No merchant sales, captive coal firms must ink long-term PPAs

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SummaryAbout a year after the Comptroller and Auditor General (CAG) slammed the government’s policy of allocating captive coal blocks on a nomination basis to private firms in end-user sectors like power, the coal ministry has now barred companies from selling cheaper captive coal-generated electricity in the merchant market at arbitrary prices and mandated these companies enter into long-term power purchase agreements (PPAs) with distribution companies ( Discoms).

About a year after the Comptroller and Auditor General (CAG) slammed the government’s policy of allocating captive coal blocks on a nomination basis to private firms in end-user sectors like power, the coal ministry has now barred companies from selling cheaper captive coal-generated electricity in the merchant market at arbitrary prices and mandated these companies enter into long-term power purchase agreements (PPAs) with distribution companies ( Discoms).

Sources said the coal ministry has asked states such as Chhattisgarh, Madhya Pradesh, Jharkhand and Orissa to insert an additional provision to this effect in lease agreements signed by state governments with captive coal miners. The ministry has quoted a favourable legal opinion to buttress its case.

Under the existing law, the Centre does have the power to decide who should be allocated coal block. However, permit for mining work is granted by state governments.

“You are required to incorporate the condition (entering into long-term PPA with discoms for electricity supply) at the time of executing mining lease of coal block allocatees of the power sector in cases where mining lease has not been executed so far. In case where mining lease has already been executed, this should be imposed as an additional condition of mining lease and incorporated in the lease agreement by way of an addendum,” the coal ministry said in a letter to state chief secretaries recently. States have been asked to amend terms of mining lease within 10 days from the receipt of the letter.

Unlike in case of merchant sale, companies are required to participate in competitive bidding and quote long-term price for electricity supply to discoms under PPA.

There is no scope for charging arbitrary prices under long-term contract.

The ministry’s move will hit more than three dozen companies, including Jindal Power and its parent company, Jindal Steel and Power, Tata Power, GVK Power, Adani Power, JSW Steels, Hindalco Industries, Bhushan Power and Steels and Balco, which have been allocated captive coal blocks to meet fuel requirements of their independent power projects ( IPPs).

The Centre amended the Coal Nationalization Act in 1993 to allow private players into captive coal mining so that domestic production could be stepped up.

Companies like Jindal Power, which are already generating power from captive coal, have been given 18 months’ time to switch to the PPA mode, while upcoming plants are required to sign contracts at least six months ahead of their scheduled commissioning.

The change in the guidelines was proposed by the power ministry in September 2012 just after a CAG report castigated the government for allowing private companies to reap windfall gains of R1.86 lakh crore by allocating coal blocks to them without auction between 2006 and 2009.

But since there was no clarity about legal tenability of the proposed amendment, the move was put on hold. Instead the matter was referred to the law ministry for opinion.

“Without securing lease from state governments, coal mining cannot be started,” said Dilip Kumar Jena, a mining consultant with PWC.

Most of the IPPs, which have been allocated captive coal blocks are yet to be become operational. Jindal Power’s 1,000-MW Tamnar is the only operational power plant.

It has been selling its entire power in the merchant market despite using captive coal . Former power secretary RV Shahi welcomed the coal ministry’s move, saying: “ It was never the idea of the merchant policy that entire power be sold in the open market.”

He added that at least 85% electricity should be supplied under long-term PPA from merchant plants, though balance can be sold in the free market.

Anticipating change in the captive coal block allocation policy, Jindal Power recently signed a 15-year long-PPA with Tamil Nadu for 400 MW supply from the Tamnar plant. Other coal block allocatees are also expected to follow suit.

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