Companies that were awarded captive coal linkages by government are selling power in high-margin open markets

Ministry of Power documents reveal that the government has consistently failed to protect consumers from high electricity tariffs witnessed since 2007, despite being aware of the huge profit margins earned by power producers thanks to captive coal allotments at throwaway prices.

Private power producers with access to coal linkages from the government or captive coal blocks that guarantee them coal at prices lower than the international market rates have been making supernormal profits all under the nose of the government and the power regulator.

A Central Electricity Regulatory Commission Policy notification No. 2/7/2008 ‘in the matter of restricting the prices of electricity in short-term market’ reveals that as much as 57.49% of the total volume of 17,325.37 Million Units traded in 2007-08 was at a sale price between Rs. 4 to Rs. 12. Data obtained by The Hindu from the CERC for subsequent years shows that trading licencees sold power at a peak of Rs 7.04/unit in 2008, Rs. 6.41/unit in 2009, Rs. 5.26/unit in 2009-10, falling slightly to Rs. 4.79/unit in 2010-11 and Rs 4.18/unit in 2011-12.

This is a whopping profit margin given that the cost of producing power with coal linkages/captive coal mines works out to just Rs 2-3/unit (the cost of power generation from older power plants is cheaper than new ones).

According to a CERC Staff Paper dated September 1, 2008, “most of the traded power is sourced from coal/hydro power plants …” The paper further breaks down the typical power production costs (cost plus tariff) per kWh with different fuels to Rs. 1.9 for domestic coal (pit head), Rs. 2.94 for domestic coal (load centre – Badarpur TPS), and Rs. 3.50 for imported coal.

Coal costs hyped

In reality, even the estimate that the per-unit generation costs of coal-based pit head thermal power plants is Rs. 2.50 or above may not be correct. For instance, Reliance as the L1 bidder won the competitive tariff bid for the Sasan UMPP at a supply quotation of Rs. 1.19 per unit (inclusive of profit). The Tatas, the L-2 bidder that challenged the award of the Sasan UMPP to Reliance, quoted Rs. 1.41 while five others quoted up to Rs. 2.27.

Those apart, even public sector NTPC, which does not have a captive coal block and buys coal from Coal India Ltd (CIL), sells most of its electricity at Rs. 2-2.50 per unit, which is also the case for various State generating companies.

A CERC Petition No 178/2009 (Suo motu) paints a more grim tariff picture. It notes that “between 9.00 a.m. to 10.00 a.m., the prices of electricity in the Indian Energy Exchange (IEX) have increased from Rs. 6.11 per kWh as on 3.8.2009 to Rs. 14.50 per kWh as on 13.8.2009. Thus there is a 2.37 times increase in prices in IEX. Similarly, the prices increased by 3.22 times from Rs. 4.50 per kWh to Rs. 14.50 per kWh.” Between 6.00 p.m. to 7:00 p.m., the prices increased 2.89 times from Rs. 5/kWh to Rs. 14.50/kWh.

The CERC’s own data carries an implicit admission that had coal linkages/blocks been given to public sector firms or had the government or the power regulator acted in the interest of the consumer, these high consumer tariffs could have been controlled.

The supernormal profits generated by private power players with captive coal blocks are even more amply demonstrated by the fact that just a 300 MW capacity plant operating throughout the year is expected to generate 2,233.80 Million Units, on which a mark-up of a mere 50 paise results in a bonanza of Rs. 111.69 crore/year. Further, several industries such as steel and cement that have been allotted coal blocks for captive power use have also reaped similar windfall gains by selling surplus power in the open market at unregulated prices.

In just two years (according to CERC’s annual report for 2010-11), the total volume of power sold through traders in the short-term market was 147.46 Billion Units. If the government or the regulators had taken steps to restrict the price of concessional coal/fuel to the cost of extraction of coal, then even a small Rs. 1.00 saving on each unit of power would have translated into a Rs. 14,746 crore saving for the consumers in these two years.

The numbers actually become mind boggling when one looks at the CERC’s order where prices were noticed to be as high as Rs. 14.50 per unit (against a cost of production of Rs. 2-3 per unit).

The killing made by private power producers in the runaway short-term market at their peak (selling at upwards of Rs 6/unit going up to a high of Rs 14.50/unit) eventually forced the CERC to step in to fix a maximum ceiling in September 11, 2009 of Rs. 8/unit.

Though the short-term prices have since cooled off substantially on account of the economic slowdown, the fact remains that for years together, when the going was good, many industries with captive power plants and power generating companies were making massive windfall gains on account of having received a preferential allotment of a natural resource from the government without passing on any benefit at all to the public at large. Even now with the power prices in the range of Rs. 4-5/ unit, companies with power plants set up years ago continue to make super normal profits on the back of coal blocks/linkages that were allotted to them on a preferential basis.

Govt. inactive

Documents with The Hindu show that the Ministry of Power, while completely in the know of this undue price advantage given to private players bidding for power projects, and despite several rounds of discussions with all stakeholders, including the Planning Commission, has been refusing to act for over a year.

The minutes of the discussions of an Advisory Group of the Power Ministry held on June 26, 2013 under the chairmanship of the Coal Secretary to discuss the revision of Standard Bidding Documents (SBDs) acknowledge that “very high bids were given by coal block allottees in competitive bidding (for power projects). CAG observations were also received in this regard. Keeping this background in view, several discussions had taken place and the present proposal was an outcome of these deliberations”.

To evolve a rational bidding process for power producers that already have captive coal blocks, the Advisory Group has decided that these firms must face separate ceilings/caps of energy charges, to be fixed by the CERC. “The cap on energy charges would have to be determined individually keeping in view the specific circumstances and associated development cost of the coal block. It would be mandatory for the coal block holder to cap the specific energy charges determined before submission of bids in the competitive bidding process. Once the bids are received, the process of reverse auctioning shall be followed to reach the lowest possible tariff”. However, no concrete action has as yet been taken to implement this decision.

Bonanza for coal block holders

In the long-term markets, even as recently as on June 28, 2013, the Tamil Nadu Generation and Distribution Corporation Ltd (Tangedco) took a decision to award long-term power purchase contracts to four companies at a levelised tariff of Rs 4.9/Kwh for a period of 15 years. Some of these companies have based their bids entirely on coal blocks/linkage which they have received on preferential basis from the Central government.

In fact regulators in the power sector have not addressed the issue of the use of preferentially allotted coal by generating companies to sell power at very high prices wherever the market forces have been allowed to operate, i.e., bilateral trading, power exchange. Even the competitive bidding guidelines for procurement of power (under case -1 route) issued by the Central government under the Electricity Act appear to have an inbuilt incentive for few companies who are in possession of a scarce coal resource. Never mind that these coal resources were handed over selectively by the government to the beneficiaries in the first place.

The Electricity Act of 2003 was aimed at freeing the electricity markets which it has managed to achieve in great measure. However, coal as a natural resource is still controlled by the government, much like spectrum in the case of telecom. Power companies simply had to manage coal allotment on preferential basis, and then the free market policies in the power sector allowed these private companies to make a killing using preferential coal.

As prices in the power market soared, the preferential coal allotments became even more lucrative for its seekers.