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Coal auction rules to bar aggressive bids

Power projects of Essar, JSPL, Tata Power, Reliance Power and CESC, which have cost-plus power purchase agreements (PPAs), will not be compensated for actual fuel cost if it shoots up at the coal block auction slated to start in December.

The rule, part of the auction methodology being finalised by an inter-ministerial committee headed by coal secretary Anil Swarup, is expected to curb aggressive bidding at the auction and help keep power tariffs under check.

The auction methodology says successful bidders among the cost plus-based power projects will get pass-through status for actual fuel cost (including the bid amount), with the Coal India (CIL)-notified price for similar grade coal being the ceiling to calculate the incremental cost.

If the bid price of coal is higher than the CIL-notified price — which is usually 30-40 per cent cheaper than international coal prices — the additional cost will have to be borne by the bidder and the regulator will not allow compensation for the incremental amount through tariff hike.

Cost plus-based power projects are those, which are implemented through the MoU route and where the producers are allowed to pass on any change in fuel cost to consumers.

The bidders would be selected on the basis of Rs/tonne bids, where developers will quote fixed figures that they would pay the government annually for the coal produced from a block during its entire lifecycle of about 30 years, linking any escalation to an inflation index like WPI.

Successful bidders would be asked to pay 10 per cent of the intrinsic value of coal blocks upfront to ensure that they remain committed to the projects.

The intrinsic value of a coal block will be calculated on the basis of the net present value (NPV) arrived at through the discounted cash flow (DCF) method. NPV gives the current value of coal in a particular block to be extracted over the lifetime of a project.

As consuming industries participating at the auction would come from both regulated (power sector, where tariff is regulated) and unregulated (such as cement and steel, where the government does not determine product price) sectors, the auction methodology would be different for the two categories.

For fixing floor prices of coal blocks meant for power projects having cost-plus PPAs or tariff-based PPAs (Case-I bidding), the intrinsic value will be calculated using the notified price of CIL (price of domestic coal) for similar coal grades. This will ensure that the fuel cost remains within a manageable limit and the auction does not result in a hike in electricity tariffs.

In tariff-based bid projects (Case-I) too, the successful bidders will not be permitted to raise tariff in case coal block price shoots up at the auction. However, the regulator can revise the tariff downward if fuel cost drops.

For unregulated sponge iron, cement and captive power projects, the intrinsic value of coal blocks would be determined based on international mouth price of coal (Australia, Indonesia) minus 15 per cent normative land transportation cost.

Three-year average price of imported coal will be used to avoid short-term volatility. The coal prices will be higher under this route.

Tariff-based projects under Case-II bidding and government companies will get coal blocks by simply paying the reserve price and without going through the bidding.

In these cases, the reserve price will be worked out based on the formula used for other consumers, but it will take into account domestic price coal to prevent adverse impact on tariffs.

Case-I bid projects are those, which do not enjoy state concessions and with whom power distribution companies have short-term contracts, while Case-II bid projects (like UMPPs) avail state benefits like land allocation and have long-term contracts to supply power.

The government has initiated the process to auction coal blocks after apex court cancelled 214 out of 218 captive coal blocks allocated by screening committees between 1993 and 2009.

Accordingly, 204 coal blocks will now be auctioned, with 74 going under the hammer in the first phase.

The auction rules are likely to be notified along with the introduction of a bill in Parliament, so that the way out of the impasse is not delayed.

Source: Financial Chronicle