India's looming power struggle

Amulya Charan is sitting in the lobby of the stately Taj Bengal hotel in Kolkata when a call comes in from a small contractor trying to sell him a 10 megawatt power plant.

There is some haggling before Mr Charan, the managing director of Tata Power Trading Company, a unit of India's biggest private sector electricity generator, winds up the call.

"I'm buying six of the 10 MW plants," Mr Charan says. "Soon I want to have 100."

The tiny power plants, which will run on biological waste from agri-industry such as sugar mills, are just a small part of Tata Power's strategy of trying to use every energy source possible to overcome an impending shortage of coal in India.

The country has the world's fourth largest coal reserves. But a mixture of bureaucratic red tape, poor infrastructure, corruption and social unrest around the mine sites means the growth of the country's domestic coal-mining industry is not keeping pace with the demands of its rapidly expanding economy.

To overcome this, India's biggest energy producers, from Tata Power to state-run companies such as National Thermal Power Corp, are on the hunt for offshore assets.

The move, combined with a government initiative to secure overseas supplies of coking coal for the steel industry, signals the extension of strategic competition for resources between China and India to a new frontier beyond oil and gas for the first time.

If India is to sustain economic growth of 8 per cent a year, it will need to nearly double the capacity of its power industry from 135,000 MW today to 250,000 MW by 2015, according to Tata Power.

But India is already running a coal deficit, with coal demand last year for the steel and energy industries reaching 452m tonnes, of which 61m tonnes had to be imported.

By 2015, the country will be consuming about 800m tonnes of coal but will have to import more than a quarter of this, according to estimates from KPMG.

India's state coal mining behemoth, Coal India, is aiming to increase domestic production but few believe it can achieve its aims.

"They have a plan to take production up to 750mt by 2012 but if they actually believe they can do that I think they are in denial," said Gerard McCloskey, chairman of the McCloskey Group, a research and news company specializing in the international coal market.

One of the biggest barriers facing India's coal industry is the accident of its geographic location in three of the country's most ungovernable states, Chattisgarh, Orissa and Jharkhand.

The coal beds are often in remote areas terrorized by ultra-left wing guerrilla groups or criminals known as the "coal mafia", who extract rent from mining operators. Then there is the problem of shifting the local population, many of whom are poor tribal people who have few skills other than subsistence farming.

"It's not like Queensland where there is just the odd dingo. Where coal is here you've got very large populations on top of them," says Mr McCloskey."

Then there is official corruption and disputes over mine allocation between the state and central governments that can delay development of a mine site by a decade.

Mindful of this, the government has ordered that four new 4000MW power plants be built near ports so that they can use imported coal.

The government has also now sanctioned the establishment of a state investment vehicle to buy offshore coal blocks, mostly for coking coal for steel but also for thermal coal for the power industry.

The state-owned operators are looking in 12 countries, which aside from Indonesia and Australia, the two best-located markets for India, could include countries as far afield as Mozambique.

One of the first companies to look offshore was Tata Power, which earlier this year paid $1.1bn for stakes in two Indonesian coal blocks. Gujarat NRE Resources, another private sector operator, has also bought small mines in Australia.

But there is a sense that with the price of thermal coal soaring by up to 80 per cent, Indian companies may have left their overseas run a bit late.

"It's a question of finding the opportunities and prices have flared up so much," says Mr Charan.

gooooooooooooooooooooooooooooooooooooooooooooooooo ooooooooooooooooooooood