product and availability of a market ready to lap up any and all output. 

Key Issues Facing the Sector

·         The biggest problem facing this sector are the issues associated with land acquisition. Coal being a commodity which is found only in certain areas of the country, the locals of the area and their politicians often find themselves having a leverage with which they blackmail coal companies to agree on their terms and conditions. Government aided companies like Coal India Limited (CIL) often have to bow to these demands and this leads to inefficiencies in the mining and office operations as the people recruited under these terms are often not qualified enough and are not willing to work their dues.
·         Unavailability of a proper solution to deal with fly ash generated at coal stations results in high pollution levels
·         Indian coal mining is plagued with low levels of employee productivity
·         With the coal sector being directly or indirectly related with the political decisions in the country, there is a huge level of interference with the operations. Good decisions are often neglected in the face of political concerns.

Some steps which can be adopted to improve the performance of Coal sector could be:
·         Since majority of coal in India is mined by Coal India Limited (CIL); it is imperative that for the performance of coal sector to improve, CIL would have to improve upon its mining costs, which are way higher than those of leading coal exporters like Australia, Indonesia and South Africa.
·         Mining is often done at areas which are very far away from the place of ultimate use. Hence, the produced coal has to be transported over huge distances by a variety of means and different conditions. Since India does not have that well developed Supply Chain Management system, any bottlenecks in logistic infrastructure, such as ports and railways, have huge effects in the performance of the coal sector. Hence, Indian Railways would have to make an effort to augment its capacity to ensure ease of transportation from the coal producing regions to the demand centres. Furthermore, ports would need to be developed to handle the shipping vessels of large sizes to achieve efficiencies in the transportation.
·         The way to the successful future for the coal industry lies in developing newer technologies which would help increase the mining efficiencies, improve the environment friendliness of the mining operations and increase the chances for commercial exploration of Coal Bed Methane (CBM) as a source of natural gas.

The Indian Opportunity

Recognition of private investment requirements for the sector has opened up immense investment opportunities in coal and related sectors. Furthermore, with the entry of private players in the open coal market the Public players would have to acknowledge the need to improve operational efficiency. This would help decrease the operation costs of coal mining and make the existing players competitive.

Captive mining across different user industries is an immediate opportunity for private investors. Several coal fields have been identified for captive allocation. Additionally, there is a huge scope in other aspects of coal mining value chain including coal washeries, transportation and associated logistics. Yet more opportunities can be observed in the yet to be explored areas of Carbon Credits. With the millions of tonnage of coal being extracted every year and development of CBM extraction processes, the companies can gain millions per year with carbon credits.

Since coal operations are heavily depended on transportation and logistics, these segments would require extensive investment for an optimal “Coal Supply Chain”. While the Indian Railways would have to make a conscious effort to increase the load capacity of the cargo trains, they would also have to make an effort that the trains are available as per the requirements for coal transportation. Similarly, the sea ports need to be renovated as the existing ports cannot handle large consignments. There is a huge queue at the ports. Even then, there are several large sized tankers which simply cannot be served at the existing ports. This, in effect, increases the transportation costs for the importers and exporters.

Future Energy Requirements and Supply Options

Given the present growth rate of 5% in coal production, India’s extractable reserves would be exhausted in 45 years. Hence, all the more need to look at alternative options for fuels. Recently, numerous experiments have been done to retrieve Coal Bed Methane, conversion of coal to gasoline and other fuels such as those by Naphtha. There are efforts being carried out to incorporate nuclear technology in the quest to meet the growing energy requirements.

Several companies are making an effort to incorporate the renewable sources of energy such as wind and solar power. And this trend is expected to grow in the near future.

Till that time, however, there are several steps that may be taken to optimise the usage of energy, such as:
·         Employ energy conserving devices for both commercial and residential purposes.
·         R&D should be carried out to devise standards to reduce fuel consumption in automobiles.
·         Development of Natural Gas sources and renewable energy sources for power generation

A key fact that the Government of India should remember that currently the commercial coal sector, being a public sector, is dominated by the problems often associated with Public Sector Undertakings such as lower employee productivity, overstaffing both in and out of mines, lack of incentive for people to work. One possible reason for the same could be the fact that with most of the coal mining being nationalised, there is no incentive for the people to perform beyond the bare minimum expected of them. To this extent, lesson should be learnt from telecom sector where after the entry of private players, even the public players have increased their operational efficiencies, the customer complaints have declined and the like. Once the sector is exposed to market mechanisms and private participations, the sector will witness higher efficiencies, not only because of the competitive policies but also because of the technical and R&D competence that such a step would bring. 
Yet another thing that government should look into is to streamline the policy framework so that the entire coal block allocation process is facilitative for private players as well. It is imperative that the government implements these steps with sufficient political will so that these issues do not remain unaddressed. Furthermore, government also needs to take action to cut down on losses due to theft and pilferage, especially as most of the mining operations nowadays are plagued by coal mafia.
As it happens, India has amongst the largest reserves of coal in the world and the producer and consumer as well. It is an emerging market in the world and a conscious effort needs to be made that the country gets the benefits that it deserves. 

  • Integrated Energy Policy, 2006
  • KPMG India Energy Conclave, 2007 
  • McKinsey Quarterly, 2007 Number 1
  • Planning Commission of India
  • Preparing For Fundamental Shift In Energy, BCG 
  • Energy and efficiency - The changing power climate, PWC 2007