Coal news and updates

Coal linkage/LoA auctions get Cabinet green signal

In a move that is likely to affect a host of non-regulated sector companies, the government, on February 3, approved a proposal to allot future coal linkages to them through the auction route.

The Cabinet Committee on Economic Affairs (CCEA) chaired by Prime Minister Narendra Modi approved that allocations of all linkages/letter of assurance (LoAs) for the non-regulated sector viz cement, steel/sponge iron, aluminium, and others [excluding fertiliser (urea) sector], including their CPPs, shall, henceforth, be auction-based, an official release said.

The tenure of the fuel supply agreement (FSA) will be as decided by the Ministry of Coal from time to time, the release added.

The framework attempts to make the coal available in a fair manner to the end-users. The proposed auction methodology will lead to price discovery through a market mechanism but it does not seek to maximise revenues.

The release claimed the methodology ensures that all market participants in the non-regulated sector have a fair chance to secure coal linkage, irrespective of their size.

Following the approval, there will be no renewal of the existing FSAs in the non-regulated sectors which will be maturing 2015-16 onwards after completion of their current agreement tenures.

However, there may not be premature termination of FSAs in the non-regulated sector as of now, the release said.

Also, the existing FSAs with central public sector enterprises (CPSEs) may continue to be renewed on expiry, but for additional linkages, CPSEs may participate in the auctions.

To start with, in the first tranche, the quantities corresponding to FSAs in the non-regulated sector [except CPSEs and fertiliser (urea)] maturing in 2015-16 onwards and 25% of incremental Coal India Limited (CIL)/Singareni Collieries Company Limited (SCCL) production during 2015-16 over 2014-15 will be put up for auction.

For auction of linkages, separate quantities shall be earmarked for sub-sectors of the non-regulated sector.

The sub-sectors could be cement, sponge iron/steel, aluminium, and others [excluding the fertiliser (urea) sector], including their captive power plants (CPPs) etc.

Auctions shall be conducted by CIL/SCCL and policy directions will be issued by the Ministry of Coal, the release said.

Background:

The Supreme Court of India vide its judgments in August and September, 2014, had declared 204 coal mines/blocks allocated since 1993 as illegal on the grounds that the procedure followed was arbitrary, Pursuant to this judgment, e-auction of Schedule II and Schedule III coal mines was conducted.

The government felt that the same philosophy of non-discretionary allocation could be extended for coal linkages as well. This would require CIL to allocate linkages through a market-based mechanism.

An Inter-Ministerial Committee (IMC) was constituted in the Ministry of Coal in January, 2015 to consider and examine various structures and models for implementing the competitive bidding for auction of coal linkages/LoAs and to recommend the optimal structure that would meet the requirements of all the stakeholders.

The IMC met 7 times since its constitution. It was decided in the 5th meeting of the IMC that auction of linkages for the non-regulated sector should be taken up first. An Approach Paper regarding the proposed methodology was discussed in the 5th meeting of the IMC and was uploaded on the website of Ministry of Coal (MoC) for inviting comments of the general public and stakeholders.

The responses received from various stakeholders and individuals, besides comments from the Ministry of Railways, Ministry of Steel and Department of Fertilisers were placed before the IMC for consideration.

Further, stakeholder industry associations presented their views and comments before the 6th meeting of IMC on August 21, 2015. The issue was also deliberated upon by the Committee of Secretaries (CoS) in its meeting held on October 9, 2015.

Coal linkages to various sectors are governed by the New Coal Distribution Policy (NCDP) issued by the Ministry of Coal on October 18, 2007. Under the NCDP, a new system of issuance of LoA was introduced for power, cement and sponge iron sectors.

Under this system, requests for linkage/LoA are forwarded to the administrative ministries for their recommendation. Recommendations are placed before the Standing Linkage Committee (SLC/LT) which authorises issuance of LoAs. However, no new linkages or LoAs have been allocated to the non-regulated sector since 2007.

Source: ICMW