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Can any one explain how reverse auction works?How can govt ensure maximum revenue from the auction if the lowest bidder wins the bidding.Why govt is going for this instead of forward auction? I went through wiki but couldn't understand its relevance in allocation of scare goods.
The govt fixes a base cost (which is the cost of production of Coal India). All the companies have to bid lower than this cost. So whoever bids for the lowest cost wins the auction. But since the bids are ending up at zero due to high competition, there is also a process of forward bidding.
In forward bidding, the companies bid for the amount of money they are prepared give to government for the coal block. Here, the highest bidder wins..
reverse auction is only for power producers . this will lower fuel cost and reduce power cost for consumers. for cement and steel it will be normal forward auction process
As already clarified reverse auction is for power producers.Under the reverse bidding method a two stage bidding takes place. .
In the first stage, power producers have to bid below the ceiling price.The lowest technically qualified bid becomes the floor price for the next stage and the gap between ceiling and floor price has to reflect through lower power tariffs — a benefit that goes to the states that consumer power. The bidders then have to start a forward auction based on the floor price fixed in the first stage(in which case bids are above floor price), whose proceeds will go to the producing state. Hence both consumers and producers are benefitted. Hope ur query is addressed @rahul1314
dekho bhai.. reverse bidding is done when the government has a stake in the price of the end product.. If in simple biding, prices of coal blocks go sky high, power would become costlier to the general junta.. Hence not a good situation.. Hence, 4 recent UMPPs got allocations based on reverse bidding, in which they bid for lowest power price.. kitini sasti bijli bechenge.. UMPPS had quoted something like Rs. 1.8 to Rs. 2.4 per unit of electricity.. In this case, the benefit of auction directly goes to the consumers..
But now the situation is different.. These are allocations for already in use blocks and for already running plants.. These plants have power purchasing agreements so they cannot change their price.. so reverse bidding cannot occur on the lowest electricity price.. So now they have changed it to lowest cost of mining the coal, keeping coal India's cost as ceiling.. Obviously, the private companies would exploit workers to achieve this.. They do not follow the government norms and employ lesser labour than required under labour laws and make them work for 12 hours a day..
What I am not getting it how is lowest cost getting transferred to the consumer in this case? This would only make power companies make windfall gains..
Here quoting an example of Reverse Auction from today's Hindu which shows how the benefit is passed to the consumer. Remember as already pointed out this reverse bidding is for coal blocks already used/ in use. At the second stage of forward bidding the revenue earned ll go to the states. So, both the consumer and the states ll benefit.
"In the reverse auction, the government sets a ceiling price that is representative of production cost of Coal India. The private sector companies, which are considered more efficient, are expected to bid at lower price. For example, if the ceiling price is Rs.1,000 and the bidder bids Rs.800, then the benefit of Rs.200 is directly passed on to consumers. This would mean if the power is sold at Rs.3.50, out of which Re.1 is cost coal and the same will become 80 paise because of pass through benefit of Rs.200. Thus, the new price of power will be Rs.3.30 a unit. In case the bids touch zero, meaning that the private producer is ready to pass on the benefit of coal extraction to power consumers, there would be a forward bidding. Under the forward bidding, the companies will be required to mention the price which they are willing to give to States."
@Connecting_the_Dots good! Earlier I thought that prices are fixed by PPAs.. but they are not.. they can change depending upon the fuel cost.. One questions remain though of what about the companies that sell in open market.. There prices are not being transferred..
Not very sure.. can't find an appropriate link for this-
I think the coal blocks which are being auctioned are captive coal blocks and the coal from these cannot be sold in the open market. Over 200 coal blocks licences were cancelled last year by the Supreme Court and all of these were captive coal blocks.
Reverse bidding means that bidding is done by seller,not bybuyer as in regular bidding. In regular bidding, buyers bid for aparticular object and highest bidder gets that item like in IPL auction, Modi's recent suit auction. Reverse bidding , buyer raises arequest for an item and list out the specifications /standards required. Various sellers putup their price and the lowest bidder gets the tender. e.g. Suppose I am acorporate executive and I need 50 chairs for conference hall. So I will raise arequest on mu company's website regarding quantity,spec like revolving chair, push back feature, 1 year replacement guarantee and will also send proposal to the potential sellers. Now seller A quotes price Rs10,000. Seller B quotes 9500. Seller C quotes 10,250. Seller D quotes 9450. So I will place an order on seller D.
