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Business News/ Politics / Policy/  Govt panel recommends auction of coal linkages
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Govt panel recommends auction of coal linkages

Govt should auction assured supply of coal much the same way it puts coalfields on the block, suggests the inter-ministerial committee

SBI Capital Markets will work out the details of the auction procedure. Photo: ReutersPremium
SBI Capital Markets will work out the details of the auction procedure. Photo: Reuters

New Delhi: The stage is set for the second phase of coal sector reforms.

An official panel has recommended that the government auction coal linkages, or assured supply of coal, much the same way it puts telecom spectrum on the block.

The panel’s recommendations come at a time when the government has been exploring options to ensure transparency, like it did in the auction of coal mines, even in the case of coal linkages. The findings justify the government’s stance.

Assured supplies, or linkages, are awarded to projects that do not have captive coal mines and need to source coal commercially from state-owned Coal India Ltd (CIL).

The recommendations were accepted by the inter-ministerial committee (IMC) in a meeting on 27 April, but were made public only on Wednesday.

“Various auction methodologies were considered. The members of the IMC were of the view that bucket filling approach and ascending market clearing approach (followed in telecom radio spectrum auction) were better suited for this purpose," according to the minutes of the meeting released on Wednesday.

The two auction strategies refer to a simultaneous auction of different lots over multiple rounds of bidding and selecting the highest bidder for that lot.

SBI Capital Markets Ltd, a state-owned investment bank which is assisting the IMC, will work out the details of the auction proposal

This comes in the backdrop of two rounds of successful coal mine auctions expected to fetch the government around 1.72 trillion from 29 blocks, giving credence to the national auditor’s claims that allocation of mines over the years had caused substantial losses to the national exchequer. In addition, electricity consumers will get a tariff benefit of 69,310 crore from 12 blocks.

The auctions were undertaken after the Supreme Court cancelled 204 coal blocks on the grounds that they were in violation of the law. It did so after the Comptroller and Auditor General (CAG) in 2012 found that awarding the mines without an auction may have cost the exchequer 1.86 trillion.

The 16-member IMC, set up in January, has representatives from NITI Aayog, central electricity authority, department of industrial policy and promotion, CIL, Singareni Collieries Co. Ltd, Central Mine Planning and Design Institute and the ministries of coal and steel.

CIL has assured supply to around 172 power projects through so-called letters of assurance. The generating capacity involved is 108,878 megawatts (MW). The number doesn’t include assurances for projects commissioned before March 2009. To be sure, CIL has been unable to meet its commitments.

The minutes state that incremental production of CIL could be earmarked for specific sectors for auction of linkages.

The plan to auction linkages follows reports of irregularities in granting coal linkages. To take advantage of the discounted price offered by CIL, developers of power plants had made false claims regarding the order of equipment, financial status, land acquisition and water supply, Mint had reported on 18 September 2012. Several firms assured of coal supply claimed to have placed orders for power generation equipment with manufacturers to strengthen their case—only, these were not really orders.

Earlier, power projects were directly awarded coal linkages. However, scarce resources and an increasing number of applicants prompted the government to introduce a system of awarding letters of assurance that required approval by the standing linkage committee. These letters were converted to linkages after a project completed its financial closure. Later, these linkages were converted into fuel-supply agreements, a legally binding document that requires CIL to supply the quantum of coal agreed upon. This conversion is usually done after the project meets certain milestones in around two years.

The process of selecting companies that were assured coal supply was as subjective as the process for allotting captive coal blocks and also involved factoring in recommendations from central ministries and state governments. Later, a points system was introduced for linkages for projects during the 12th Plan period (2012-17). States were happy to provide letters assuring water supply (a key requirement) to power plant developers, which signed in-principle agreements to set up projects.

A SBI Capital Markets spokesperson didn’t respond to emailed queries till press time.

“We are not clear what quantity of coal will be available for linkages for unregulated sector. Also, we need more clarity on whether the fuel-supply agreements, which were earlier signed, still stand or not," said V.K. Talwar, coal adviser for Cement Manufacturers’ Association.

In an earlier interview to Mint, coal secretary Anil Swarup said that the government was looking at the entire linkage scenario and an alternative strategy for awarding coal linkages may be evolved by 30 June.

“What is likely to happen by 30th of June (is) we are hopeful of bringing out an alternative strategy in terms of grant of linkages which is more transparent and objective as compared to the existing manner in which linkages are granted. And, this we derived from our experience in auctions," Swarup said.

“So long as the benefit or the value gets transferred to the ultimate consumer, we don’t have that big a problem. But where the value is not getting fully transferred to the consumer, there is a cause for concern and we have to look into that in non-regulated sectors," Swarup said.

As part of the National Democratic Alliance government’s plan of achieving energy security by getting 1.5 billion tonnes (bt) of coal mined in the country by 2020, CIL has to mine 1 bt of coal.

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Published: 20 May 2015, 01:35 PM IST
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