Coal news and updates

Aggressive bidding for coal mines detrimental to returns: ICRA

Rating agency ICRA feels, aggressive biddings for coal mines may lead to “significant under-recovery (in fuel cost)” for the power sector winners in the recent coal block auction.

The two rounds of auction saw power producers bagging nine running or soon-to-be-operational coal mines. The blocks are stated to ensure fuel security to 6,000 MW capacities.

Having participated in reverse auction, the winning bidders quoted “zero” cost for producing fuel. Additionally, they promised to pay the government ₹302 to ₹1,100 a tonne as revenues. The payables are linked to wholesale price index. ICRA now estimates that the negative bidding will cost the winners of coal blocks ₹0.39/kwh to ₹1.02/kwh as under-recovery on a levelised basis over a 25-year period (life of the mine). Aggregate under-recovery is estimated at ₹800 crore in 2015-16, which is likely to increase to about ₹18 billion by 2017-18.
Escape plan

Theoretically, the winning bidders may bridge some of the under-recoveries through merchant sale (open market sales) of 15 per cent of the generation capacity.

However, in a low open market tariff (as is the prevailing condition) such sales may not be profitable enough. Historically, except for a few months in 2011, demand for merchant power remained weak on a round-the-clock (RTC) basis. The current RTC average is far below the generation cost of most of the new units. The other possibility, as pointed out by ICRA, is to quote higher fixed charges (for electricity generation) during the tariff-based bidding for power purchase agreements (PPA).

Power sector sources, consider it a theoretical possibility, as the buyers - state distribution utilities (discoms) – are unlikely to give away the advantage of aggressive bidding for coal blocks.

“There is a limit to which fixed charges can be inflated. Moreover, given the results of the coal block auction, the cash strapped discoms may utilise the opportunity to lower electricity tariff,” a power sector official told BusinessLine. ICRA also sounds a similar note of caution. The conditions are “favourable to discoms”, it said.

According to ICRA the cancellation of coal blocks (allotted in the past) impacted nearly 18,000 MW in the private IPP segment.
Trouble continues

As against this, the current auction of coal blocks secured fuel supply to a net of 2500 MW worth capacities (excluding 3500 MW capacity that previously enjoyed fuel supply from CIL).

It means 15,500 MW capacities involving investment of ₹93,000 crore continues to remain affected. Of the 15500 MW approximately 8000 MW worth of capacities is at risk in the absence of tapering coal linkage.

A tapering linkage is a conditional fuel supply, previously offered by CIL to keep the end-use plant running till the captive mine was ready.

source: http://www.thehindubusinessline.com