Coal conundrum

The dispute between CIL and NTPC frames the urgent need for reform in the sector

India's largest buyer of coal, NTPC, has accused Coal India Limited (CIL) of adulterating the quality of coal supplied to it. It is a commercial dispute, between two of India's largest companies. Three aspects of the face-off, however, speak of a larger problem. One, both companies belong to the public sector, their ownership lies with the government. Two, in February this year, the government obtained a presidential reference to make CIL agree to sign a series of fuel supply agreements with its largest customers. And three, the fuel supply agreement between these two companies is still to happen. The conclusion is obvious: a regulator, in this case the government, should restore sanity in the sector. The only flaw in that argument is that the current developments are the result of government interference.

The coal sector would appear to be caught in a vicious cycle. The private sector is seen to have indulged in profiteering and has been largely eliminated from the mines. Coal supply is once again the monopoly of CIL, but it is mixing different grades of coal. Consequently, NTPC is running low on coal supply. There may be a valid reason for CIL mixing coal grades. It has been tasked with raising production levels at the shortest possible notice. It has large pithead stocks of various grades. To keep costs manageable and raise production quickly, the company has a perverse incentive to use the stock. For NTPC, however, low-grade coal can play havoc with its power plants.

After a year of playing the blame game, the coal economy seems to be edging back to 2004, when the PMO and the coal ministry began formulating alternatives to raise supply. The critical lesson that had been glossed over in the round of accusations in the sector has resurfaced. The current price mix makes it unviable to bring coal to the surface. This held true for the private sector miners, who kept sitting on their allocation, and it holds true for the public sector too. This is a conundrum whose resolution will require reforms in power, the railways and several other sectors.

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