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Power project developers reluctant to mine coal from bid-out blocks

Power project developers who had bid aggressively to secure coal mines in the auctions conducted by the government this year are reluctant to mine them.

According to a report by the consultancy PricewaterhouseCoopers (PwC) and the lobby group Indian Chamber of Commerce released on Wednesday, the reluctance stems from the government’s decision to cap the fixed charges.

Electricity tariff have two parts. One, fixed cost, the investment incurred towards power generation equipment, and variable cost or the cost of fuel, in this case coal. Analysts have maintained that the rationale behind the aggressive bidding was to recover the costs by transferring them to the fixed-cost component.

The government has termed the coal block allocation process as a successful template for the allocation of natural resources in India. It plans to mine 1.5 billion tonnes of coal by 2020. Of this, one billion tonnes is from Coal India Ltd and 500 million tonnes from non-Coal India sources in line with the government’s push to raise natural resources production to kickstart economic growth.

“On account of the uncertainty of coal cost recovery, firms are reluctant to proceed with the coal block takeover and subsequent operations,” said the report titled, ‘Coal block Auctions: A Win or a Winner’s Curse?’

“In the power sector, all the block auctions till date have gone into forward bidding, i.e. the cost of coal will not be passed through to customers, while owners have committed an additional premium to the government, which is likely to reduce tariff,” the PwC report said, adding, “With the inputs negatively priced or priced at a high cost, the sustainability of their pricing strategy, though achievable, is now a challenge.”

A total of Rs.3.35 trillion will accrue to the states from 66 blocks, which are being awarded through a mix of auctions and allotments to state-owned public sector firms. Additionally, electricity tariff benefits totalling Rs.69,311 crore will accrue to state distribution companies.

Ratings agency Icra Ltd in a 27 March report wrote, “The winning bidders may however look at options to bridge the under-recoveries in fuel cost using the additional gains generated from sale of 15% of the generation capacity in the merchant/short-term trading market as well as possibility of quoting higher fixed capacity charge in the upcoming competitively bid PPAs (power purchase agreements) for the capacity which is yet to be tied-up.”

“Further, ability of the bidder (who is yet to tie-up capacity) to quote a higher fixed capacity charge so as to recover the under-recovery in fuel cost in a competitive bidding process remains to be seen,” the Icra report added.

However, the government’s decision to cap fixed charges has put a spanner in the works. “Further, in order to capture the amount of fixed charge that can be passed through in the power tariff, GoI (Government of India) proposed to cap the fixed charge, which will inhibit the companies from recovering their entire costs. GoI recently published the new standard bidding documents which prescribe that the fixed cost will be capped based on the inputs from the state regulators. This might have some effect on the firms, especially those which bid aggressively.

Very recently, Monnet Ispat proposed to surrender its Utkal C coal block owing to the proposed cap on fixed charge in the judiciary,” the PwC report said. The government has clearly stated that it would not allow miners to “smuggle” costs as it would defeat the purpose of reverse auctioning of coal blocks.

“The whole idea of coal auctions was to bring the tariffs down. That we have been saying time and again. Having said that, if some people still want to understand that they will be able to smuggle this as fixed price, it’s their problem,” Anil Swarup, coal secretary had said.

This comes in the backdrop of several private project developers dressing up their accounts while approaching banks for funding and inflated capital expenditure to increase debt value, thereby reducing their equity contribution, Mint reported on 4 December 2012. Also, these developers placed equipment orders with manufacturers that quoted inflated order values and later transferred the balance back to the developers.

“By which stretch of imagination can you have a variable cost smuggled in as fixed cost. By definition, fixed cost means something. The price of coal by definition can’t be a part of the fixed cost,” Swarup added.

Coal-field allocations have been controversial since the Comptroller and Auditor General of India (CAG) said in a report in August 2012 that the national exchequer had suffered a loss of Rs.1.86 trillion because of a flawed allocation process. The CBI is probing the allotments. In September last year, the Supreme Court cancelled 204 coal mining permits awarded to firms, terming their allotment arbitrary and illegal after the CAG report.

In response to a query on the fate of such aggressive bidders who realise their folly, Swarup in an interview on 26 March said, “He will have to forgo his bank guarantees and then we will auction it again.”

The numbers tell the story. Of 26 blocks allocated to the power sector, nine were auctioned. “Icra notes that the bidding by power generating companies in the auction has been quite aggressive with the bidding happening on a forward basis on the reserve price payable as bid quoted is zero in reverse bidding. Thus, bids quoted by the successful bidders range from Rs.302 per mt to Rs.1,110 per mt, which are “negative price bids” for the bidders which essentially means that a winning bidder would have a zero fuel charge recovery in PPA and in addition would bear the cost of both i.e. cost of coal mining and quoted reserve price payable to State Government. As a result, winning bidders remain exposed to a significant under-recovery in fuel cost which is estimated to range from Rs.0.39/kwh to Rs.1.02/kwh on a levelized basis over a 25-year period. Aggregate under-recovery for the bidders is estimated at Rs.8 billion in FY2015-16, which is likely to increase to about Rs.18 billion by FY 2017-18,” the Icra report added.

This also comes in the backdrop of the government planning to auction coal linkages, or assured supply of coal, much the same way it puts telecom spectrum on the block. Assured supplies, or linkages, are awarded to projects that do not have captive coal mines and need to source coal commercially from state-owned Coal India Ltd (CIL).

The plan to auction linkages follows reports of irregularities in granting coal linkages. To take advantage of the discounted price offered by CIL, developers of power plants had made false claims regarding the order of equipment, financial status, land acquisition and water supply, Mint had reported on 18 September 2012.

Several firms assured of coal supply claimed to have placed orders for power generation equipment with manufacturers to strengthen their case—only, these were not really orders.

source: http://www.livemint.com