Coal news and updates

SBI Cap suggests methodology for auction of linkages

March 20: SBI Capital Markets Ltd, which was appointed by the Ministry of Coal to suggest ways for going ahead with the auction of linkages and letters of assurance (LoA) to a Inter-Ministerial Committee (IMC), has recommended that all such coal consumers should be asked to participate in the auctions, according to information available with ICMW.

The presentation made to the ministry on March 17 was opposed by the representative of steel and cement sectors.

In its presentation, SBI Capital said prices discovered in the e-auction of Schedule II Coal Mines are at significant differential compared to the ROM prices for CIL, which reflects a serious demand supply mismatch for domestic coal.

It said that “without doubt, the winning bidders will be at a substantial disadvantage compared to their competitors who are assured of coal supply from CIL courtesy, the FSA executed by them earlier.”

“While it can be argued that the bidders had bid for such prices taking into account this fact, it may be less than fair if future coal linkages are allotted to companies on CIL run- of- mine (ROM) price,” SBI Capital said.

It recommended that the power sector should continue with the current linkage prices while have transparent bid criteria so as to have tariff minimisation as a goal, but for the  non-regulated sector (cement, steel), an approach linked to economics of major end-user industries as per extant rule should be followed.

For the power sector, SBI Capital said, a rational pricing of coal linkages can be discovered through competitive bidding and pooled approach linked to GCV of coal rather than mine-specific auction of linkages can be adopted.

It also said that only capacity tied through existing/future Case 1 bids may be allowed to participate and priority be given to plants in operation or near operation, which have capacity tied through Case 1 bids and are without linkage or captive coal block.

As second priority, SBI said, linkages may be bid out along with ‘modified Case 1 bids’ (standalone/pooled) wherein developers would quote combination of variable and fixed charges.

It suggested two approaches for auction to power sector. Under the first, bidders may be asked to quote a fixed and variable levelised tariff and weight may be assigned to fixed and variable components of say 60:40 while selection may be based on the weighted score.

Under the second approach, SBI Capital suggested development of an index for the entire plant life and bidders may quote the first year’s tariff linked to the index.

SBI Capital, in its presentation, said that for the non-regulated sector only the non-regulated sectors should bid for linkages earmarked for that sector.

Bidders will have to bid above the CIL price for the relevant grade and since there may be multiple claimants for one particular link quantity, a weighted average cut-off matrix may be followed wherein each bidder gets the linkages at the cut-off price similar to tariff-based bidding followed in some solar projects and book-buildings in IPOs, it said.

It suggested that bids may be invited either for pre-assigned lot sizes or for the entire link quantity being offered and suggested four methods through which auction could be conducted.

SBI suggested four approaches for auction to non-regulated sector:

The first approach was similar to book-building IPOs under which a floor price is set on the basis of mine economics and for a particular link quantity. If bids are received for quantity greater than the link quantity, then the floor price shall be increased and auction stops when bids are received for exact quantity, ie, link quantity offered.

Under the second approach, bids can be invited for pre-assigned lot size and lots can be awarded on the basis of descending bids received.

Under the third approach, SBI Capital said, bids can be invited for pre-assigned lot size and lots can be awarded on the basis of weighted average cut-off matrix wherein each bidder gets the linkages at the weighted average price for the quantity bid.

The fourth approach for non-regulated sector suggests that bids can be invited for pre-assigned lot size and lots are awarded at the H1 price offer received and other bidders are asked to match the H1 price offer.