Power companies ready to pay premium for coal mines due to growing uncertainty over the price of imported coal

Thanks to growing uncertainty over the price of imported coal, power project developers are ready to pay a premium to secure access to captive coal mines.

A case in point is the R112 per tonne coal price quoted by Lanco for developing a 2,000 mw power project in Chhattisgarh for Maha Tamil Collieries, which has been allocated a captive coal block to meet its fuel requirement.

Industry watchers are surprised by Lanco’s move and wondering if the project would be commercially viable. But a senior Lanco official maintained that the company would still make a decent profit. Some eight developers, including L&T, GVK, Jindal and GMR, had bid for the project.

Maha Tamil Collieries is a 77:23 joint venture between Tamil Nadu and Maharashtra. The captive mine, Gare Pelma Sector II, allocated to the JV is located in Chhattisgarh and has the production potential of 15 million tonne a year.

Lanco won the project by quoting a coal price of R112 a tonne. While Maharashtra will get its share of 3.45 million tonne of coal from the block, the balance will be used to fire the 2,000 mw power plant. According to an estimate, Lanco will have to make a total investment of R15,000 crore to develop the captive mine and set up the power plant. In return, it can sell800 mw from the plant in the free market.

Back-of the-envelope calculations suggest that if Lanco has to recover its cost, it must sell electricity at R5 a unit. But according to the data released by the Central Electricity Regulatory Commission (CERC), the average weighted price of electricity in the free market during 2010-11 was R3.44 a

unit in the Day Ahead market and R3.77 a unit in the Term Ahead market.

Lanco’s coal mining cost is estimated at R900 per tonne of coal. The developer will also have to pay to Maha Tamil for every tonne of coal produced from the block. Coal price will be revised annually in line with CERC’s coal price index.

Significantly, the central government is amending law to auction captive coal blocks to consumers instead of following the existing procedure of nomination for selection of developers. If the Maha Tamil experience is anything to go by, we can expect fierce bidding in future auction of captive coal blocks.