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Policy & Procedure For Coal Block Allotment & Coal Linkage, Shri R V Shahi, Former Secretary, Ministry Of Power

Policy & Procedure For Coal Block Allotment & Coal Linkage

R. V. Shahi

The second "Monthly Round Table on Energy Issues", which is a regular feature organized by Infraline Energy and IDFC was held on 1st August 2007. The specific topic of discussion was Policy and Procedure for Coal Block Allotment and Coal Linkage. These Round Tables are convened and coordinated by me and the Member Energy Planning Commission has agreed to chair these proceedings. The format of the Round Table consisted of outlining the size of the problem particularly with reference to the 11th Five Year Plan requirements and also for advance preparation for 12th Five Year Plan, which was done by me, remarks and observation by the Member Energy Planning Commission followed by three detailed presentations - by Shri Rakesh Nath, Chairman Central Electricity Authority, Shri. S.K. Chowdhary Former chairman Coal India Ltd. and presently Executive President of India Coal Forum and Shri Pradeep Baijal, Former Chairman Telecom Regulatory Authority. Subsequently more than 70 participants had an hour of open discussion, comments, observations and suggestions and finally the Round Table deliberation was summed up by me by way of conclusions.

The issues that emerged by way of these presentations, comments and observations could be summarized as given below:

  • The power sector would continue to depend in the most predominant manner on Coal as the primary fuel.

  • Only factor which could hold up the targeted rate of economic growth of 9-10% could be power.

  • In the last few years legislative and policy changes in the power sector have led to overwhelming interest in development of new power projects. Power project developers, equity investors and lenders all are looking forward to their contribution toward an accelerated growth in capacity addition.

  • More than 49,000 MW of capacity is under construction. In the 11th Five Year Plan, including the carry over projects of the last year of 10th Five Year Plan, the likely capacity from captive group and expected capacity from merchant plant group, a total of 100, 000 MW appears to be a figure which everybody is trying to reach. More than 60% of this could be on coal.

  • As suggested by the T. L. Sankar Committee, it may be necessary to import about 30-35 millions tones of coal per year when the capacity peaks. However, for the balanced capacity the domestic coal industry must come to the required assistance of the power industry.

  • Barring a few years when stresses were experienced in supply of adequate quantity of coal, Indian Coal Industry, by and large, has been able to support power sector in a significant way. 11th Plan, however, because of the quality preparation which has been done, might present enormous pressure on the indigenous coal industry inspite of import which again is constrained by many other factors like capacity of ports and down the line road/railway, transportation bottle necks.

  • Planned growth rate in electricity sector, during the 11th plan is over 9% as per the Working Group of Power which I had the privileged of chairing. Considering the fuel and technology mix the projected growth rate in coal consumption should be of the order of 11-12%. The present growth of coal production has been 5-6%. Therefore, coal industry as a whole will have to accelerate the growth in production, even though we may assure a reasonable inflow of new capacities on efficient super critical technologies.

  • Obviously Coal India Subsidiaries and Singareni Coal Company alone may not be able to meet the requirement. Private investment in captive coal mine development is therefore essential.

In Nov 2006 Ministry of Power issued a guideline on the basis of which its recommendation to the Coal Ministry would be guided for allocation of coal blocks and coal linkages for power projects.

Para 10,11,12 of the Ministry of Power OM of 3rd November 2006 may be worth mentioning.

Para 10.- Keeping the above background in view, the following approach may be followed in respect of coal linkage and coal block allotment to power plants. This would supersede all the previous communications issued by the Ministry of Power in regard to coal linkage/ allotment of coal blocks:

  • Projects proposed to be executed by Central Public Sector Undertakings/ organizations and state public sector organizations (namely, generating companies, Electricity Boards etc) may be accorded the first priority. Within this group expansion projects will have higher priority in view of their shorter gestation.

  • Joint Venture projects, namely, joint venture between Central sector and State sector or between the two States, or Central/ State with private sector with substantial say in the matter of management of the Joint Venture by the public sector, may be accorded next priority.

  • IPP projects, which have been allowed tariff approval by the appropriate tariff commission under Section 62 of the Electricity Act, 2003.

  • Projects being developed on the basis of competitive bidding for tariff under Section 63 of the Electricity Act. This would include Ultra Mega Projects and projects being developed on similar lines by the distribution companies / State Electricity Boards or agencies authorized by them to be the Nodal Agency for development of such projects.

  • Expansion of existing IPP plants which are already supplying power to the grid as per tariff policy and captive power plants supplying at least 25% of their capacity to the grid.

  • Other captive power plants.

  • Merchant Power Plants.

    • Linkage to the plant upto a capacity of 1,000 MW; and

    • Captive coal block allotment for plants in the range of 500 - 1000 MW capacity.

