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BW Businessworld

Fuelling A Debate

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There appears to be no resolution in the stand-off between the nation’s coal monopoly Coal India (CIL) and power producers on pricing the coal imported via CIL for upcoming power plants. Power producers are expected to sign the fuel supply agreement (FSA) before their memorandum of understanding with CIL expires on 31 December.  
Though the FSA does not specify the price of the imported coal, it does make CIL liable to pay penalties to power producers if its supplies are anywhere short of the 80 per cent commitment. Of this, only 65 per cent has to be from its own mines, and the balance 15 per cent can be imported. CIL proposes to do this on a cost-plus basis through the canalising agencies — Metals and Mineral Trading Corporation (MMTC) and the State Trading Corporation (STC).
The debate now is on the pricing of the imported coal. Power producers have to choose if they would rather import the coal directly, or have it routed via CIL, which may substantially hike their costs. But should they choose to import the coal directly, CIL will only be responsible for the promised 65 per cent from its own mines and, thus, will not be liable to pay a penalty on the remaining 15 per cent.
“Channelising (imported coal) through CIL will include CIL’s administrative cost, which may be incremental. CIL will not keep itself open to liabilities and will seek to keep (protect) its margins,” says Dipesh Dipu, partner at Jenissi Management Consultants.
20% Is the saving in costs to NTPC when it decided to import coal on its own

 Power company NTPC had faced the same dilemma, and now imports coal on its own after imports through CIL became unaffordable. And that “brought the cost down by 20 per cent”, says Arup Roy Choudhury, chairman and managing director of NTPC.
A power industry official, who did not want to be named, says, “power companies are keeping their options open... Producers will opt for direct imports to get the right quality at the right time and at a competitive price”.
Should CIL fail to fulfil its supply commitment, it will have to pay the firms a penalty (for example, 1.5 per cent for short-supply in the 80-65 per cent bracket, to 40 per cent for supplies below 50 per cent). 
The debate on FSA has been long drawn with issues such as trigger level and penalty clauses.

CIL has refused to entertain any more discussion on the price of imported coal, and sent the modified FSA to the Central Electricity Authority and power producers for their comments.  

(This story was published in Businessworld Issue Dated 29-10-2012)