1. All eyes on guidelines

All eyes on guidelines

The coal ministry is likely to finalise the new auction norms by the end of this month.

Published: November 5, 2014 12:50 AM

Power producers whose captive coal blocks have been deallocated by the Supreme Court are nervously waiting for the new guidelines on reallocation. For, they do not know how much they will have to pay for getting these blocks back. If they end up paying the market price or a high reserve price for coal blocks, it will have huge implications on power supply contracts, which have already been sealed.

Power producers could face difficulty in passing on the extra fuel costs to discoms. They are also unlikely to find much support from regulators who tend to side with consumers rather than electricity suppliers. The current guidelines provide for a 90% discount on the reserve price for power sector allocatees, but these are meant for allocation of new blocks. With all variables loaded against them, power producers are now in an unenviable position.

The coal ministry is likely to finalise the new auction norms by the end of this month, and power producers are just hoping that they won’t be subjected to yet another shock this time.

“The auction price should not reach the level where the power cost becomes unaffordable”, said an anxious Ashok Khurana, director general of the Association of Power Producers.

The government has indicated that power PSUs will not have to participate in the bidding for getting captive blocks. But they will have to pay the reserve price. If the reserve price is high, it will end up increasing the electricity cost. Since the cheapest power gets supplied first as per the Merit Order Dispatch system, PSUs could face difficulties in selling costly electricity.

The government will also have to balance the interests of PSUs against the imperative of providing a level playing field to private investors, who are expected to account for nearly half of the generation capacity addition envisaged during the current 12th Five-Year Plan.

In September, the Supreme Court deallocated 214 out of 218 captive coal blocks allocated to PSUs and private players between 1993 and 2011, creating a nightmarish scenario for allocatees. As per estimates, captive blocks allocated were expected to produce 100 million tonnes of coal by 2017.

To deal with the crisis created by the Supreme Court’s judgement, the  government has issued an ordinance to reallocate coal blocks expeditiously. The ordinance provides for commercial coal mining, though this flexibility will not be allowed for de-allocated blocks. But the government has made it known that commercial mining will be allowed in fresh coal blocks, which are taken up for auction in the next round.

Since the nationalisation of coal mines in 1973, commercial coal mining has been the exclusive preserve of state-owned Coal India Ltd. Because of a widening gap between domestic coal demand and supply, the government amended the law in 1993, allowing captive coal mining for meeting the fuel requirements of end-use projects. The blocks were allocated to private players through the screening committee route while PSUs got mines through the nomination route. However, the Supreme Court in August ruled that the allocation of all coal blocks except four was illegal.

Salil Garg, director, India Ratings, said, “the government would have to take care that the coming auction of coal blocks leads to a fair and economically viable price to the end-use power plants so that power purchase agreements already signed are not impacted.”

The proposal for auction of captive coal blocks was first mooted by officials in the coal ministry way back in 2004. But the auction began only in 2013. Meanwhile, the government allocated dozens of blocks to private players without auction. In its audit report tabled in Parliament in August 2012, the CAG rapped the government for delay in following the auction route for coal block allocations. The CAG reckoned that private players unduly benefitted to the tune of Rs 1.86 lakh crore from the delay in auction.

The government started auction belatedly in late 2013 and put up three blocks for bidding. But it could not find any takers for these blocks. In the wake of the apex court judgement, the coal ministry has been forced to formulate new guidelines.

Although India has the world’s fifth largest coal reserves, its coal imports have risen sharply in recent years. Coal India, which accounts for 80% domestic coal production, is struggling to raise its output while fast-paced capacity addition in user industries fuels coal consumption.

By Noor Mohammad

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