The ongoing coal block auctions have seen aggressive bids for operational mines. The objective behind aggressive power sector bids is to achieve fuel security and retain mines, while the benchmark for non-power sector bids seem to be landed cost of imported coal costs.
Shankar K of Edelweiss Securities says he was expecting the bidding to be aggressive for the power sector especially since there is a huge mismatch between demand and supply. Also, within power, different developers have different problems, and the assumption being if a company manages to secure a coal mine, perhaps losses can be lowered or are chances of signing a PPA higher after winning a coal mine. All these provided added impetus, resulting in the aggressive bidding, he says.
He believes Coal India may face some issues in ramping up its production.
According to him, the company’s ability to sell merchant power will help hedge some losses. He says, at the moment, 20 GW capacity does not have tied-up fuel source.
Below is the verbatim transcript of Shankar K's interview with Ekta Batra & Sonia Shenoy on CNBC-TV18.
Ekta: How you have thought the bidding for coal auctions have panned out till now and were you expecting it to be as aggressive as we have seen?
A: We anticipated the bidding to be aggressive especially the first round. The broad elements being that the demand especially for the power sector, the demand vis-à-vis the supply of coal when you see it from a power sector perspective there is a huge mismatch. So where there is significant high demand and the kind of supply that is going to come in from these kind of auctions is very limited. There is some amount of an uncertainty over the ramp up of Coal India coal and over what time period and how much quantity it is likely to come up.
So this is in the outer perspective where one of the fundamental reason why it will be. The second is if you look within the power space there are a whole lot of other factors, different developers are into different kind of problems so there are already with a stressed balance sheet. Some of them are incurring cash losses also. So call over there would have been if I can secure some kind of coal mine what is a potential benefits that they could accrue on a relative basis. Can I start lowering my losses or can I start getting into profit bill situation.
The other angle could also be like with some amount of PPA likely to get signed and if I secure some kind of coal mines I will be slightly in a better position to sign some of these PPAs. Given the choice and recent clarification that even if you can start selling on some bit on merchant and the cost of the coal for that will not be so significant that also provides some kind of added impetus. Having said all of this there are others in the fringes, there have been a couple of developments which is beyond the coal mines that has already happened which a developer will surely have been taking cognizant of it - something like the 5/25 scheme and all of that. If you see it from a collectively perspective different developers are in different situation so a combination of these factors would have helped them in taking these kinds of decisions.
Sonia: You were talking about the uncertainty of the ramp up in the Coal India’s production but that was a concern that was addressed by the coal secretary recently where he told us that the Coal India production would cross 500 million tonne this year and he is expecting it to cross 1 billion over the next five years. How confident would you be of Coal India meeting this production target?
A: What I actually meant is because most of the power plants if you notice they are already up in running. So it is actually on the ground and they are either not working optimally and result in there could be some kind of a less than optimal return so whether it is losses or lower returns. Ramp up of Coal India is, it could happen but like you rightly said - it is over a period of 5 years.
So over the next two years, the cash losses if somebody would have to underwrite that could have been significant and obviously varies from developer to developer. So that is something which is if you are already with a stretched balance sheet I doubt how many people or how many developers would be in a position to look into something of that sort. That is what I was trying to address. So, securing something in the short to medium-term may be the net present value could have been slightly better in terms of your relative position.
Ekta: How would you explain the financial viability of CESC going forward considering that their bid for the Sarshatali coal block was assumed to be extremely aggressive?
A: Once again in the CESC case you should look at the relative perspective that if they did not get this kind of coal or retain this coal the alternative would have been to source imported coal. You are aware even after these suppressed prices the delivered cost of imported coal to any of the power plants are close to as good as double the current levels. So they were working around the objective of either you do not run that plant or use the imported coal and tariff goes significantly higher where you might be out of the merit order dispatch and it still becomes a difficult situation for the regulated to pass through.
Having said that they also have this option about the merchant and so if they try and mitigate some of the losses by quoting this kind of a bid then and lastly because there is a fungibility agreement also. If you have another power plant where you can use this coal mine they have a Dhariwal power project so they might be trying to look at that project as well. So all in all they have taken a kind of a calculated stance of trying to mitigate the risk and offset the loss that they could have potentially got after putting this kind of a bid.
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