Coal auction:Power firms face huge under recovery in fuel cost

Aggressive bidding seen in the auction of 33 mines would result in significant under recovery in fuel cost estimated at "Rs 18 billion by FY2017-18" for the winning bidders in power sector, rating agency ICRA said.
It also said cancellation of blocks has impacted capacity in private IPP segment to the tune of 18 GW.
"Bidding by power generating companies in the auction has been quite aggressive ...As a result, winning bidders remain exposed to a significant under-recovery in fuel cost ... Aggregate under-recovery for the bidders is estimated at Rs 8 billion in FY 2015-16, which is likely to increase to about Rs 18 billion by FY 2017-18," it said in a report.

The government has so far auctioned 33 blocks in two tranches garnering over Rs 2 lakh crore, a figure surpassing CAG's estimates of losses of Rs 1.86 lakh crore on account of allocation without auction of mines.
ICRA said of the 33 blocks, 12 were earmarked for the power sector and the government has announced successful bidders for nine mines which have a geological reserves of 1200 million tonnes of which extractable reserves are 60 per cent.
These blocks are "estimated to provide a fuel security for about 6 GW of generation capacity in the power sector, in ICRA's view. ICRA notes that the bidding by power generating companies in the auction has been quite aggressive with the bidding happening on a forward basis on the reserve price payable as bid quoted is zero in reverse bidding," it said.

It added that the bids quoted by the successful bidders range from Rs 302 per tonne to Rs 1,110 per tonne which are "negative price bids" for the bidders "which essentially means that a winning bidder would have a zero fuel charge recovery in PPA and in addition would bear the cost of both i.E. Cost of coal mining and quoted reserve price payable to State Government."

It said as a result the winning bidders will remain exposed to significant under-recovery in fuel cost which is estimated to range from Rs 0.39/kwh to Rs 1.02/kwh on a levelised basis over a 25-year period."

Further it said the quantum of under-recovery in fuel cost would remain sensitive to both the stripping ratio of the coal mine and cost of mining related to over-burden removal during the operating phase.
"ICRA estimates that the SC ruling cancelling allotment of coal blocks had impacted capacity in private IPP segment to the tune of 18 GW and the current coal auctions have secured fuel for 2.5 GW out of those 18 GW," it said.
Thus, capacity of about 15.5 GW (with cumulative project cost at around Rs 930 billion) continues to remain affected and within the same, about 8 GW is at risk also due to absence of tapering coal linkage.

The Supreme Court in September last year had cancelled allocation of 204 mines terming same as "fatally flawed" necessitating the auctions.