By Manik K. Malakar
Coal, a seemingly run of the mill commodity, is one that has been affecting the power sector in India rather a lot of late. As India’s power demand and generation grows, the demand for the fuel is set to burgeon.
And the government has now set into play a series of steps that may just make this sedimentary rock more accessible to power producers in India. “Like any other process, if the rules are properly designed and implemented, they will be useful in discovering, the true price of the resource,” says D. K. Aggarwal, CMD, SMC Investments and Advisors. Aggarwal was speaking with reference to the new rules on Coal Block auctions, in a Ministry of Coal notification, “Auction by Competitive Bidding of Coal Mines, 2012” effective February 2012.
The notification provides the framework for allocating coal and lignite blocks to companies, both governmental as well as private, and starts the process of getting coal block auctions underway in this country. “We think that these new rules of coal allocation will provide more transparency to the overall coal block allocation process, as the state governments will select a company on the basis of competitive bids for tariff and will recommend for the allocation of area containing coal to such companies only,” says Uday Narayan Dubey VP, Research & Institution Business, R K Global. Currently, coal blocks are offered on a preferential basis by an inter-ministerial screening committee.
So, coming back to power producing companies, how does it benefit them? But before that, perhaps in context it may be mentioned that thermal; or the generation of power by coal, accounts for a major share of India’s power generation.
According to figures from the CEA for October 2010 as cited in the DRHP of PTC India of the 167,278.36 MW of power generated, 108,602.98 MW came from thermal power generation. As power generation goes up, this figure and the consequent demand for coal is set to increase.
“Definitely power companies will have a sort of relief as these companies would be selected on the basis of electricity tariff for the power plant connected to the block,” Dubey explains. He opines that the move will definitely help power companies to improve margins.
There are however some gaps in the proposal, that need to be looked into. According to analysis from SMC the government exempts power companies from having to participate in auctions for coal blocks. Thus, power companies will only have to pay the reserve price that is fixed by the government for such projects.
“Prima facie the act of specifically exempting power companies from competitive auction appears to be a poorly conceived loophole,” says Aggarwal. “When a depleting resource is allocated not on the basis of market-based pricing, but arbitrarily it is bound to lead to the under-pricing of energy,” says Aggarwal.
Power companies: worth investing?
“If the government takes cognizance of the fact that the new rules are in violation of the economic prices and eventually they work out another way for power companies, it might have a negative impact on power companies stocks. The problems in the power sector are multifarious, and one must keep these in mind when looking at power stocks,” says D.K. Aggarwal of SMC.
“As far as Coal India is concerned it is a monopoly producer. The impact on Coal India will be very limited,” he continues.
Fuel Supply Agreement
A Committee of Secretaries constituted by the PMO under the chairmanship of Pulok Chatterjee (Principal Secretary to PM) has asked CIL to sign FSA, for all power plants commissioned up to December 11, with 80% penalty trigger level.
The quantity of coal to be imported, according to inputs from Emkay – a brokerage, would be about 73 million metric tonnes or 60% of new FSAs in FY13E.
“Private power producers have been reluctant to enter into long term supply agreements for imported coal at current prices and without which it would not be feasible for CIL to enter into long term contracts with coal suppliers and guarantee 80% of ACQ. Plus, for private producers, it is as good as importing coal themselves, rather they would be more comfortable in importing coal themselves than asking Coal India to import for them,” says Amit Golchha and Harshad Shukla of Emkay.