SECTOR UPDATE: COAL BLOCK AUCTION :: Kotak Sec

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SECTOR UPDATE: COAL BLOCK AUCTION
The first phase of auctions has been divided into three tranches. The coal
auction process for the first tranche kicks off with the auction/allocation of
42 mines which are operational. Out of these, 24 blocks are set aside for
first tranche of auction and the remaining 17 blocks would be allocated to
state owned units.
While the coal block auctions is expected to bring transparency in the
allocation of resources, the current auction of coal blocks would only
partially address the problem of coal supplies to the power sector as the
demand outstrips the supply.
The coal blocks auctions, in non-regulated sector would see huge demand
from the participants like steel, cement and from the non-ferrous industry
(aluminium).
Coal blocks to be auctioned in three tranches
The first phase of auctions has been divided into three tranches and the first tranche
kicks off with the auction/allocation of 42 blocks which are operational. Out of
these, 24 blocks are set aside for first tranche of auction and the remaining 17
blocks would be allocated to state owned units.
The entire process of selection and transfer of first tranche of coal mines to the successful
bidders would be completed by Mar 31 2015.
The second tranche of auction/allocation of 32 coal blocks would start after 7-10
days from the commencement of auction of first tranche of coal blocks.
Thereafter, the third tranche of auction/allocation of 27 coal blocks would start
within the next 10 days.
The government expects to complete the transfer of tranche II and tranche III mines
to the successful bidders by June 2015.
In the second phase, the government would take up the auction of the balance 103
blocks. Thus, in all 204 blocks would be awarded by the end March 2016.
The 204 coal blocks to be auctioned/allocated have a capacity of 380-400 mn
tonnes. The government is working on raising the Coal India Ltd (CIL) production to
~ 1 bn tonnes from current level of ~ 500 mn tonnes by 2020. Thus, together with
output of captive mines, the government's target is to raise coal output to 1.3-1.4 bn
tonnes by 2020.
Bidding Process: For Regulated sectors ( Power)
The approach paper aims at power tariff rationalisation by adopting reverse bidding
for power sector wherein the lowest bidder wins. Bidders will have to quote the price
bid below the ceiling price. The ceiling price would be fixed at run-of-mine price of
equivalent grade as specified by CIL for the power sector. In addition to this, a fixed
reserve price of INR100/tonne will be payable based on the actual production. Royalty
would be paid in addition on the CIL notified price. Thus, totally, the captive
miner would incur the reserve price, mining cost (based on bid price) and royalty
Bidding process designed to ensure that benefit of lower coal
cost is passed on to power consumers
 For generation capacity having cost plus PPAs - CERC/SERCs will allow bid
price of coal to be treated as being equivalent to Run of Mine (RoM) cost of coal
together with applicable levies provided that it shall not lead to higher energy
charge throughout the tenure of PPAs. Thus, in cost-plus PPAs, there would be
no gains if Run of Mine (RoM) cost of coal is lower than bid price as actual mining
cost has to be passed through to the consumer.

LINK
http://www.kotaksecurities.com/pdf/dmb/MorningInsight06012015av.pdf