Stumbling blocks: Centre does not have much to show for its coal block allocations

More than a year after cancelling the fourth round of coal block auctions for lack of sufficient interest from bidders, the central government intends to auction off six blocks to the iron and steel sector for captive use. In the two years since the Coal Mines (Special Provisions) Act, 2015, was enacted, the government has allotted blocks to public sector companies besides auctioning them. As it embarks on yet another round of auctions, it is useful to review the auctions and allotments (together called allocations) done so far.

Fast off the blocks

The Coal Mines Act was the government’s response to the cancellation of over 200 coal block allocations by the Supreme Court in September 2014. Reacting rapidly, it passed the legislation and allocated nearly 70 coal blocks by March 2015. The urgency of action was justified by the coal minister who said in Parliament that if action was not taken quickly, production from captive blocks would come to a standstill, to the detriment of the country.

Under the framework of this legislation, winners of the auctioned blocks are expected to pay the government of the state where the block is located the bid amount and a “fixed rate” of Rs 100 per tonne of coal produced, while government-run companies allotted blocks have to pay a “reserve price” of Rs 100 per tonne. In addition, the framework envisaged tariff reduction for electricity consumers. Based on this, the government claimed that production from the allocated blocks over their lifetimes would result in a revenue stream of Rs 2.4 lakh crore to coal-bearing states, and tariff reduction benefits to the tune of Rs 69,000 crore to electricity consumers.

The Act also introduced amendments to existing laws that allow the central government to allocate blocks for mining of coal for sale. In this context, the proposed auctioning mechanism was expected to increase competition and deepen the market. Have these objectives of minimal disruption in production from captive blocks, enhanced revenue to states, reduced consumer electricity tariffs and greater competition been achieved?

Diminishing returns

Forty two of the blocks whose allocation was cancelled by the Supreme Court had been producing or were “about to produce” coal. Of these, the government later allocated 35 blocks for captive use. As of November 2016, only 10 of these were producing coal, and at much lower levels than before. Production from these blocks came down sharply from 31 million tonne in 2014-15 to just 12 million tonne in 2015-16, a fall of over 60%. Seventeen of the 35 blocks were allotted to government companies, of which 15 were reallotted to the same companies that had held them before the cancellation. Perplexingly, only two of these have restarted production even two years later.

The following charts summarise the allocation and the fall in production over the last two years. Analysts had warned that aggressive bidding by private companies to acquire blocks in the initial rounds of auction would render these blocks unviable. This combined with weak demand outlook for power, cement, etc, increased production from the public sector Coal India Limited and Singareni Collieries Company Limited, bureaucratic delays, and uncertainties over ongoing court cases could have caused the fall in production.

Low production has meant lower revenues for states. Proceeds from captive coal block production were only an estimated Rs 463 crore in 2015-16 and Rs 775 crore in 2016-17 until November. This is less than half of what they would have received (Rs 1,592 crore) had these blocks produced at even half their pre-cancellation levels.

Cost of power

While the Coal Mines Act framework held the promise of consumer electricity tariff reduction in principle, the mechanics of its implementation were never quite clear. Tariffs can be revised by electricity regulatory commissions, either on their own or on the direction of their respective governments. Although the central government wrote to all states to issue such directives back in April 2015, only one state (Madhya Pradesh) has actually done so. As a result, the regulatory commissions of only Madhya Pradesh and West Bengal (acting on its own) have revised tariffs downward. Rajasthan also uses coal from allotted captive blocks but its latest tariff process has not accounted for it. The situation with Odisha’s Talabira-I block in particular is confusing as its coal is seemingly used in GMR’s Raikheda power plant in Chhattisgarh, but that plant does not have a Power Purchase Agreement with any state utility. It is also understood that the Raikheda plant has submitted a bid of Rs 4.05 per kilowatt-hour in the latest round of power procurement by Uttar Pradesh which, according to our estimates, appears to be higher than what it ‘should be’ under the framework of the Act. Thus, the central government’s desire to reduce consumer tariffs by allocating captive blocks has not been realised so far.

Slow race

While the initial rounds of auction drew reasonable response (see table), subsequent rounds have seen diminishing interest. In the third round of auctions, there were only three bidders on an average per block. In the fourth round, this came down to fewer than two bidders per block, leading to cancellation of the round. Similarly, the only round of allotments to government companies too elicited muted interest – less than four applicants per block – compelling the government to subsequently allot these blocks on a more discretionary basis.

The diminished interest is not limited to captive coal blocks. It is also reflected in the poor response of state government companies to acquire mines for commercial mining, response to the auctioning of coal linkages and Coal India’s struggles to find buyers for its produce. Clearly, there is insufficient competition and/or interest in the coal sector currently and going by the predictions of low coal demand in the draft National Electricity Plan, this is likely to continue.

The verdict

The government’s objectives of minimising disruption in production, enhancing revenue for states, reducing consumer electricity tariffs and deepening competition in the sector have clearly not panned out. In addition, there are concerns about transparency in the allocations and legal and regulatory ambiguities. It is, therefore, fair to conclude that the allocation of captive blocks cannot be “universally hailed to be a success” as claimed by the government. This, together with likely reduced demand for coal going forward, should give the government pause as it forges ahead with another round of auctions and major new initiatives like commercial mining.

Saumya Vaishnava, Ashok Sreenivas and Rutuja Bhalerao are with Prayas (Energy Group).