There's no such thing as a free lunch, goes the popular adage. The Government's policy of dishing out scarce natural resources, however, proves the contrary — that free lunches are absolutely there for the taking for those who know how to work their way up the system.
After the spectrum allocation scam, which has reignited the debate on handing out resources across key sectors, coal could be the first key sector where the Government may be forced to initiate steps to put its house in order. But not before the damage has been done.
An estimated 40,000 MW of private power capacity is coming up over the next six years on coal linkages and blocks handed out to them for absolutely zilch by the Government, based almost entirely on a discretionary, point-based screening system.
What's ironical is that despite getting fuel linkages for free, nearly all of these projects will be selling the electricity generated by them in the market at commercial rates, thereby ensuring that the end-consumers do not stand to gain in terms of cheaper tariffs on account of the Government's largesse in terms of free coal.
These include developers with not a single megawatt of capacity on the ground, but clearly the wherewithal to get the Government to hand over coal resources to each of them.
At the same time, state-owned NTPC Ltd, the country's largest power generator that sells electricity under regulated tariffs to consumers, is faced with a massive scarcity of coal and is forced to import the commodity at much higher costs to tide over shortages.
With fuel costs being a pass-through component while fixing of tariffs, consumers across the country will be footing the bill on NTPC's fuel imports.
State Electricity Board projects, which are also on a regulated tariff structure, are also forced to rely on imports to tide over coal shortages. This is likely to be the trend, given the serious coal resource crunch in the country.
MILKING THE SYSTEM
Policymakers appear to have woken up to the fact that the dishing out of coal linkages and blocks to all kind of private players under a discretionary system is depleting the Exchequer. This is clearly evident from the course correction that the Government seems to be attempting.
The proposed Mines and Minerals (Development and Regulation) Amendment Bill is expected to provide for the allocation of coal blocks through auction to private companies, replacing the allocation by the Government screening panel. Moving the Bill in the Rajya Sabha on August 13 last year, then Mines Minister, Mr. B K Handique, had conceded that the prevailing system of allocating coal blocks through the screening committee route was “vulnerable to criticism on the ground of lack of transparency and objectivity”.
But, in the interim, coal resources through linkages and blocks have already been allocated to private projects that are to come up well into the current decade, essentially implying that those who could milk the system for as far in the foreseeable future as possible have already done so.
The obvious question then is that why was this largesse allowed for so long? This, especially, when India is staring at a massive shortfall of coal that is expected to surge from the current 83 million tonnes to 142 million tonnes by the end of the next fiscal (2011-12).
The system of allocating a coal linkage free of cost had originally evolved for public sector projects for supplying power to distribution utilities on a regulated tariff.Later, this was extended to private developers selected on the basis of lowest quoted tariff in competitive bidding, such as the Sassan Ultra Mega Power Project, wherein cheap availability of fuel resources is reflected in the electricity tariff.
In the case of a merchant power plant, which sells electricity at market-determined rates with the object of making profit, the additional profit due to cheaper coal would naturally accrue to the project developer and the consumer is unlikely to be benefited.
However, the Ministry of Power guidelines for allocation of coal blocks/linkages, states that it is “desirable” to develop untied generating capacities to cater to the need of the short-term electricity market, and hence the diversion of coal to these projects.
LEVEL PLAYING FIELD
It is clearly evident that even among the private players that have access to resources, possibly the deserving ones in terms of proven project execution credentials have been left out. This is established by the fact that the demand to have auctions for award of coal resources is coming from private players themselves. Major Private Developers, including Tata Power, Reliance Power, Essar, Jindal Power, GMR, GVK, and Adani Power, have jointly stepped up the pressure on the Government to shift to an auction process to award new coal blocks and linkages in order to ensure a “level playing field” to all participants.
These players, under the aegis of an industry body called Association of Power Producers, estimate that the 50-plus coal blocks holding resources of around 15 billion tonnes that are in line to be given out to prospective project developers, can fetch up to Rs 30,000 crore in terms of direct auction money for the Government from the bidding process (using a conservative assumption that the winning bidder offers Rs 20 per tonne).
The demand by private project developers on the need to shift to the auctioning route comes in the wake of a significant spurt in the share of private players in overall project commissioning this Plan period. Likening coal to telecom spectrum and other scarce resources, the APP, which represents an upcoming generation project portfolio of around 1,20,000 MW, has proposed a segmented (sector specific auctions for the power and cement sectors) auction process for better price discovery.
When you calculate the notional loss to the exchequer for the 40,000 MW of capacity that has been guaranteed linkages and blocks (translates into around seven billion tonnes of coal), the hit comes to around Rs 15,000 crore, using the most conservative estimate (bid amount of Rs 20 per tonne).
LOSS TO EXCHEQUER
In reality, this amount could well be five times the above estimate, if bidders were to get aggressive, which they are bound to in light of the prevailing shortages.
If at all the Government wants to play Santa Claus and distribute blocks and linkages, those deserving the largesse are clearly utilities such as NTPC and state-sector generating units, in which case the availability of cheaper coal resources is likely to be passed on to the consumers at large.
Besides, projects where developers are selected through tariff-based competitive bidding (specifically those coming up through the Case II bidding route), can also get free coal. The others, quite simply put, need to slug it out in the market to get hold of the country's coal resources, the same route that they would ultimately be using to sell the electricity generated from their projects.
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