CIL TO OPT FOR COAL LINKAGE AUCTION MODEL
Every coal consuming sector will be earmarked definite volumes of the fossil fuel which would then be offered only to companies in the segment through forward auction. The volume for each segment will be determined on the basis of deemed demand for the fossil fuel in the sector which is being worked out by SBI Caps. The mechanism would be implemented for sectors other than power to begin with.
“For example, if 5 million tonnes of coal is earmarked for sponge iron, all sponge iron makers would be allowed to bid for a portion of this volume on the basis of their coal requirement. The bidding process would be supplier-controlled ascending market clearing auction model which would fix the price at which Coal India will supply during the contracted period,“a senior coal sector official said.
Deciding on the right volume of demand is necessary because the price discovery auction will be based on the quantity of coal being offered. If it's larger than required for any sector, prices discovered will be lower than real market prices leading to losses for Coal India. If volumes offered are less than total demand, the prices discovered may turn out to be higher than real prices leading to tighter margins for the participating companies. In a bid to replace the age-old system of offering coal supply contract on nomination basis with an auctioned linked supply system the government has decided to adopt the market clearing auction model. This model of auctions simply offers a volume of coal to be sold and asks interested parties to bid for the whole or part of this coal volume at a definite price fixed by the seller. In case sum of total bids volumes by all bidders are more than the total volume being offered in the auction, the price of the coal offered would be increased by certain percentage. Following increased price of the coal, some bidders are expected to opt out of the bid process. This will result in bids for total volume falling by certain extent.
DECIDING ON THE RIGHT VOLUME OF DEMAND IS NECESSARY BECAUSE THE PRICE DISCOVERY AUCTION WILL BE BASED ON THE QUANTITY OF COAL BEING OFFERED