  • Any other category not covered above.

Para 11. - While the inter-se priorities have been indicated above, to operationalize it and to see that project development process is smooth and speedy, it may be desirable that coal blocks are identified for captive mining for power plants, from among the coal blocks available, and are earmarked for allocation for different categories of projects mentioned in para 10 above.

Para 12. - Keeping in view the past experience where many of the allocated captive coal blocks to different industries did not get developed, it would be essential that certain normative criteria are laid down for eligibility for coal blocks allotment, particularly to IPPs and merchant plants. These criteria could relate to net worth of the company, their internal resource generation and annual turn over. Similarly, the agencies being allotted the coal blocks, may also be required to put in place bank guarantee of a reasonable amount which should be liable to be en-cashed if important milestones for development of coal mines are not achieved. The amount should be adequate enough to discourage agencies which apply for allocation which supply for allocation and are not serious enough for development of coal mines and power projects. The inter-mediate milestone may include not only in relation to development of coal mines, but also with reference to the power projects, such as award of EPC contracts, commencement of construction etc. Within six months, if satisfactory progress is not achieved in respect of financial closure and also in respect of EPC contracts/ contract packages, the allotment may be liable for cancellation. Encashment of bank guarantee would obviously be in addition to the cancellation of allotment of coal block itself.

  • Already based on the decision taken, during the middle of 2006, by the Energy Coordination Committee chaired by Hon'ble Prime Minister, 29 blocks of 8 billion tones have been allocated as captive coal blocks to NTPC, other public sector undertaking, State sector and Private sector.

Nos. GR (Million Tones) Power Potential (MW)
NTPC 6 5399 28000
Other PSUs 3 150 800
State Sector 9 1472 7500
Private Sector 8 955 5000
Total 29 7966 41300

Further 10 coal blocks of 6 billion tones reserves have also been identified for Center and State power utilities.

Nos GR (Billion Tones) Power Potential (MW)
A. Central Sector utilities through Govt.
Central Sector Utilities 4 1.49 6700
State Sector Utilities 6 4.59 24000
Sub total 10 6.08 30700

  • The initiative of the Government of India on Ultra Mega Projects and similar exercise by States have given lot of hope for getting power at highly competitive rates. 16 blocks with 6 billion tones of reserves have been identified for this category of projects.

Nos GR (Million Tones) Power Potential (MW)
B. Power producers to be identified through tariff based competitive bidding
Central Sector Utilities 9 3.46 12000
Others by States 7 2.55 9900
Sub Total 16 6.01 21900

  • Further 15 blocks with 3.6 billion tones of reserve have also been identified for private sector projects in the category of merchant plants, and captive plants (of the Steel, cement industry etc.) to be done through Screening Committee.

  • Thus aggregating all these three categories, 41 blocks with 15.7 billion tones of reserves have been identified for development by agencies other than Coal India and SCCL.

The Sankar committee has made elaborate recommendations on allocation of coal blocks. From the executive summary of the report, the following extract may be relevant:

  1. Proven coal reserves un-blocked as a result of a detailed exercise may be grouped into the following categories:

  1. All blocks with proven reserves that can support a production of 2.5 million tons per annum or more for 30 years should be earmarked for power production exclusively.

  2. Within the blocks earmarked for power generation attempt should be make to identify a few blocks that could support an annual coal production of 10 million tons or more for 30 years.

  3. Blocks that can support a production of 0.5 mt to 2.5 mt of coal annually for 30 years to be made available to any of the eligible end users.

  4. Small and isolated blocks reserved for lessees producing for Coal India under sub-leases or for captive and group captive needs.

A transparent mechanism for allotting the coal blocks so identified should be put in place. The following alternatives as the criteria for selection of the preferred applicant among several for the same block.

  1. A minimum net worth of Rs. 200 crore for being eligible for blocks in categories (i) (a) above. The minimum net worth requirement to rise by Rs. 100 crores for every whole multiple of the minimum mine capacity of 2.5 million tons proposed under these categories. A minimum net worth of Rs. 50 crore for blocks in category (i) (c) above rising in steps of Rs. 25 crore for each whole multiple of the minimum production potential of 0.5 million tons. And finally, a minimum net worth of Rs. 5-20 crores, depending on the size of the deposit, for blocks in category (i) (d) above.

  2. An undertaking to produce a minimum of 2.5 millions tons of coal by an agreed date before the end of the 11th Plan for blocks in category (i) (a) above, 5.0 million tons of coal for block in category (i) (b) above, and 0.5 to 1.0 million tons of coal for block in category (i) (c) above (depending upon the size of deposit). The minimum production target for blocks in category (i) (d) above to be specified individually.

