Captive Power Projects Lost in Translation? - My views on captive coal block allocation for CPPs

The policy on allocation of captive coal blocks and rules framed for auctions leave the captive power projects in cold. While the rules permit captive coal block allocation for power, and refrain from distinguishing between an independent power project and a captive power project, the Auction by Competitive Bidding of Coal Mines Rules, 2012 have completely ignored the captive power projects, negating their prospects even in comparison to steel and cement sectors while these sectors may have no significant economic fundamentals different from those for justifying inclusion of captive power projects.

The independent power projects (IPPs) have traditionally been eligible for coal linkage from government owned companies and for captive coal blocks since the eligibility for captive coal block allocation was enhanced to include power projects in 1993. However, either for linkage or for captive power projects (CPPs), typically there was no distinction until the New Coal Distribution Policy came into being and reflected a realization that captive power producers used energy for manufacturing of products whose pricing were market driven and not regulated. Since then the policies and rules and regulations have been tightening on IPPs and on CPPs, but more so on CPPs that have been neglected altogether by the Auction by Competitive Bidding of Coal Mines Rules, 2012.

According to these Rules, coal blocks will be allocated to the States that would run tariff based competitive bidding to identify power project developer on lowest proposed electricity tariff. The power purchase agreements in these cases will be signed with the state owned distribution companies for the entire capacity, not allowing the projects either to sell power in the open market or to sell surplus coal to their own or any other projects. These rules have the objective of negating any profiteering on account of national resources. The allocation of coal blocks to the states and ultimately to the successful bidder on competitive bidding is likely to follow a relatively low reserve prices for coal blocks such that the electricity tariffs are affordable and do not escalate on account of government receiving higher upfront values for the coal blocks.

Case for steel and cement sector projects are different. The coal blocks to be allocated to them will be used for manufacturing of steel and cement that are sold in open markets and their prices are not regulated. The government therefore may not have any constraints in seeking the objective of revenue maximization while the steel and cement companies may seek to have supply security and greater control on supply source and the value chain in view of the uncertain supplies from CIL and coal accounting substantially for the final costs of manufacturing of steel and cement.

Captive power projects are neither here nor there. These projects will not be allowed to participate in the State run tariff based competitive bids that will ultimately be eligible for coal block allocation since the PPAs would essentially be signed with state distribution companies. The other group obviously is exclusive for steel and cement. Considering the business fundamentals, the CPPs are similar to the steel and cement sector projects as these projects generate electricity to be consumed for manufacturing of products such as lead, copper, zinc, aluminium, and several other products whose markets are mostly globally linked and are not regulated in India. These projects, therefore, have a business case for allocation of captive coal blocks no worse than steel or cement sectors. It may therefore be required of the Government to create a class within power sector for CPPs whose allocation method could and should resemble those for steel and cement sectors. In cases where the coal block may have the capacity to generate more power than the consumer may use, there could be a requirement to generate such power and sell to the distribution companies at competitive tariffs.

These are justifiable on the following two counts. One, India does have substantially large coal resource base. The Geological Survey of India (GSI) data provides that the coal resource base is more than 265 billion tonnes and a proven reserve base exceeds 110 billion tonnes. Even after discounting for unavailability of gross reserves in totality and then the geotechnical parameters for mine-ability, it can be concluded that the Indian domestic reserves can last for any foreseeable future. Hence, these should be made available to consumers at an appropriate price.  Second, the Indian manufacturing sector that competes globally with the Chinese and other manufacturing countries desperately needs competitive edge through cost controls and effective management of the entire supply chain of raw material sourcing to markets. Domestic availability of coal can be one such competitive edge in view of constraints of sourcing coal from international markets where volatilities, disruptions and other uncertainties have persisted. Indian policies have stated intent of encouraging manufacturing sector and the appropriate action on this front would include allocation of captive coal blocks for the purpose of captive power generation.    

Government of India needs to re-assess its position on CPPs and make appropriate amends in the recent policy statements, rules and regulations to allow CPPs to participate in captive coal block allocation.