Ind-Ra: Loss Minimisation Leads to Aggressive Bidding for Coal Blocks Earmarked for Power Sector

Developers are quoting negative final price offers in the reverse auction process, for coal blocks earmarked for the power sector, implying zero fuel cost pass-through. While this is beneficial for the end consumers and the state governments, the same has the possibility of negatively impacting the financial profiles of the developers, believes India Ratings & Research (Ind-Ra). Though Ind-Ra in a commentary dated 24 December 2014 had expected strong interest, the prices being quoted by the successful bidders are more aggressive than envisaged by us.

The government through the bidding process is likely to achieve its twin objectives of revenue maximisation and power tariff rationalisation.

As per the auction guidelines, if the price bids reach zero under the reverse auction, then the forward auction mechanism would commence. Given that all four blocks auctioned for the power sector have seen price bids reach zero, forward auctions were kicked in all the four blocks with developers quoting negative price bids. (INR484/t for Talibara-I awarded to GMR Chattisgarh, INR470/t for Sarisatolli awarded to CESC, INR940/t for Trans Damodar awarded to Durgapur Projects and INR712/t for Amelia North awarded to Jaiprakash Power Ventures).

The bids would mean that developers would not charge any fuel cost to the beneficiaries and would pay the amount bid per tonne to the state governments. Assuming INR600/t as the mining cost, INR200/t as the transportation cost and INR100/t as sizing and handling cost, the developers would incur around INR1400/t (mining cost + transportation + handling and sizing + the negative bid) or INR1/kwh as the fuel cost which will not be passed on to the consumers. So, with a zero fuel cost pass-through, a plant would only get the fixed cost per unit for power sold under the long term power purchase agreement (PPA) route. Ind-Ra opines that the bidding strategy followed by most developers would lead to minimisation of losses, however, earning profits post such bidding could be very difficult.

Additionally, Ind-Ra also believes, that fixing the run-of-mine price of Coal India Limited with adjustments for gross calorific value as the ceiling price of the mine would also lead to problems. CIL's stripping ratio (1.74x) is far lower compared to the average stripping ratios of the mines (Talibara-I - 1.09x, Sarisatolli- 2.95x, Trans Damodar-6.83x, Amelia North-8.44x) bid out and hence the extraction costs could be higher.

Ind-Ra observes that since the current round of bidding involves operational blocks the interest by developers is high. However, investor interest is likely to wane in ready-to-operate blocks and other Schedule-I coal blocks.

However, Ind-Ra notes that developers would have tried to bid keeping in mind the possibility of sale of 15% of power generated through the merchant route which could result in covering up the losses that the developers would likely incur on the sale under the long-term PPA mode. Ind-Ra believes that the financial viability of the projects could suffer in case the assumptions with respect to mining cost and merchant selling price deviate. Moreover, sales through the merchant route would not be entirely able to cover for the losses incurred from sales under the PPA route.

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