Surprise! India's coal sector mired in scandal

Pity the poor Indian electrical consumer. During a torrid summer, an electric grid failure in India on 30-31 July resulted in the world's largest blackout, affecting more than 600 million people.

In retrospect, it was easy to see it coming, as India's surging economy has resulted in increased electrical demand that the country's ramshackle power grid has been unable to provide. Bad as the blackout was, 300 million people, a quarter of India's population, still have no access to electrical power, and as they are wired in, demand can only surge further. Although India has substantial coal reserves, mine output has been slowed by the Indian government's notorious bureaucracy and disputes over environmental and land permits, combined with a lack of investment in modern mining technology preventing output from keeping up with demand.

 According to the International Energy Agency (IEA), hydrocarbons account for the majority of India's energy use. Together, coal and oil represent about two-thirds of total energy use.

In light of the country's recent blackouts the report noted, "India suffers from a severe shortage of electricity generation capacity. According to the World Bank, roughly 40 percent of residences in India are without electricity. In addition, blackouts are a common occurrence throughout the country's main cities. Further compounding the situation is that total demand for electricity in the country continues to rise and is outpacing increases in capacity. Additional capacity has failed to materialize in India in light of market regulations, insufficient investment in the sector, and difficulty in obtaining environmental approval and funding for hydropower projects. In addition, coal shortages are further straining power generation capabilities. In order to address this shortfall, the Indian government continues to work towards adding capacity… Coal predominates (in the country's energy sector), generating roughly 70 percent of India's power. India is both the third-largest consumer and third-largest producer of coal in the world. India's domestic coal is low in quality - this renders coal-fired power generation relatively inefficient and necessitates imports of metallurgical coal for steel-making. The country imports considerable quantities of coal (83 million tons or 11 percent of total consumption in 2010)."

While India accordingly pursues every power option from nuclear to solar through hydrocarbons, coal's great attractiveness is the fact that it is an indigenous energy resource. But with such high stakes, it is perhaps not surprising at a major scandal is brewing over the government's coal policies.

India's Comptroller and Auditor General has just issued a report concluding that the Coal Ministry did not establish a competitive bidding mechanism for allocating blocs of coal mining leases, even though such a policy was proposed in 2004.

Firing back, Coal Minister Sriprakash Jaiswal stated during a press conference on CAG report that his ministry's allocation of coal blocs to private firms including Tata Steel and Jindal Steel and Power Ltd were done in a transparent manner, adding, "There could not have been a better policy than this."

Clearly stung by the allocations of favoritism in the bidding process, Jaiswal said that eight years ago the competitive bidding process could not be implemented due to conflicting legal opinions and the fact that states including Rajasthan, Chhattisgarh and West Bengal were then opposed to the competitive bidding process. Justifying the two coal blocs awarded to Tatas and the Jindal Steel and Power Ltd for their coal-to-liquid projects, Jaiswal stated that they were intended to reduce India's dependence on crude oil imports.

The uncomfortable fact remains however that the CAG report tabled in Parliament on 17 August, which revealed that 142 coal fields were sold since July 2004 to private and state-run companies reportedly earned the private companies a windfall profit of $34 billion because of the low prices they paid for the fields, adding that an auction would have given the government some of that revenue.

Tata Steel and Jindal Steel and Power Ltd were not the only miscreants in the affair however, as the CAG report also named and shamed Essar Power, Hindalco, JSPL, Adani Power, Monnet Ispat, JSW Steel, DB Power, Ultratech, BALCO, Grasim Industries and CESC, among others.

CAG also reported that production from underground mines stagnated at roughly 43 million tons annually for the period 2006- 2010 before declining to 40 million tons in 2010-11.

Accordingly, given the volume of lost revenue, combined with declining coal production amidst soaring demand, Minister Jaiswal can expect at the very least to be summoned before Parliament to explain in detail as to how "There could not have been a better policy than this."

By. John C.K. Daly of Oilprice.com