Auctions will settle future coal supplies

To stem future allegations of impropriety and ensure competitive power tariff for consumers, the government proposes mandatory coal block linkage for power projects awarded by state distribution companies on the basis of competitive tariff-based bidding. The move follows successful completion of the first round auctions for captive coal blocks, where the government offered 67 blocks to end users under a competitive bidding allocation process.

Sources in the coal ministry said that tariff-based bidding as a method for providing long-term coal linkage has been suggested by the power ministry and endorsed by the interministerial committee constituted to finalise methodology for the proposed auction of coal linkages. Till now, coal linkages with supply assurances from Coal India (CIL) were being granted on an adhoc basis by the government, much like the way it did for allotting blocks. But after the landmark Supreme Court ruling, which cancelled all such adhoc allotments, the ministry has recently started looking at the option of e-auction of existing as well as future coal linkages to avert any allegation of impropriety in the future.

“Since power is a regulated sector, the allocation mechanism would be such that the benefits of such linkage are passed on to the consumers. Tariff-based competitive bidding for allotment of coal linkages works out best here,” an official in the power ministry said, asking not to be named. Power secretary PK Sinha confirmed that tariff-based bidding was one of the issues being discussed in the interministerial committee, and said that the recommendations would be out soon. As per the plan, which is expected to be finalised later this month, Coal India (CIL) would provide reasonable quantity of coal for auction and attach a price tag for each grade. Based on this assurance, power companies would participate in tariff-based bidding invited by the discoms. The company quoting the lowest tariff would bag both the power project and the coal linkage.

Sources said that the tenure of linkage (time period for supply of coal by CIL to the power project at notified prices) for power projects would be 15 years. This is being considered on the request of department of financial services (DFS) that wants linkage period to be equal to the tenure of the loan period instead of 5-10 years. However, for cement and steel sectors the tenure of linkage could be lower between five ands even years. For unregulated sectors, including steel, cement and captive power units, where end-use pricing is not regulated, the auction of linkage could be on the basis of forward bids. Here the companies could be asked to quote a price higher than the notified price of coal declared by CIL.

The government may follow allocation route to meet coal requirements of other sectors, such as fertilisers and paper, as their requirements are small. This group may be exempted from participating in auctions. “The proposals are still being discussed and a final decision would be taken after SBI Capital Markets submits its report,” the official quoted earlier said. SBICAP has been asked by the government to prepare a roadmap for next two-three years for coal linkage auction to clear any uncertainty among coal users.

At the third meeting of interministerial committee (IMC), it was also discussed that CIL shall first meet its obligation of supplying up to 80 per cent of annual committed quantity (ACQ) to the power sector under the existing linkages (FSAs/LoAs) before auction of coal linkage process is started. The IMC has also asked the ministry of power to conduct a demand supply study based on existing linked capacity, upcoming capacity and capacity tied up under PPAs to enable finalisation of a long-term linkage auction policy.

It is expected that under linkage auction, bidders might also be given an exit option in the FSAs, after a certain lock-in period to enable them take advantage of coal price fluctuation in the international market. The IMC has also suggested that escalation factor should also allow for a decrease in coal price as globally coal prices moves both in positive and negative direction. It has also suggested that traders/ washeries should not be allowed to participate in the proposed auction of coal linkages.

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