Kolkata | Jan 28, 2015: The coal block auction on reverse bidding principles will bring down power costs since the variable cost of generation will decline on the basis of bid price replacing price of coal through linkage.
A coal ministry official told FE that the inter-ministerial committee (IMC), formed to look into the impact of the auction on the power sector, said in its report to the coal ministry that the cost of generation was expected to decline by up to 4% since the variable cost of generation has been estimated to come down by about 4 to 10 paise per unit. This will happen because the bid price was expected to remain between Rs 420 and Rs 550 per tonne with a ceiling set on the bid price above the notified price.
Since the ceiling price will be lower than linkage price, the case 1 bidder (case 1 bidder is allowed to pass on the variable cost to consumers) or the project with a cost plus based power purchase agreement, after winning a block offering highest discount on the ceiling price, would be able to bring down the variable cost of power generation and pass on the benefit to the consumer.
However, the findings of IMC will be reviewed by the cabinet committee on economic affairs, an official said.
IMC is of the view that with the variable cost of generation going down, the overall cost of generation is expected to decrease between 1% and 4% and projects closer to mines would be able to offer cost competitiveness.
More than 85% of the coal mines put up for allocation are in the states of Chhattisgarh, Jharkhand and Odisha. So projects located in these states would be able to produce cheaper power because proximity to mines reducing logistics cost would enable project developers to offer higher discount on ceiling rate.
However, rating agency ICRA notes that though there were opportunities in reducing generation tariff by offering coal blocks via the auction route, there were fears that the ability of bidders to keep their actual mining costs (both operating and capital cost for mine development) in line with the quoted bid price would be critical. Failure to keep mining costs in line with the quoted cost could lead to a “risk of under-recovery in variable cost which in turn would affect profitability. This is significant given that most bidders have either limited or no experience in mine operation and development,” ICRA noted. However, the auction according to ICRA, will mitigate the risks of fuel shortage and thus address the problem of mismatch between fuel cost and recovery because captive block owners would not have to depend much on costlier imports.
Assocham felt the import requirement would come down with both public and private sector given room to increase coal production. Coal import reached 168 million tonne in FY14 costing $17 billion to the country. By FY16, coal import, to feed the country’s growing power sector, is expected to touch 240 million tonne but this growth in imports has to be contained to check the current account deficits, Assocham opined.
(Source: http://www.financialexpress.com/)