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Coal block winners may have to pay 10% upfront

Winners of coal blocks for steel, sponge iron and captive power plants would have to pay 10% of the floor price upfront. Subsequently, they would have to pay on a per-tonne basis an amount that would be calculated by annuitizing the remaining bid value, government sources privy to discussion on the methodology of auctioning coal blocks said.

The sources said norms for allotment to power projects, including those of state generation utilities, would have safeguards to ensure that the benefit of low coal price is passed on to the consumers. Separate dispensations were being discussed for power projects with tariff-based bidding and cost-plus power purchase agreements. The government is set to auction coal blocks, including some in operation and several others close to production, after the Supreme Court in September cancelled all mine allotments since 1993. Last month, the government brought an ordinance to take over the land and infrastructure of the cancelled blocks for auctioning them.

Initial contours of the methodology emerging from discussions, the sources said, indicate that the floor price of the blocks would be worked out by computing their net present value (NPV) through discounted cash flow method.

For auction to steel, sponge iron and captive generation units, this intrinsic value would be worked out by using as benchmark the pithead prices for Indonesian and Australian coal available with Argus and Platts, the leading global providers of benchmark price assessment in energy and other commodities.

These prices would be on the basis of FoB (free on board) basis, which requires the seller to deliver goods to a vessel designated by the buyer. A discount of 15% would be applied to account for domestic transportation costs involved in case of imported coal. Besides, prices for three preceding years would be taken into account to guard against adverse impact of short-term volatility.

For allotment to power projects with tariff-based bidding or state generation utilities, the benchmark for calculating the NPV of blocks would be Coal India's price for corresponding quality — known as gross calorific value band. Under this plan, there would be no auction and, so, no impact on tariff.

Source: The Times of India