New Delhi | March 02, 2015: Even as power companies slugged it out during intense bidding in the first phase of coal mine auctions, Adani Power, one of the biggest developers, was conspicuous by its absence from the list of successful bidders despite having applied and qualified for the maximum number of mines.
Adani is India’s biggest private power producer with an installed capacity of 9,240 MW from three coal-based plants. The company is installing another 7,260 MW capacity in Gujarat and Madhya Pradesh, which will be on stream by 2019. Adani participated in the e-auction of six of the seven blocks earmarked for the sector, but didn’t seem to be keen on competing for them.
What differentiates Adani from its competitors is that nearly its entire capacity is tied up in long-term power purchase agreements (PPAs). That, coupled with comparatively distant end-use plant locations, made aggressive bidding unviable for the company.
Experts say companies may have chosen to win coal blocks even at relatively higher prices given their need to cut losses on account of the interest cost being incurred on stranded plants. These companies had failed to find long-term buyers.
“They would have calculated whether it was better to keep paying the interest cost or incur some loss in bidding for the higher price of coal.
Second, they would have done it for the assurance of long-term coal supply. There is a lot of uncertainty involved in importing coal. So they went ahead with fuel assurance that a mine provides though they paid a slightly higher price,” an industry insider told FE.
Some of the successful bidders — GMR, JPL, JPVL and Essar — have substantial capacity without any long-term PPAs. In the past, several power producers have had problems winning PPA bids due to lack of coal supply assurances. On the one hand, having a coal mine increases their chances of tying up capacity in long-term PPAs while, on the other, they can tailor future PPAs to account for lack of fuel pass-through by suitably adjusting the capital component of tariff.
“Initial bids indicate long-term strategic fuel security is getting precedence over near-to-medium-term profitability — as underscored by multiple bids at zero. The current low plant load factor (PLFs) will, therefore improve, but the risk shifts to underrecovery in fuel cost, especially for developers with existing power purchase agreements (PPAs). However, successful bidders who are yet to sign PPAs can seek higher fixed charges to compensate for the under-recovery. The impact on profitability will depend on the extent to which future PPAs support the incremental cost,” Crisil rating said in its report.
The second aspect that explains intense bidding by some and subdued bidding by others, especially Adani Power, is the distance of the end-use plants from the mines. All the firms —GMR, CESC, JPL, JPVL, Essar and Durgapur Project — that won mines have their end-use plants in eastern India, closer to mines.
“Only a few companies with long-term PPAs with fuel cost pass-through provisions and firm CIL linkage will find it viable to pursue blocks in this auction. Plant location is a primary factor in bidders’ response as savings in mining costs are finite and can at best support a logistical costs equivalent to 300 km. Beyond that, it would impact profitability,” Kameswara Rao, leader, power and mining, PwC India, told FE.
Firms like Adani have the option to use imported coal in a blend to cover any shortage in CIL supply. For them, sea freight is cheaper per unit than rail transport, and better grade means lower quantity needs to be transported, Rao added.
Adani, however, could be back in reckoning in the next phase of auctions, where bidding is expected to be less intense compared to schedule II blocks. Besides, the Adani Group, by virtue of having run a mine development operator (MDO), will have the knowhow to start mining at these blocks quickly for its upcoming 7,000 MW capacity in Gujarat and Madhya Pradesh.
“My understanding is that bidding for schedule III mines will not be as aggressive as schedule II mines. The aggressive demand has been met as people who were desperate to have coal blocks have got it. The other reason is that these blocks will require a lot of investment as they are not ready to be mined yet. They will take six months to a year for actual mining to start on the ground,” coal secretary Anil Swarup told FE.
(Source: http://www.financialexpress.com/)