Reverse bidding for power has its own problems
Given the government’s stated desire to keep power tariffs affordable, it is not surprising the approach paper for auctioning of coal mines clearly differentiates between the bids for coal blocks for the power sector and those for iron and steel and cement. While the latter will be bid in the normal manner where the highest bidder wins the block, in the case of the power sector, reverse bidding is to be done. In this case, Coal India’s price of various categories of coal is taken as the ceiling price, and the firm that bids the lowest will get the coal mine. In case the firm already has a power purchase agreement based on coal from Coal India, it will inform the regulator about the lower price of coal—accordingly, the regulator will cut the final consumer tariff. Allowing regular bidding for sectors like cement and iron and steel, on the other hand, will provide benchmarks as to where prices will head should a completely free-market be allowed and, in a sense, will provide direction to the government as to the path ahead. Indeed, since power firms will also be allowed to have a certain amount of merchant capacity—an extra sum will have to be paid to the government for this—this also provides some indication as to how free-market prices will pan out.
There are, though, some issues that could be problematic. There is the issue of gaming since there is the possibility that power plants that don’t have PPAs will be able to bid lower prices for the coal, get the mine and then load on the extra costs back on to the fixed costs—which is why the power ministry will have to at some point rethink its opposition to Section 62 which allows regulators to determine tariffs after looking at all costs. Related to this is the larger question of coal shortages, estimated to rise to 220 million tonnes at the end of FY17. If commercial mining is to be allowed—and this is supposed to be the government’s thinking—the government will have to free up prices; once again, Section 62 becomes critical since costs will have to be passed on to consumers after ensuring producers work as efficiently as possible and lower ATC losses.
A related issue, of course, is whether using the Coal India price is the correct thing to do. Though Coal India’s inefficiency means private miners can mine at a lower cost, it is also true Coal India has the better mines with largely depreciated infrastructure; that is, it may not be feasible for firms to mine at these costs. Also, with lower royalty collections for states since Coal India prices are lower than global prices, states have that much less incentive to help miners acquire land for their coal mines for the power sector. The previous attempt to rope in the private sector in mining—for oil and gas—by the Atal Bihari Vajpayee government worked well because it worked on market pricing. It is not certain if deviating from that principle is a good idea.