Coal block sale: reverse auction method could be advantage private power producers

If you get your power from a private utility, your electricity bill could come down, with the Centre deciding to award captive coal blocks to private power producers through the reverse auction method, according to sources.

Power consumers will get the benefit of cost-efficiencies, which in the past were pocketed by the captive block allottees.

According to the sources, at a meeting earlier this week, the inter-ministerial committee decided that the Centre should not try to maximise its revenues from the blocks meant for the power sector.

Allocation method While a decision is still to be made on the method for allotment of blocks without an auction to government run utilities, the committee decided to use Coal India’s prices as the ceiling for private power companies bidding for blocks.

With blocks awarded to bidders offering the maximum discount to the CIL price, the Centre hopes to keep the price of power down.

Hitherto, due to lack of transparency on the cost of production, the transfer (or sale) price of fuel by the mining arm to the generation utility was used as the reference rate.

Private sector captive miners, such as CESC Ltd, would transfer the fuel at CIL prices, while state utilities would usually procure fuel at 19.5 per cent discount to Coal India prices from EMTA Ltd controlled joint venture mining arms.

But the reverse auction method may, according to industry watchers, benefit only a section of power consumers because most of the captive mines are controlled by state utilities.

Of the 42 operating mines, 17 belong to the state sector. Utilities of Rajasthan, West Bengal, Punjab, and Karnataka control the lion’s share of assets. In the private sector, CESC Ltd and Jindal Power and Steel control three assets.

Bar raised for steel, cement In a related development, the inter-ministerial committee has, according to the sources, decided to extract maximum revenues from the steel, cement and sponge iron sectors that operate in the open market. It has decided that the net present value (NPV) of such assets will be calculated based on price benchmarks, which are double the domestic coal price.

The higher the NPV, the higher will be the floor rate. In the first round of auction, the UPA government had used international prices (Australian for metallurgical coal and Indonesian for thermal) to calculate the NPV.

Considering that some top grade Indian coal (of 6000-plus gross calorific value) sell at import linked prices, calculating the NPV at double the CIL price can make the assets hugely expensive to buy.