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Domestic prices to be basis for valuing coal for auction

The model for auctioning 74 cancelled coal blocks will likely consider domestic coal prices as the benchmark to arrive at the net present value, or the current value of each block based their potential future earnings. The floor price for each tonne of coal, specific to each block based on energy content and other factors, will be calculated on the basis of this NPV.

The proposal is scheduled to be placed at the next Cabinet meeting for approval, people with knowledge of the matter said. The plan to calculate NPV on the basis of domestic prices comes as good news for companies looking to bid for the blocks as state-run monopoly supplier Coal India Ltd's prices are lower than international rates.

Earlier, the government was evaluating the option of considering international prices as well. "Domestic coal prices would mean prices charged by Coal India because coal isn't commercially sold by any other company. The prices vary between Rs 5,000 and Rs 400 per tonne for coal sold to the power sector, depending on the energy content in the coal," said an official close to the development. "Coal, sold to non-power sector is priced higher. Nevertheless, coal India also sells a portion of its coal through an electronic bidding system which is at least 15-20% higher."

E-auction price would not be considered for valuing the blocks, this official said. A central sector company is at present busy valuing these blocks with data supplied by the Coal Controllers' Office, which has been entrusted with the responsibility of collecting the data from block owners whose licences have been cancelled.

The blocks will be auctioned on the basis of the amount of money a bidder is willing to pay to the government for every tonne of coal produced. The highest bidder needs to pay 10% of the total NPV upfront to the government. Rest can be paid over the life of the block depending on the volume of coal the owner is expected to produce each year and the price it quoted for each tonne of coal at the auction.

The net present value will be arrived at by evaluating total revenue the owner will make from selling coal over 30 years, minus expenses, including on infrastructure and lifting the coal.

This value will be discounted with an estimated inflation rate for the next 30 years to arrive at the present value. The NPV will then be divided by the volume of coal that the block is expected to produce in its life time and a per-tonne net present value of coal will be arrived at. The floor price will be 90% of this value.

Source: Economic Times