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Law ministry questions rate-based bidding for power projects

Sudheer Pal Singh/New Delhi 25 Oct 12 | 12:52 AM

The law ministry has raised questions about the logic behind making rate-based bidding mandatory for coal miners.

“The law ministry has asked the coal ministry whether rate-based bidding actually benefits consumers of power. The ministry is now seeking the power ministry’s opinion on the query," a senior official close to the development told Business Standard.

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The coal ministry had sought the law ministry’s advice on whether the proposal could be implemented retrospectively.

The coal and power ministries had proposed to make participation in rate-based bidding mandatory for captive coal miners, to curb profiteering by them.

While the proposal aims to correct a major policy anomaly in the coal mining sector, the government is in a fix over whether its implementation should be prospective or retrospective.

Even after months of deliberations, consensus on the proposal could not be reached.

Prospective implementation would mean taking no action on companies that have sold power in the merchant market in the past, while retrospective implementation would require seeking sharing of benefit from companies in lieu of the power already sold. Merchant power is an industry term used for electricity sold outside long-term purchase agreements with power distributors.

“A strange situation has now developed. What if companies, which have plants running, willingly quote high in the bidding? Would the government ask them to stop their projects? The power ministry must explain this," said an official close to the development.

Coming at the backdrop of the coal block allocation scam, the fresh queries are set to further delay implementation of the proposal. Some companies had been selling power produced by using coal from captive mines allotted to them, in the merchant market. Under rate-based bidding, a company will have to sign long-term power purchase agreements (PPAs) to supply power.

The power ministry had asked the coal ministry to include a clause in the allotment letters that captive coal block allottees would have to participate in rate-based bidding. According to sources, there are about eight-10 companies that have coal blocks, but continue to sell merchant power.

The original allotment letters issued to captive miners had no conditions attached. The letters did not specify whether the companies are free to sell power through PPAs or in the merchant market. To make tariff-based bidding mandatory, the coal ministry is now making changes in the original allotment letters through an addendum, said a senior coal ministry official.

The official added that a case in point is Jindal Power Ltd (JPL), a subsidiary of Member of Parliament Naveen Jindal-led Jindal Steel & Power Ltd (JSPL). JPL has been operating a 1,000 Megawatt (MW) coal-fired power plant at Raigarh district in Chhattisgarh since 2008. The plant uses coal from two captive mines – Gare Palma IV/2 and Gare Palma IV/3 located seven kilometres away.

A recent news report had said that despite having the cheapest coal from the mines, JPL sold power at the highest prices of Rs 4.30 per unit in 2010-11 and Rs 3.85 per unit in 2011-12.

“The average tariff per unit for us has come down over the years and works out to Rs 3.40 a unit now, compared to Rs 3.85 last year," said a company spokesperson. The company’s coal cost works out to Rs 650 per tonne, including Rs 147 paid as royalty, against the cost, Rs 700 per tonne, of buying coal from Coal India. He also added that the company had no choice but to sell power in the open market as it did not get any long-term PPA.

Twenty nine blocks, including JSPL’s Gare Palma blocks, allotted to 22 companies had started production by March. The firms include BLA Industries, Monnet Ispat & Energy Ltd, Prakash Industries Ltd, CESC Ltd, Jayaswal Neco, SEML, Usha Martin, Sunflag Iron & Steel Ltd, Electro Steel Casting Ltd, BS Ispat, Shree Virangana Steel Ltd, Hindalco, Damodar Valley Corporation (DVC) and the state-owned utilities of Punjab and West Bengal.

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