6 JUL, 2012, RACHITA PRASAD, ET BUREAU
MUMBAI: The coal ministry has threatened to cancel allocation of coal blocks of power companies that are selling power in the short-term market at lucrative rates, and has asked them to enter into power purchase agreements (PPAs) on the basis of competitive bidding.
The ministry has been charged of handing over coal worth 10.7 lakh crore to companies, according to a draft CAG report. Coal Minister Sriprakash Jaiswal has defended the allocation saying that if the blocks had been auctioned, the consumers would have paid a heavy price for power and steel.
The coal ministry's latest directive would specifically impact independent power producers and companies with captive units, and is aimed at benefiting consumers from low tariff.
Industry officials say the major companies producing power from captive coal blocks include Jindal Power and Tata Steel. A Jindal Power spokesman said the company had not received the directive from the coal ministry, while industry officials said Tata Steel does not sell power in the open market.
The coal ministry wants to ensure that companies sell power on the basis of competitive bidding. It plans to make this a condition for coalmines already allocated, sources said.
Ministry officials say that the government had allocated large number of coal blocks to independent power producers and captive power producers, hoping that the benefit of low cost of generation would be passed on to the consumers, officials said.
In an earlier communication seeking the coal ministry's advice, the power ministry noted that many coal block owners were not participating in competitive bids but selling power in the short-term market at higher prices, sources familiar with the development said.
In response to this, the coal ministry has directed power utilities to comply with norms of power ministry and participate in competitive bids or face cancellation of allocation.
"As coal blocks were given for power sector, the developers must participate in the bid for procurement of power by the discoms as per bidding guidelines issued by ministry of power and offer the benefit of the government allotted coal blocks to the consumers," the letter cited Ministry of Power's concerns.
Ashok Khurana, director general of the Association of Power Producers that represents 24 companies in the sector, said that the government may be justified in asking merchant power producers with captive mines to sign long term PPAs but highlights that the transition would be difficult.
"Not too many states have been inviting bids for buying power so where would the power producers go. We need to give them time to sign long term agreements, and this cannot be implemented immediately," he said.
According to the ministry of power's tariff policy, all state power distribution companies are required to tie up power purchase agreements (PPA) through tariff based competitive bidding.
This ensures that the discoms buy power at the best available rate and consumers get lowest possible tariff. Power sold through long term PPAs is typically priced lower than that sold in the short term market.
For instance, power generators selling in the short term market, also referred to as merchant power producers, have gained as power rates in energy exchanges have surged above Rs 7 a unit in most parts of the country in the last few weeks, and shot up to Rs 12 per unit in the southern states due to weak monsoon.
"Consumers would be the biggest beneficiaries if more merchant power companies tie up long term PPAs. This would also address the concerns over profits being made by some power producers," said Debasish Mishra, senior director - consulting, Deloitte Touche Tohmatsu India.
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