Government appoints firm to find ways to offset any spike in power production costs after e-auction of coal blocks

KOLKATA: The government has appointed a consultancy firm to find ways to cushion power companies against a rise in generation costs after they buy coal blocks through e-auctions, and look at the possibility of passing a part of it on to consumers, a senior official said.

"There is a strong possibility that power generation costs are to rise once power producers have to buy the blocks through e-auctions," the power sector official said on condition of anonymity. "The consultancy firm, which is slated to submit its report in the next 10 days will look at both options of cushioning power companies from increased production cost and passing on a portion of the rise to consumers, although not at one go," the person said. The move comes despite the government's assurance that the upcoming auction of coal blocks will not lead to a hike in power tariffs. Any increase in consumer tariffs, if required, will be implemented in phases.

"For power generation firms that set up plants on tariff-based biddings, increasing power tariff will also be legally difficult. Ways of factoring in this increased cost will be suggested by the consultant to the government," the official said.
Some power generation companies had been allotted coal blocks on the basis of their plants. They have also signed power purchase agreements (PPAs) with power utilities to supply electricity at a mutually agreed pre-determined price. PPAs are legally binding documents and increasing this contracted power tariff will lead to violation of the contract.

The ordinance to auction coal blocks follows the Supreme Court's order cancelling allocation of several coal blocks, after the Comptroller & Auditor General estimated that coal worth Rs 1.86 lakh crore was given away. At present, 42 producing blocks and 32 that are ready to start production will be offered — some through auctions and others through direct allocation to state utilities.

The auction will commence on February 11 next year, and the winners will be informed by March 16. The government expects these 74 blocks to produce 210 million tonnes of coal a year.

Coal blocks will be auctioned on the basis of their net present value, which is the current value of future earning from the block. The floor price for bidding will be fixed at 90 per cent of the net present value. Winners need to pay 10 per cent of the bid amount upfront. A successful bidder or allottee may utilise coal mined from a particular coal mine in any of its other similar end-use plants by giving a prior intimation to the central government in writing and the government will be free to impose terms and conditions it deems necessary.

State utilities would be allocated blocks depending on per-capita power availability in the states and future requirements. They will not be allowed to bring in private firms as joint venture partners in such blocks.