E-auction not favourable to Power utilities

Recently, the strike in Andhra Pradesh and the floods in the Eastern states caused severe depletion in the coal supply, due to which many power plants stopped generating electricity. The Power ministry asked the Coal ministry to stop the e-auction of coal and source it to the power companies on a priority basis. The need of the hour was for power companies to buy the coal and keep the stations up and running. But this was not what happened.

According to the news published in the Business Standard, Coal India currently has a coal surplus of 50 lakh tonnes, as power companies did not source the diverted coal. It is very disturbing to find out why something like this happened. We, at DSIJ, have gone ahead and tried to look into the reasons why power companies would have failed to source the coal.

The problems start right from the sourcing of coal. According to the directions for an e-auction route as mentioned on the Coal India website, any company that wishes to buy coal through this route is required to transport the coal from the pit to the road by itself. This costs the companies about 5 times more than the Rs 125 per tonne per kilometer this is charged by Indian Railways for the same work. The buyer is also required to bear the loading charges as per the Indian Railway rules, and have to arrange the rakes by themselves. Besides, they are also required to pay service charge, taxes and royalty payments. For FY10-11, the service charges are 0.7% of the bid price and Service Tax is levied at 10.3% on the service charges. From a phone call we made to Coal India, we also found that the coal price in an e-auction is set at the market price, which is higher than the prices set in long-term supply agreements. Power companies require coal on a daily basis, and hence, they tie up the coal supply through long-term agreements. 

It should be understood that not all is well with power companies, which are already reeling under tariff pressures. As the tariffs are based on the coal prices set in the long-term coal supply, the extra coal price is not the pass through component for most of the power utilities. The key question is why a power company would source e-auction coal when it cannot afford power generation at the prices set in a long fuel supply agreement. This does not give them any advantage to buy the coal from the e-auction quota.

This is not good for merchant power producers either. The rates for merchant power are highly volatile, and fluctuate as per the demand for power. As reported by The Telegraph, Calcutta, on April 19, 2010, the prices for merchant power were about Rs 10.50 per unit. These prices have now settled down to about Rs 3.5-4 per unit. When there is surplus energy, these prices fall further. Even if one considers that merchant power producers will generate power with high input costs, it cannot be guaranteed that there will be buyers. Most of the state electricity boards are not willing to buy power at higher costs and sell it at lower cost due to under recoveries. For the merchant power producers, it doesn’t make any sense to generate power from such highly-priced coal when one can’t assure the tariff.

For the long-term agreements, the government has set an order of coal supply in which the power generating companies get the highest preference. If power utilities start opting for the e-auction route even in critical times, their profitability may come under pressure. Thus, it is clear why coal from e-auction was not purchased by the power utilities. We believe that this trend will continue in the same fashion, and e-auction will not be preferred by the utilities.