Coal news and updates

Some coal blocks will be auctioned in price bands

The Union government may set a price band in the auction of coal blocks bunched together for power producers whose electricity tariff is based on the cost-plus formula.

Such a band may also be set for the cement and steel producers whose end-product prices are unregulated.

While the bidding nor­ms for the auction are to be finalised in a fortnight from now, the government may indicate a price cap in addition to the floor price for the blocks meant for power producers that can pass on fuel costs to their consumers. Setting a price band for coal blocks is seen as the only way to trim coal price and prevent the cascading effect from translating into higher electricity tariffs.

Similarly, price caps would be set also for cement and steel producers as pricing freedom in these sectors would allow the companies to pass on increased fuel costs to customers, leading to cost escalation for infrastructure projects.

For power producers that have won projects based on electricity tariff, the government would only indicate the floor price, as these companies have to either absorb the higher fuel cost or resort to imports in case coal was available at lower rates in global markets.

“We are formulating the auction process in a manner that electricity tariffs do not go up. If fuel cost is pass-through in power projects, the whole purpose of auctions will get defeated as bidders would be able to quote any price,” coal secretary Anil Swarup told Financial Chronicle.

However, Swarup refused to divulge further details, including the methodology for setting the price band for each coal block, saying that it has to be first approved by the cabinet committee on economic affairs (CCEA).

In the power sector, several companies have developed projects via power purchase agreements (PPAs) and memoranda of understanding (MoU) with state agencies. These companies would now have to place their bids within a band to regain control of the captive blocks that were withdrawn from the private operators after the recent Supreme Court order.

Coal blocks with price bands may be offered to companies with power projects that can pass the enhanced fuel costs to consumers. These are companies that won power projects during 1993-2006. Beginning April 1, 2006, power projects were awarded to private sector firms based on electricity tariff quoted by the bidders.

Price band-based auction could apply to projects of companies such as Jindal Power (2,200mw Tamnar project in Chhattisgarh), Essar Power (1,800mw Tori and 1,200mw Mahan projects), CESC, Monnet Ispat, Jaiprakash Associates, GVK Power (Govindwal Sahib), Tata Power, Reliance Power, SKS Ispat, Tata Steel, Adhunik Alloys and Rungta Mines.

CCEA will meet shortly after prime minister Narendra Modi returns from Australia to decide on the pricing norms for coal blocks set aside for bidding by power, cement and steel companies. Modi is currently in Australia to participate in the G20 summit. He is set to return on November 19.

In the first round, 74 blocks would be put up for auction exclusively for end-user industries, like power, cement and steel.

Swarup said auction for each category of end-users would be done separately under a different reserve price depending on whether the sector was regulated or unregulated or the bidder was a government entity. State entities would be allotted a few blocks directly on payment of the reserve price.

The government is also evaluating the possibility of putting up 130 coal blocks for auction in the second round after finishing the first tranche of auctions before March 31, next year.

As the presidential ordinance has an enabling provision for allowing commercial coal mining by private sector, some of the blocks to be auctioned in second round could be considered as part of the exercise to open up the country’s coal sector. However, Swarup said the decision on the timing would be the prerogative of the government.

The coal secretary has set up four separate groups to determine the reserve prices and other norms for coal auction. These groups will make their recommendations over the next few days.

In September, the Supreme Court had directed the government to complete the auctions in six months. The government initiated the process of auctioning some 204 coal blocks after the apex court cancelled 214 out of the 218 captive coal blocks allotted between 1993 and 2010 by various screening committees.

Source: Financial Chronicle