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Constrained bids, again PDF Print E-mail
Wednesday, 18 February 2015 08:55
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The power bids are, largely, a reflection of this

With the auction of coal blocks progressing smoothly, India has now decisively moved away from the principle of subjectivity in allocation of natural resources. Whether it is airports, metros, roads, spectrum, power projects and, now, even coal blocks, everything is to be auctioned in a transparent manner. Over the years, India has also experimented with different types of auctions—highest bids, lowest bids, revenue sharing and, now, even reverse bidding with a cap put on tariffs. Though there are some problems with the reverse bidding, the broad principle is that, having experimented with various forms of bidding, the government now knows most services can be bid out—it is possible to fix the price of water and set the number of hours of daily delivery, even the time, and bid it out to the most efficient firm. Which is what the ministry of power did in the case of coal mine auctions—a cap was put on the tariff that could be charged by way of energy charges.

The problem is that, as in the case of all constrained auctions, the bids being made make little sense. Forget about companies quoting fuel tariffs that are lower than those based on Coal India Limited’s supplies—this would have made sense since Coal India is an inefficient supplier—the winners in the few bids that have come out so far have not just offered to charge nothing for their energy charge, they will also pay the state government some money for the coal they mine (R370 per tonne in the case of the GMR bid for Talabira in Odisha). There are various reasons for these bids. For one, there are around 15,000 MW of power plants—GMR is one of them—which have been completed but have no coal supplies; another 8,000 MW of plants will get completed in the next 12-14 months and will face a similar situation.

In such a case, the choice before the bidder is to pay annual interest costs of the shut plant to keep it from becoming an NPA, or bid aggressively. What the firms seem to have decided is that keeping the plant shut is a more expensive option than not charging for fuel costs while paying the state governments some money. It also helps that, in the case of plants like GMR’s, the plants have not tied up all their supplies in power purchase agreements (PPAs)—so when the firms bid for the next round of PPAs when various states call for bids, they will probably quote a higher fixed-cost component. Theoretically, the firms who have bid in this manner can try and cancel their current PPAs, but doing this is next to impossible as Adani Power found when it tried to terminate its PPA recently. The question then arises as to when other power suppliers, who are buying coal from Coal India, will be able to participate in the auctions. At current bids, they cannot, but once the coal-less plants have bid, and more mines are put in the kitty, the bids will become more rational. To get more mines in the auction kitty, the government will have to move to a revenue-share kind of system, as in petroleum, where the prospecting risk lies with the private firms instead of waiting for government-owned bodies to give their estimates of coal in various mines. This is critical especially if the government wants to really open up the sector quickly and invite global mining firms.

 

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