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Walking on hot coals

After the success of the auction of coal mines where a sum of Rs 2 lakh crore is to be fetched over a period of 30 years, the government has done well to announce that coal linkages—a guaranteed supply of coal from the public sector Coal India Limited—will be auctioned soon. That is the recommendation by a 15-member inter-ministerial committee headed by AK Dubey, additional secretary in the ministry of coal. Not doing this is both an aberration as well as a source of patronage. If the former coal secretary and the former prime minister were hauled up for their role in allocating coal blocks without a transparent policy for doing so, the same applies to coal linkages—these are not given through any transparent policy either. Since Coal India’s coal is the most attractively priced, this means any firm without a ‘linkage’ is automatically at a disadvantage—coal got from e-auctions is more expensive than CIL’s ‘linkage coal’ and imported coal is the most expensive. In the case of the power sector, for instance, having more expensive coal endangers the plant’s economics the most since the rules of power purchases are that the cheapest power gets bought first. Auctioning Coal India linkages, to that extent, will fix the ‘level playing field’ issue. Of course, if coal linkages for the future are to be auctioned, and not the existing ones, that will leave existing distortions untouched.

The problem, however, is in the manner in which such auctions are going to be conducted, and have been conducted in the past. All the auctions for power plants were done through reverse bidding—in this case, the principle was that the plant that bid the lowest energy charge would win the coal mine. Given the extreme shortage of coal, winners not only brought down their energy costs to zero, they even agreed to pay the state governments extra for the coal they mined—according to rating agency Crisil, the bids could cost the firms around R4,500 crore a year since it is not possible to recover costs from just the fixed-part of the electricity tariff. While coal and power minister Piyush Goyal is right when he says firms bid with their eyes open, the fact is that in all constrained auctions—such as the telecom ones where spectrum was in short supply—bids tend to become astronomical. It is true the government is trying to augment supplies—building railway lines to certain coal mines, for instance, will raise produaction by 150 million tonnes—but until supply equals demand, bids will always be astronomical. In FY15, despite the sharp fall in global coal prices, India imported $17.7 billion of coal, a figure that was higher than FY14’s $16.4 billion. In which case, firms which win bids for coal linkages will also likely end up making huge losses. The minister would do well to allow existing PPAs to be reworked to pass on the higher coal prices, and to desist from trying to now put a cap on fixed costs as he is threatening to do.

source: http://www.financialexpress.com