Ind-Ra: Draft Approach Paper on Coal Auction to Evince Strong Developer Participation

India Ratings & Research (Ind-Ra) expects the guidelines outlined under the approach paper for the auctioning of coal mines to evince strong participation by serious developers with operational and likely-to-be-operational end use projects. The guidelines could also lead to tariff rationalisation for power plants and revenue maximisation for the government. The approach paper furthers Ind-Ra's belief on the government's intention to fast-track e-auction of coal mines.

Post the finalisation of the guidelines, the approach paper expects the signing of coal mine development and production agreement within 60 days from the date the technical bids are submitted.

Eligibility Criteria to Ensure Serious Developers: To be technically eligible, the bidder should have incurred 80% of the total project cost (TPC) for schedule II coal mine (under production mine) and 60% for schedule II coal mine (ready to commence production). This would lead to participation from developers who have either operational or nearing completion projects. The approach paper allows state government entity/JV of state government entity to bid if the end use is the same. Mostly serious players will participate in the e-auction given the eligibility criteria for the full payment of additional levy in case of prior allottees and the criteria restricting the extractable reserves to 150% of the annual coal requirement of the end use project considered over a period of 30 years.

Tariff Rationalisation and Revenue Maximisation: The approach paper aims at power tariff rationalisation by adopting reverse bidding for power sector wherein the lowest bidder wins. To ensure revenue maximisation from the non-regulated sector, forward bidding is proposed wherein the highest bidder wins. Additionally, the bidding process is proposed to be a two stage process with technical and financial evaluation. Post technical qualification, only top 50% of the bidders will qualify for further participation thus ensuring that only the most interested bidders enter the e-auction round.

Locked Capital Concerns Addressed: A successful bidder is required to make payments borne by the prior allottee towards the cost of land, mine infrastructure, leases and clearances. This mitigates the uncertainty towards investments made by the prior allottees in the coal blocks.

Surplus Coal to be sold to CIL: The surplus coal mined in excess of the annual requirement of the end use project will have to be sold to Coal India Limited (CIL) at the bid price or at prevailing CIL notified price for similar grade. Thus, gains from the sale of surplus coal to CIL will depend upon the mining costs and CIL notified price.

Forward Bidding: In case of non-regulated sectors, the forward bidding methodology is proposed where in bidders have to quote the bid price above the floor price (not less than INR150/tonne). The bid price would be considered as base for the year of bidding and would be escalated linked to a reference index. The floor price under forward bidding would be based on the net present value of the block calculated based on the notified price of CIL for the non-regulated sectors for the corresponding gross calorific value band. Royalty would be paid in addition to the above. Thus, non-regulated sectors could price their bids so as to get coal at a discount to the imported/e-auction price.

Reverse Bidding: Reverse bidding is to be followed in case of the power sector blocks wherein bidders will have to quote the price bid below the ceiling price. The ceiling price would be fixed at run-of-mine price of equivalent grade as specified by CIL for the power sector. A fixed reserve price of INR100/tonne will be payable based on the actual production. Royalty would be paid in addition on the CIL notified price.

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