This process is only successful when there are large no. Of sellers. If sellers are low, then it is not feasible due to oglipoly of sellers. For e.g. if I raise a request for fifth generation fighter plane. Then, probably the sellers like rafale,Boeing, Lockin Martin will make a nexus and will not lower prices.
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Comments
The govt fixes a base cost (which is the cost of production of Coal India). All the companies have to bid lower than this cost. So whoever bids for the lowest cost wins the auction. But since the bids are ending up at zero due to high competition, there is also a process of forward bidding.
In forward bidding, the companies bid for the amount of money they are prepared give to government for the coal block. Here, the highest bidder wins..
check this
https://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0CB0QFjAA&url=http://economictimes.indiatimes.com/slideshows/nation-world/et-in-the-classroom-9-facts-you-should-know-about-the-coal-auction/can-the-initial-result-of-the-e-auction-strengthen-the-governments-cases-in-court/slideshow/46257860.cms&ei=jG3oVMOLLtK9uATx4IDoCw&usg=AFQjCNHT7AGqbUJICWpGnFJKfPZxSaE6-w&sig2=-78aQRdhsb9qUZ7AyJtaxQ&bvm=bv.86475890,d.c2E
In the first stage, power producers have to bid below the ceiling price.The lowest technically qualified bid becomes the floor price for the next stage and the gap between ceiling and floor price has to reflect through lower power tariffs — a benefit that goes to the states that consumer power. The bidders then have to start a forward auction based on the floor price fixed in the first stage(in which case bids are above floor price), whose proceeds will go to the producing state. Hence both consumers and producers are benefitted.
Hope ur query is addressed @rahul1314
But now the situation is different.. These are allocations for already in use blocks and for already running plants.. These plants have power purchasing agreements so they cannot change their price.. so reverse bidding cannot occur on the lowest electricity price.. So now they have changed it to lowest cost of mining the coal, keeping coal India's cost as ceiling.. Obviously, the private companies would exploit workers to achieve this.. They do not follow the government norms and employ lesser labour than required under labour laws and make them work for 12 hours a day..
What I am not getting it how is lowest cost getting transferred to the consumer in this case? This would only make power companies make windfall gains..
Here quoting an example of Reverse Auction from today's Hindu which shows how the benefit is passed to the consumer. Remember as already pointed out this reverse bidding is for coal blocks already used/ in use. At the second stage of forward bidding the revenue earned ll go to the states. So, both the consumer and the states ll benefit.
"In the reverse auction, the government sets a ceiling price that is representative of production cost of Coal India. The private sector companies, which are considered more efficient, are expected to bid at lower price. For example, if the ceiling price is Rs.1,000 and the bidder bids Rs.800, then the benefit of Rs.200 is directly passed on to consumers. This would mean if the power is sold at Rs.3.50, out of which Re.1 is cost coal and the same will become 80 paise because of pass through benefit of Rs.200. Thus, the new price of power will be Rs.3.30 a unit. In case the bids touch zero, meaning that the private producer is ready to pass on the benefit of coal extraction to power consumers, there would be a forward bidding. Under the forward bidding, the companies will be required to mention the price which they are willing to give to States."
Full Article -
http://www.thehindu.com/todays-paper/tp-business/coal-auction-to-benefit-power-consumers-swarup/article6918187.ece
good! Earlier I thought that prices are fixed by PPAs.. but they are not.. they can change depending upon the fuel cost.. One questions remain though of what about the companies that sell in open market.. There prices are not being transferred..
Not very sure.. can't find an appropriate link for this-
I think the coal blocks which are being auctioned are captive coal blocks and the coal from these cannot be sold in the open market. Over 200 coal blocks licences were cancelled last year by the Supreme Court and all of these were captive coal blocks.
Reverse bidding , buyer raises arequest for an item and list out the specifications /standards required. Various sellers putup their price and the lowest bidder gets the tender.
e.g. Suppose I am acorporate executive and I need 50 chairs for conference hall. So I will raise arequest on mu company's website regarding quantity,spec like revolving chair, push back feature, 1 year replacement guarantee and will also send proposal to the potential sellers. Now seller A quotes price Rs10,000. Seller B quotes 9500. Seller C quotes 10,250. Seller D quotes 9450.
So I will place an order on seller D.
This process is only successful when there are large no. Of sellers. If sellers are low, then it is not feasible due to oglipoly of sellers. For e.g. if I raise a request for fifth generation fighter plane. Then, probably the sellers like rafale,Boeing, Lockin Martin will make a nexus and will not lower prices.