Power play in the coal economy: Tracking Chhattisgarh unofficial levy row

The scandal over an unofficial levy in Chhattisgarh reflects the shortage that is afflicting the economy and a walk-back from market-friendly reforms

Allegations of an unofficial coal levy being extracted from miners by a cabal of middlemen, state officials and politicians in Chhattisgarh reflect the shortage that afflicts the coal economy again. Though such “levies” cannot be condoned, they recur when policy makers walk back market-friendly reforms such as cutting the volume of coal sold via e-auctions and micro-managing demand and supply.

That there is a coal shortage is clear from a Ministry of Power order last week invoking Section 11 of the Electricity Act to order power plants that use imported coal to generate electricity at full capacity. This section was invoked for the first time last year and has been deployed again as the hot weather sets in. Since last year, off and on, the coal economy has begun to face a demand-supply asymmetry.

This situation is a contrast to expectations that coal shortages would disappear with the first set of auctions for mining blocks in 2015. After an initial spurt, interest dipped as the rules said bidders had to show why they needed the coal. It has risen again after coal miners were allowed to prospect for and sell coal on a commercial basis with no government interference in June 2020. Encouragingly, 99 bids for 36 coal mines were received for the fifth round of auctions in November 2022, reversing a tepid cycle. This has freed up production prospects for the sector. It will, however, take some time for these mines to become operational.

Meanwhile, though power demand has risen sharply, growing at 4 per cent annually, the coal and power ministries have baulked at allowing sales from state-owned Coal India (CIL) and Singareni Collieries Company Limited (SCCL), which still account for over 80 per cent of domestic production, to be made on market-determined terms.

The most prominent example of this is restrictions on coal e-auctions to non-power sector companies with per head demands of less than 4,200 tonnes a year. Begun in 2007, this single window has lived up to its promise of being transparent and offering “equal treatment to all the categories of customers without any discrimination”. It has shielded smaller buyers, such as sponge iron, glass and paper mills, from the mega-demands of thermal power plants which buy coal from CIL and SCCL through legally enforceable fuel supply agreements (FSA).

These e-auctions have been good for CIL and SCCL’s margins. “All said and done, sectors whose product prices are market-driven need to secure coal from the market for their survival. E-auction is ideal for such consumers as it is a transparent process,” said former CIL Chairman Partha Bhattacharya. The company’s bottom line improved over the year with e-auctions, he added.

But with demand from the power sector shooting up, the draw on CIL and SCCL has increased sharply under the FSAs. Last year in the peak summer of April, several parts of Mumbai, like Byculla, Prabhadevi, Dadar and Mahim faced load shedding, though power distributors blamed local faults. To avoid a repeat, the coal and power ministries have begun to direct coal allocations. While these moves have insulated the thermal power producers to a large extent from sudden coal supply disruptions, it has come at a cost.

The supply from the e-auction window has come down. It was supposed to be 20 per cent of CIL’s annual sales. But actual sales dropped a massive 52 per cent to 60.51 million tonnes in calendar year 2022, against 126.2 million tonnes in 2021.

The series of cases in Chhattisgarh is a vivid illustration of this problem. According to the Enforcement Directorate, these minor coal consumers were being forced to offer bribes to get a no-objection certificate from the administrations of some districts to get their supply. The proviso of the certificate is itself malafide, it is alleged.

This is particularly disturbing as the price realisation from the e-auctions is far higher than what they get from sales to power stations. In December 2022, the monthly e-auction premium over FSA prices was 177 per cent. But since citizens care more if there is light at their homes than whether industry has power, the political push is for the former. So last year, the Union cabinet approved a single e-auction window to replace the sectoral ones. This meant coal would be sold through one e-auction window for types of consumers — small and medium enterprises, large companies, and all types of industry.

A note from S&P Global Commodity Insights said, “Clubbing of the e-auction windows would not involve any additional cost to the coal companies. Besides, selling coal through a single e-auction window would enable (them) to sell coal at market discovered price.” The problem is that the amount of coal available in these auctions is still subject to CIL/SCCL first meeting power companies’ demand. Though the scope of sales is wider, the cabinet decision did not do much to expand supply.

Frustrated, the Coal Consumers Association petitioned the government early last year. “The ministry is requested to look into the matter empathetically as resumption of at least some amount of coal supply to the non-power sector would be pivotal for the sustenance of the industries at present,” its letter stated.

The methods employed in the Chhattisgarh case is different in detail, but bears resemblance to the coal scam that swarmed all over India from 1993 to 2007. Entrepreneurs tried all means, just and unjustly, to procure assured supplies of coal. In the prevailing climate of shortage, the Union government had to issue an unprecedented presidential directive to CIL in April 2012 and again in July, 2013 to maintain its level of production.

India has come a long way since then. CIL’s production has jumped 16 per cent in this financial year. For FY24, the target has been fixed at slightly over one billion tonnes. The shortages are temporary, but, as Chhattisgarh has shown, turning away from markets has significant costs.