India To Impose Tariff Restrictions On Captive Power Produced From Coal Mines Earmarked For Auction

NEW DELHI -- In what could mitigate the likely inflationary impact of India’s upcoming coal-field auctions, the Indian government on Wednesday said that it would impose tariff restrictions on the power that would be produced from captive coal mines it plans to auction off in the first quarter of 2015.

The power produced from such mines is for the companies’ own use and firms are allowed to pass the entire cost of power to the end customer. Because, historically, Indian companies were allowed to acquire a coal mine at no cost to produce captive power, it’s now a matter of concern that companies expected to bid for a coal mine would pass on the excess cost to their consumers. Having a tariff cap in place would therefore mean that power costs would not add substantially to the cost of production of commodities that are produced by those who win these coalfields in the auction.

India’s Coal Secretary Anil Swarup said on Monday that while no mechanism on imposing such tariff restrictions was in place yet, the government would devise one by the third week of December, when it plans to roll out the auction process for 74 of the 204 coalfields that will be given to power, steel and cement producers. The remaining 130 coalfields would be auctioned off later. Of the 74 coalfields, 42 are already in use.

Swarup said that the auction was “not a revenue maximization exercise” and that the idea was not to burden the end consumer with increased power costs. He further said that imposing tariff curbs would also ensure that companies would refrain from bidding aggressively, as had happened when the government auctioned third-generation telecom spectrum in 2012.

Dipesh Dipu, a coal and power analyst and partner at Jenissi Management Consultants, said that tariff caps could have a flip side, where several companies could bid similar amounts for the coal fields and the government would find it tough to choose from the bidders.

India plans to reallocate 204 coalfields, which had been taken back by its Supreme Court in September, after it declared their earlier allocations illegal. These mines had been given away at no cost, between 1993 and 2010, on a first-come-first-served basis. To be sure, some of the coalfields are likely to be given away to a few government-owned companies without an auction.

Swarup said that the government plans to issue the first set of letters of allotment by March 16. He added that no company, state-owned or private, will be allowed to monopolize the bidding process and garner more than a set number of coalfields.

On Monday, the Indian government also announced draft rules to determine the auction process. The government plans to introduce legislation on the auction process in parliament, which begins its next session on Nov. 24. This legislation will effectively ratify an executive order that the government had issued last month.