Coal blocks: aggressive bidding likely to hit the viability of power companies

Can an electricity generator mine coal at its own cost, without charging the end consumer, and pay the Government over ₹470 a tonne or more as royalty? If you think this is absurd, take a look at the winning bids in the coal block auction.

GMR Chhattisgarh won the Talabira-I in Odisha at a negative bid of ₹478 a tonne. On Sunday, CESC won Sarisatolli in West Bengal at a negative bid of ₹470 per tonne. Both are operating mines and have exhausted the majority of the mining resources.

In negative bidding, the winning bidder pays the government instead of recovering the cost of developing a field from consumers. It means GMR and CESC will mine coal at “zero” production cost and pay royalty on every tonne they produce.

“Don’t ask me, I am perplexed. We warned the government about the possibility of ridiculously aggressive bidding. They didn’t pay heed,” said the official of an industry body.

The Centre adopted the reverse auction mode to keep power tariffs in check. But this has left a big question mark over the viability of the industry.

Keeping aside fixed costs such as land acquisition, rehabilitation and resettlement, Coal India (CIL) currently outsources coal from large contract miners, such as the Aditya Birla Group-controlled Essel Mining, at ₹250 a tonne. With taxes, duties and railway freight (to carry the coal to the power station 200 km away), the final cost of fuel will be approximately ₹650 per tonne. The power produced from this should cost (variable) 50 paise per unit.

If compared against the average tariff of CESC, this is just half of the 16 per cent profit margin allowed by the electricity regulator. The margin would get squeezed further if all the fixed costs are taken into account.

Logically there is little reason for generation utilities to opt for captive mining, unless their entire cost structure is gold-plated. But power industry sources say gold-plating may be limited to 10-12 paise a unit.

The industry official blames the government’s short sightedness for the fiasco.

Considering the limited number of blocks on offer and the large number of bidders that had invested huge sums in creating assets, such a situation was anticipated.

Aggressive bidding is evident from other sectors too. Hindalco, which has lost possession of the Talabira-I mine, has won the Kathautia mine in Jharkhand by offering ₹2,860 ($46 a tonne) per tonne of coal. The mine has reserves of around 26 million tonnes. 

The final cost of coal should be way above the delivery cost of imported coal. A medium-sized iron and steel company that had posted a net profit of ₹21 crore in the last fiscal year now promises to pay ₹48 crore a year just in royalty alone.

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