The Government is expecting that the system of reverse bidding, which it has introduced in the e-auction of coal blocks meant for the power sector, will lead to a windfall of Rs37,000 crore by way of tariff cut to end users. Sources involved in the process, told The Pioneer that in order to ensure that the benefits of power tariff cut gets passed on to the common consumer, amendments have been effected in the tender documents which the bidders are submitting for the e-auction of coal blocks.
As per the amendments, the existing power purchase agreements (PPAs) can be reopened and the tariff rates will be downwardly revised. Since the auction involved coal blocks which are already under production, the PPAs of these reserves had been signed between the original owners of the blocks with the respective state governments (where the blocks are located). Also these PPAs had been signed at a time when the blocks had been allotted to the previous owners.
The existing power tariffs are as per the terms and conditions of the old PPAs. Now, sources said, with these blocks freshly being auctioned, the bid documents which the new bidders were asked to submit, had been amended by the Coal Ministry. The new reduced power tariffs which will come into effect as a result of the reverse auction system, will be implemented through the amendments in the old PPAs. The existing PPAs will be reopened and tariffs will be downwardly revised.
Once the auction process gets over, the Power Ministry will have to set the ball rolling, as in other words, it will have to ensure that the existing PPAs are revised and the benefits of lower tariffs are passed on to the common man, sources privy to the development said.Under the reverse bidding system, Government sets the ceiling price which represents the coal cost of Coal India ltd (the amount the state-owned entity spends on extracting and processing coal), and bidders have to bid lower than this. The lowest bidder gets the mine. As private companies are expected to be more efficient than CIl and incur less coal cost, they are therefore required to bid lower than the ceiling price.
The Government after setting the ceiling price, invites the initial price offer (IPO) and only 50 per cent of the bidders who have bid the lowest, qualify. This fear of disqualification necessitates that the IPO is aggressive and bidders put in the best possible price. Based on their IPO, the best 50 per cent bidders are allowed to participate in the final round of auction and the lowest IPO is set as the new ceiling price. Therefore for example if the ceiling price is Rs1,000 and the lowest IPO opens at Rs600, then this Rs 600 will be the new ceiling price for final round of bidding.
In case the bids touch zero, meaning that the private producer is ready to pass on the benefit of coal extraction to power consumers. If two or more parties bid at zero, which is the lowest possible bid, then the auction will move to forward bidding.Under the forward bidding, the companies will be required to mention the price which they are willing to give to states.
Coal Secretary Anil Swarup had said last week that reverse auction for the power sector will result in benefits to the tune of Rs 37,050 crore to end-users by way of a cut in tariff, “This is also a huge amount. Because this is getting lost... most of the auctions have begun at zero...But what we are forgetting is that it comes from a ceiling price of a particular level and comes down to zero and this is the value that will get transferred to the tariffs,” he had said in a press conference.