Old king coal must be market-facing

Setting up a coal exchange, as recently announced by Union coal and mines minister G Kishan Reddy, is a necessary step accompanying the country's recent foray into commercial mining that offers a means to reduce its energy import dependency. India needs access to all available energy sources to sustain a high economic growth rate. Given its coal reserves and demand for electricity, the industry must become more market-oriented to draw the required investment. A coal exchange plays a crucial role by lowering transaction costs, and improving price discovery as well as risk management. Since India is among the top consumers of coal, it also makes sense to have prices determined domestically for import substitution.

Coal mining efficiency has been affected by decades of nationalisation, and the entry of private miners is expected to counteract this. The industry must shift to modern processes to improve extraction, and to improve market share among global sources. Competitive intensity is likely to rub off on the operational parameters of the state-owned miner Coal India Ltd (CIL). A better market-clearing mechanism than cost-plus administered pricing ought to improve the industry's financial metrics.

Unlike crude oil or natural gas, whose reserves are yet to be established, coal offers a surer and shorter pathway to energy security. New Delhi has, on these grounds, resisted global pressure for accelerating curbs on coal production. Its renewed emphasis on coal does not necessarily run counter to India's self-imposed climate commitments. Geopolitics over oil has strengthened the country's argument for enhancing its coal-mining capacity. As new supply comes on-stream, the industry needs transparency in pricing that a coal exchange provides. The country's electricity exchange has improved price discovery in the spot market, and the coal bourse is likely to deliver similar outcomes. India will burn a lot of coal over the next couple of decades. It needs institutions like bourses to drive investments in the sector.