After coal blocks, Coal India fuel pacts set to be auctioned

Even as the process of auctioning 33 coal blocks has been wrapped up, the government is planning to shortly auction coal produced by state-run collieries to players in sectors such as power and steel. It is likely to invite competitive bids for auctioning fuel linkages given by Coal India Ltd to its buyers in these sectors, thereby extending the auction mechanism to even fuel supply pacts.

Linkages are assured supply commitments from Coal India to a company that has an end-use plant and needs fuel to run its operations. They are currently handed out in the form of Letters of Assurances (LoAs) to the companies though the coal ministry’s linkage committee.

An inter-ministerial committee (IMC), constituted by the coal ministry two months ago to explore ways to auction linkages, in its meeting on March 9 has stated that auctioning CIL linkages to the power sector should be undertaken through competitive bidding. SBI Capital Markets has been roped in as a consultant to devise an effective auction mechanism.

The panel suggested that the reserve price for auctioning linkages can be based on the notified coal price of CIL. The bidder should be informed beforehand about the grade, quantity and location of the coal being auctioned. “The committee has also said that reasonable quantity of coal should be put up for auctions as earmarking small quantities can lead to aggressive bidding by large players,” a coal ministry source said. “The whole issue is under examination,” coal secretary Anil Swarup told The Indian Express. SBI Caps has been asked by the IMC to initiate talks with concerned stakeholders in this connection.

The IMC said top priority should be accorded to either operational or ready-to-be-commissioned coal-fired electricity generating plants, according to the source. But they must have power purchase agreements with distribution companies (discoms) and should not be having any linkage or captive coal blocks.

The source said for non-regulated sectors like steel, aluminium and cement, the committee is divided on whether to fix the bid price of linkages based on prices of the finished goods or indexing it at CIL-notified price. SBI Caps would examine, instead of linking the escalation to some index, whether a fixed percentage may be applied to cap the price of coal for the bidder.

However, the panel is unanimous that auctioned linkages for the non-regulated sectors should be valid for 10 years. CIL would be asked by the ministry to indicate the quantity of coal which can be auctioned, its quality and a tentative auction time line.

The panel disagreed on a suggestion by some power deficient states they should be given preference in linkage allocation. This is because the central electricity authority (CEA) has submitted that in view of the readiness of the national integrated grid, power deficit should not be made a criteria for allocation of linkages to states. Rather, each state can be allocated a fixed amount of coal linkages on the basis of which their discoms can invite bids, the source said.