KOLKATA (miningweekly.com) - The Indian government is likely to use the domestic coal price as a benchmark to establish the net prevent value (NPV), or current value, of the coal blocks going on auction, based on future earning potential.

The floor price would be based on the NPV of each block and by benchmarking the blocks against the domestic coal price, making them more attractive to prospective bidders, since the local coal price was lower than that of imported dry fuel, an official in the Coal Ministry said.

The benchmark price would, in effect, be the price charged by major Coal India Limited to power and nonpower companies, since no other coal was commercially sold, he said.

Thermal power producers were charged less for their coal in an effort to protect electricity consumers by keeping power tariffs in check, while coal sold through e-auctions was usually 20% higher than coal sold directly to user industries.

However, the Coal Ministry official said that the higher-priced e-auction coal would not be considered when determining the NPV of the auction blocks, in order to keep a check on the floor price.

The NPV of the auction blocks would be calculated by evaluating the total revenue potential from a successful bidder from the sale of the coal produced over 30 years, and would exclude infrastructure and mining expenses. The value would be discounted by the projected inflation rate over 30 years to arrive at present value.

The NPV would then be divided by the volume of coal that the block was expected to produce during its lifetime and a per-tonne NPV would be derived. The floor price fixed for bids would be 90% of this value.

The highest bidder would need to pay 10% of the NPV up front and the balance would be payable by the investor over the life of the block on volume of coal produced each year and the price the bidder had quoted for each tonne of coal at the auctions.