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Friday, 21 September 2012 00:00
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New bids to capture upside of captive coal mines

If there’s a sudden jump in the number of power purchase agreements (PPAs) being signed by power producers who’ve got captive coal mines that are the subject of the CAG’s Coalgate report, it’s for a good reason. While the coal ministry had tried to limit the upside to these power producers by insisting that all sales of power only be made through commercial bids, the power ministry is in the midst of tightening this quite considerably. The new standard bidding document on this is expected to be finalised within the next 2-3 months, so there’s a window of opportunity—anyone who signs a PPA before this gets to escape the rigours of the new system!

An example will make this clear. If power producer A has a capital cost of R1 per unit of power and buys coal for R1.5 per unit of power, it can sign a PPA only at R2.5 per unit of power. If power producer B, on the other hand, also has a capital cost of R1 per unit of power and is able to extract coal from its captive mine at 45 paise per unit of power, it can sell at R1.45 per unit. So even if there was to be a commercial bid, which is what the coal ministry started insisting upon after the CAG report on the gains made by these companies came out, power company B could win the bid at R2.4 a unit, and still make an extra profit of 95 paise per unit of power. What the power ministry is now planning is that power companies be asked to bid only on the basis of their capital costs with the fuel as a pass through. In which case, if company B was to win the bid, it would only get R1 for its capital cost and 45 paise for its fuel costs, thereby ensuring that the benefits of the captive coal went to the consumers of electricity.

Though the purpose of the new bidding format was really to fix a lacunae in the current bidding system which forces power producers to take an impossible call on what fuel prices will be for the next 25 years—this is where the Tata and Anil Ambani ultra mega power projects have got stuck—its immediate impact will be to fix a larger part of the Coalgate problem since just a handful of those power producers who have got captive mines have signed up PPAs already. As for those companies who have captive mines and are selling such power on a merchant or non-PPA basis, this will not be allowed once the new norms come in place.


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