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Business News/ Politics / Policy/  Power ministry wants coal block allottees to sign PPAs
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Power ministry wants coal block allottees to sign PPAs

The communication came before the CAG report last month on alleged irregularities in coal block allocations

Merchant power is electricity sold as a commodity at market price, not to pre-identified customers under long-term agreements. Photo: MintPremium
Merchant power is electricity sold as a commodity at market price, not to pre-identified customers under long-term agreements. Photo: Mint

New Delhi: The power ministry asked its coal counterpart in March to direct allottees of captive coal blocks to sign long-term power purchase agreements (PPAs) or risk cancellation of the blocks.

Many of these allottees, such as Jindal Power Ltd (JPL) owned by Congress party lawmaker Naveen Jindal, have been generating strong cash flows by utilizing low-cost coal from captive mines to generate electricity that they sold in the merchant power market.

Merchant power is electricity sold as a commodity at market price, not to pre-identified customers under long-term agreements. There are no rules to prohibit JPL and other companies that were awarded coalfields from selling power generated using the fuel in the merchant power market.

“We want the coal ministry to direct the companies having captive coal blocks to enter into PPAs," said a senior power ministry official on condition of anonymity. “In order to do so, we had written to them around a few months back making it very clear that they should ask the developers to participate in bids called by state distribution companies. By doing so, a competitive tariff would emerge that would help the consumer."

The power ministry communication came before the Comptroller and Auditor General of India (CAG) report last month on alleged irregularities in coal block allocations. A second power ministry official said that the move wasn’t made in anticipation of the CAG report.

The CAG report estimated that the coal block giveaways had cost the exchequer 1.86 trillion in notional losses and gains for private coal block allottees such as Jindal Steel and Power Ltd (JSPL), Essar Power Ltd, Adani Power Ltd, JSW Steel Ltd, Monnet Ispat and Energy Ltd, Tata Steel Ltd, CESC Ltd, GVK Power and Infrastructure Ltd, ArcelorMittal India Ltd, GMR Energy Ltd and Lanco Group.

An inter-ministerial group (IMG) is looking into the allocations and whether they should be cancelled, alongside a probe by the Central Bureau of Investigation after the CAG report triggered political uproar, demands for the resignation of Prime Minister Manmohan Singh, calls for the cancellation of the coal block allotments and an independent inquiry.

“Our stand is very clear," the first official cited above said. “This is the only way that this scarce resource should be utilized. If the firms that have captive coal blocks allocated to them don’t do so, their blocks should be cancelled. This has always been our demand and stand."

The Business Standard newspaper reported on Wednesday that the government is “planning a clause to make it mandatory for captive miners to take part in tariff-based bidding for power".

“We have insisted that allottees should sign compulsory long-term PPAs if they want to retain the blocks," said a senior functionary in the power ministry, also on condition of anonymity. “We have insisted that allottees should sign compulsory long-term PPAs if they want to retain the blocks. This is also to ensure tariff competitiveness. We did not want any of the captive block allottees to sell power in the merchant market, because the captive coal blocks are considered to be a national asset and the coal should be used to produce electricity for the citizens."

Between June 2004 and 31 March 2011, the coal ministry allotted 195 coal blocks on a nomination basis to various firms for captive use. Of these, 115 were awarded to companies developing power projects. Of the 57 blocks mentioned by CAG in its report, 22 were meant for the generation of power.

“The power ministry is contemplating that long-term PPAs should be signed by the captive coal block allottees," said Pramod Deo, chairman of the Central Electricity Regulatory Commission, the power sector regulator.

IMG is likely to submit its final report by 15 September, after which the government will take a call on scrapping the allocations.

“It is being discussed between the ministries," said a person familiar with the development. “No final decision has been taken yet."

Mint had reported on 18 March 2008 that there were significant irregularities in the Union government’s award of mining rights for 15 coal blocks with reserves worth around 5.37 trillion to 31 companies.

An 11 September report by UBS Investment Research said: “Cancellation of allocation in some blocks is a realistic possibility, especially on the ones where not much work has happened. Even for the coal mines where awardees have invested significant capital, it is possible that there is some negative fallout."

JSPL, Adani Power and Lanco have “significant exposure to merchant power", UBS had said in a report dated 9 March.

A JSPL spokesperson didn’t respond till press time.

K. Rajagopal, chief executive officer (thermal) at Lanco Infratech Ltd, said, “As far as coal block allocations are concerned, they were allotted according to terms and conditions of those times. Today, they are asking to tie up for power. While a capacity of around 30,000 megawatts is under construction, it is only partly tied up as no bids are coming from the states. While on the one hand the government wants the developers to tie up on power, on the other there are no bids coming from the states. It is for the government to take a view."

An Adani Group spokesperson said his organization doesn’t have any captive coal blocks allocated to it as the one that had been allotted was not given environmental clearance. “We have signed PPAs for all plants that we are implementing," the spokesperson added.

Dipesh Dipu, partner at Jenissi Management Consultants, a Hyderabad-based energy and resources-focused consulting firm, said, “It is critical for the captive blocks to be developed efficiently so that resources are made available for power generation. Regulatory reviews of cost of mining can be a way to ensure consumers are protected and the developer is adequately compensated. Forcing the developers to bid for tariff-based competitive bids may not always achieve these objectives. However, liberalizing the sector such that there is regulated competition in coal mining would do good to the sector."

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Published: 13 Sep 2012, 12:27 AM IST
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