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ICRA: Impact Assessment of Auction/Allotment of Coal blocks

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ICRA report on Power sector and the impact on coal block auctions/allotment: 

·         For the power sector, the auction approach approved on reverse bidding principles with a ceiling on bid price set at notified price is a positive development for power consumers in ICRA’s view, since the tariff level for projects / bidders winning coal blocks is likely to be lower than the same based on linkage route given the discount to the ceiling price that will have to be offered during the bidding process. Also, it is noteworthy that in the scenario where the energy charge (EC) based on quoted bid price for the coal mined captively is lower than the EC quoted in case of existing PPA based on Case-1 bid, the final EC payable would be lower of the two. This is likely in turn to lead to lower power procurement costs for state owned distribution utilities & thus for end consumers.

·         While the decline in generation tariff improves the cost competitiveness of the genco (the successful bidder), ICRA is of the view that the ability of the bidders to keep their actual mining costs (both operating & capital cost for mine development) in line with the quoted bid price would be critical as a failure to do so could lead to a risk of under-recovery in variable cost which in turn would affect their profitability. This is significant given that most of bidders have either limited or no experience in mine operation & development.

·         A positive for the private sector IPPs arise however from the prospects of mitigation of fuel supply risks, arising out of a shortfall in availability of domestic coal, by securing captive coal blocks through the auction route. In addition, such projects which have Case 1 competitively bid PPAs (where bidding assumed domestic coal availability) & currently are facing risk of mismatch between fuel cost & recovery of the same through tariff (arising out of dependence on costlier imports to bridge the domestic coal shortfall) get a chance to mitigate such risk through the auction route.

·         In case of project with cost plus based PPA, the variable cost of generationis estimated to decline by about 3 to 12 paise/unit assuming that the bid price varies from Rs. 560 per MT to Rs. 420 per MT as against the same based on coal through a linkage, after factoring the impact of reserve price to be paid. With this, tariff or overall cost of generation is estimated to decline by 0.9% to 3.6% respectively against the same based on coal in a linkage route. Projects with competitively bid PPA under Case I are also likely to see a reduction in the variable costs since the auction price would now be the basis for calculation of energy charge, although the extent of reduction would depend upon the energy charge quoted earlier. The projects which are located closer to the mine block would be able to offer better cost competitiveness & thus projects located in the states of Chhattisgarh, Jharkhand and Odisha (which together constitute for 87% of the coal mine reserves put up for allocation to power sector) are expected to benefit considerably from the coal mine allocations. Overall, the bidding strategy for such projects in terms of ability to offer discounts to notified price level would thus also depend upon the distance of their projects to the mine blocks & energy charge quoted in case of any existing competitively bid PPA.