Allocation of coal blocks will make projects viable, aid lower tariffs

The power ministry has favoured continuation of the current policy of reserving coal blocks for the power sector even when the auction route becomes mandatory later this year.

In a communication to the coal ministry, the power ministry has said that the allocation of coal blocks for captive use is important for all tariff-based power projects. This will help sustain the viability of these projects and enable companies to offer lower electricity tariffs.

?Auction process for coal blocks would usher in two-stage bidding for the power sector that will prevent discovery of best tariff for power consumers,? said a power ministry official, requesting anonymity.

Power producers currently participate in tariff-based bidding on the assurance of coal linkage or a captive coal block. Under the bidding route finalised by the government for coal sector, all future coal blocks will be allocated to user industries in the power, cement and steel sectors on the basis of a competitive bidding process. This is expected to increase the cost of fuel for these user industries and in turn impact final product prices for consumers.

?There is a suggestion that this (exemption from auction for power projects) should be done in the interest of the power sector consumers. The government is seriously considering the issue and directions from the group of ministers (GoM) on coal on the matter,? said an official privy to the development. He added, that the dispensation could be subject to availability of coal.

Coal minister Sriprakash Jaiswal told FE earlier that the power ministry asked his ministry to give its input on the matter so that necessary changes could be made in the coal auction guidelines.

If the proposal is accepted, sources said it could again become ground for controversy as allegations could be leveled over favouratism being shown to a few companies in allocation of coal blocks.

The move could benefit private sector power producers such as Jindal Power, Reliance Power, Essar Power, JSW Energy, Tata Power and Adani who fear that competitive bidding process will raise the cost of fuel and make the tariff-based bidding process difficult. It will also put private projects at a disadvantage against state and central sector projects that would continue to be allocated coal blocks.

Moreover, under bidding, domestic coal will not be guaranteed to projects and some will have to buy expensive foreign coal for their projects. Imported coal costs almost thrice as the domestic market price.

Under auction rules being finalised by the coal ministry, all future coal blocks will be allocated to power, cement and steel sector users on the basis of competitive bidding. The coal block to be auctioned will be earmarked sectorally and the process will be done for the power sector in consultation with the power ministry. The net worth of the bidder will be an eligibility criterion with the successful bidder getting time to pay the bid amount in five installments.

Coal is in short supply in the country with expected imports of about 142 million tonne in 2011-12.