  3. Undertaking to set up the full capacity of the power plant by the end of 12th Plan for blocks under category (i) (b) above. All other end use capacities to be realized in full by the end of the 11th Plan.

  4. An unconditional bank guarantee at the rate of Rs. 40 per ton of coal to be mined per annum. The bank guarantee to be only Rs.10 per ton of coal to be mined for blocks in category (i) (d) above.

  5. One half of the bank guarantee to be encashed on a pro rata basis if production falls below the guaranteed production by the end of the 11th of the 11th Plan. The remaining 50% of the bank guarantee to be encashed (on a pro rata basis) if the end use project not realized as proposed in the application. Bank guarantees to be released on a pro rata basis if the targets are met. In the event that the mine is never established, the full guarantee must be encashed and the assigned block must revert back to Government of India.

  6. As a contingent measure, in case the end- use industry does not materialize for any reason the allottee should then convert his status to that of a lessee who produces on behalf of CIL/SCCL. In case the allottee is unable to produce coal, as per the plan, the bank guarantee would be encashed as laid out in (e) above. Further, the Bank Guarantee for not putting up the end use project would be encashed in full.

  7. In case of multiple applicants for the same block, the Screening Committee should base its decision on a point system based on net worth and technical expertise / experience. In case of a tie, the speed of bringing a mine into production should be considered. As a last resort the level of guarantee offered above the minimum required could be used for selection among competing applicants.

On the issue of AUCTION, a lot of observations both from the panel and from among participants were made. Shri S. K. Chowdhary former chairman of coal India stated that auction would not be a practical approach, details of reserves are not known, it could lead to court litigations and therefore, any other transparent method may be more relevant but it should not be an auction.

Shri Pradeep Baijal former chairman TRAI was of the view that auction will not only lead to a high entry cost and therefore increase the cost of coal leading to increasing the cost of power, but also perhaps it may not be legally tenable. He was of the view that the system of auction in telecom failed. The objective should be that the tariff must come down. Auction price will be carrying the inefficiency of this sector. Infact auction in telecom and auction in FM radio met with disastrous consequences. As per the Act the only element which is available is the royalty and any other elements through auction or otherwise might be fraught with legal complexities.

During the open session some of the important observations and suggestions which emerged might be summarized as below:

  • Past experience of allotment of coal blocks to others has not been very successful. Therefore, extra ordinary care will have to be taken to see that the allottes perform.

  • There would be a number of requirements of infrastructure development such as siding, road connectively etc. which may not be possible to be done by each allotee. Coal India, as a large group, was able to do it. For others this might pose a problem and therefore need to be addressed.

  • System adopted for allotment of power projects under Ultra Mega Project scheme could also be considered in case of coal.

  • Period of allocation of linkage as also the capacity linked to 25 years is unrealistic because normally the life of power plant is more than 40 years.

  • If there is any thought on auction then the criterion should be based on be the price of coal and not any premium and upfront fee. Sankar Committee has also not suggested any such premium or fee.

  • Coal is highly under invested sector.

  • There is a need to put a Coal Regulator in place.

  • CMPDI alone is not adequate to handle the investigation.

  • Even though priorities have been laid, it would be essential that for each category such as public sector, state sector, private sector, merchant plants, certain reserves are identified under which allocations would be made.

Those who participated in the open session included Shr. U. Kumar, former CMD of Coal India Subsidiary, Shri R. B Mathur of ESSAR Group, Shri Ashok Verma, Shri Kocchar of Tata Power, Shri Raghuraman of CII, Shri M. P. Narain, former Coal India Chairman, Shri Padmanaban of Chennai Power Company etc.

Conclusions:

Based on the presentations and deliberations the following conclusions were finally highlighted:

  • The procedure and process has to be objective and transparent.

  • The criteria must be notified in advance.

  • Apart from networth and capability, preparedness for power project should be one of the important basis.

  • The capacity of the mine should be worked out on the basis of the power project life of 35-40 years.

  • Bidding for any premium and upfront fee would inevitably increase the cost of coal and therefore it must be avoided.

  • Government may consider to institutionalize a mechanism to support development of coal mines by way of coordinating the efforts for infrastructure namely road connectively, siding.

  • Reliable geological report is a must and CMPDI and other agencies need to assure this.

  • CMPDI alone may not be adequate and therefore more agencies need to be brought in.

  • Whether it is linkage or allocation it should be treated as a transition period strategy. In the long run (beyond 10 years) we should facilitate coal market development.

  • Coal Regulator should be put in place.

  • For different priority groups specified coal reserves may be identified. It was pointed out that the communication of November 2006 from Ministry of Power has already provided this.

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