Newspapers have reported that the Indian government is considering the break-up of India's largest coal producer, Coal India Limited (CIL) to boost competition and raise production. Earlier too, the idea was had been proposed - in 2017 - that CIL should be split so that the individual units can compete among themselves and raise funds for the government but the plan was dismissed considering that a number of issues relating to the structure of the proposed units, as well as regulation will first have to be dealt with.

Now it appears to be back on the agenda. But the questions that were asked earlier are still valid. Will the move work, and what are the implications of taking this step, which must also be factored in? The Brookings Institution, India looked at the contours of the coal sector in India, and at CIL's role in it; their findings were published in a recent report.

Coal and India

India's primary source of energy is coal, and CIL is the country's leading coal miner. However, despite India being the largest coal producer, importing coal has still been unavoidable; imported coal is of better quality, (especially in terms of the ash content) and many power plants have been designed to a particular quality of coal, so it's not easy to substitute Indian coal into those. While foreign coal is available, many plants are in limbo after the prices for imports rose well beyond their initial assumptions.

In the past few years Coal India Limited has also been substantially failing to meet its production targets. The targets may have been ambitious to some extent, since they assumed very high growth rates in production despite the falling grade of the coal over the years. For the country, the alternative is to use other energy sources, including renewables, to bridge the gap, but here too there is much to be done - it would take over 500 Gigawatts of renewable energy capacity by 2030 (from approximately 80 GW today) to manage without growth in coal-fired production. Unfortunately the sad reality is that our renewable energy is very inconsistent and coal is critical to our daily need for electricity.

CIL and its subsidiaries

Coal India Limited grew out of nationalization of coal in the 1970s and the subsequent merger of several existing units into one large entity. New subsidiaries were thereafter added, and today CIL has seven producing subsidiaries which are not the same on most scales. Coal is sold under fixed price for various grades of coal (called notified prices); these prices are set by technocrats aiming to keep CIL profitable. About 10-20% of coal is sold via e-auction through open markets to garner higher prices than the notified price. The company makes an overall profit but this varies substantially across the subsidiaries. Besides poor management, the profitability is also affected by high shares of underground mining, the use of direct employees over contract labour and bad geo-technicals.

The subsidiaries' profits have also been inconsistent; some units have incurred losses even during years that CIL had an overall profit, and in other years all subsidiaries have been profitable. Policy changes at management level can reduce cost spread only to a very small extent, the author suggests that one of the possibilities to even out the cost difference is to have a uniform market clearing price instead of average-cost pricing which CIL has been following all along but this would result in higher prices for consumers.

The falling grades of coal in India, and their incompatibility with
some of the planned power plants
has left India with limited options.

Changing the ecosystem, not just the company

Any proposed change in CIL will have to look at the ecosystem in which it operates, and the quirks in it, many of which have a direct bearing on the profitability of the company. The authors of the Brookings report point to more such things.

For example, the price borne by the coal mining companies is only a subset of the delivered price. Levies imposed on production are on a per-ton basis, leading to further twists based on the grade of coal. Transportation costs are also not homogenous for consumers, due to the location of mines - many are far from the major industrial areas of the country. Indian Railways is said to transport a major part of the coals, and coal is the single largest freight carried by the railways. Frieght charges on IR are used to subsidise ticket prices for passenger travel.

Moreover, the fact that coal grades vary across mines and subsidiaries makes them less replaceable; alternate supplies are nearly impossible as power plants are designed to a narrow range of coal, and much of that variety is now available only through imports, especially in the case of large coastal plants. The unequal spread of renewable energy - across southern and western parts of the country, closer to the economic hubs - is also a factor.

All of this is bound to have implications for any split-up of CIL, especially if it is done to strengthen a 'market' for coal. Such a step will not even out the cost-spread, but will have wide shifts in prices at different places. Coal producers with low costs may raise their price to average market prices. And non-competitive mines may shut down leading to loss of domestic production which might again increase the imports.

While it is likely that splitting up CIL will spur production due to competition, greater efficiency in how the companies function will have more to do with management freedom and flexibility than competition alone. Employees' worries about job losses will also need to be addressed; in publicly owned companies, this is never an easy step. The government may be ready to welcome commercial mining, and this could possibly mean more competition and less imports, but it could also be an awakening call for the country to shift to renewable sources.