Coal Auction: Centre decides on minimum discounts for power cos

Thermal power units with electricity sale agreements but no fuel supply pact to support them will have to offer a minimum discount of 7 paise per unit on existing tariffs to get Coal India's notified prices for 25 years, the government has recently decided.
Some industry executives say the discount requirement is too high, being seven times of what was required in a similar auction in 2017. This will hurt margins, they said. Analysts said the government had to do a balancing act.

“It is not unreasonable for the government to set floor to minimise any disadvantage to participants of previous rounds,” said Kameswara Rao, head of energy, coal and mining at PWC India. “On the other hand, as these PPAs are regulated and price set on power auctions, a high floor price would be unreasonable to the current bidders. So, it’s a tight rope walk for the government.”

Coal will be offered in the third round of reverse auction under Shakti B(III). About 3.1 gigawatts of capacities requiring an estimated 16 million tonnes are eligible for participation.

Reverse bidding will be in two parts. In the first stage, producers will quote an initial minimum discount of 7 paise or more. In the second stage, they will be offering additional discounts in multiples of 1 paise per unit to a maximum of 40 paise per unit.

“The floor of 7 paise per unit is equal to the tariff discount discovered in the second round of auction,” said Sabyasachi Majumdar, group head at ratings firm ICRA. He said this was negative for thermal plants because they are already stressed and are facing significantly higher capital costs.

Analysts estimate that reducing fixed tariff by 7 paise per unit for a thermal project with capital cost of Rs 7.5 crore per MW and fixed tariff of Rs 1.50 per unit will reduce the debt service coverage by 0.09 times over the debt repayment tenure and return on investments by 60-70 basis points.

Ashok Khurana, director general at Association of Power Producers, said high discount will hurt already stressed units. The association has suggested lower discount as the auction is meant for stressed projects on the verge of becoming non-performing assets.