Tap Off, Pressure On

The confusion in the coal and power sectors continues with the tussle over signing fuel supply agreements (FSA) between Coal India (CIL) and power producers showing no signs of coming to an end. 
 

In April, the government ordered CIL to sign FSAs guaranteeing 80 per cent of the agreed supply of coal for 20,000 MW of power capacity, after the Maharatna firm missed its 31 March deadline. What followed was a prolonged debate over conditions in the FSAs — including the low penalty of 0.01 per cent on CIL should it fail to keep its end of the bargain. 
 

Power producers objected to this low penalty, among other clauses, and refused to sign the FSAs, even approaching the power ministry. CIL had to finally knuckle down and agreed to pay a penalty of up to 40 per cent for supplies under 50 per cent of the annual contract value (ACV). But only 33 power producers have signed the FSAs, while over 70 (including NTPC) are still holding out. S. Narsing Rao, CMD of CIL, while admitting that the power producers had made representations to the power ministry, said they were over “minor” issues.
 

What is interesting, though, is that while the tug of war is on, CIL continues to supply coal to these power producers; it is supplying around 49 million tonnes (mt) to power producers (commissioned since 2009) based on memorandums of understanding (MoU). 

NTPC currently gets coal for its 4,300 MW generating capacity (commissioned between 2009 and 2011) based on a 2009 MoU, which has been periodically reviewed and extended. “We are hopeful of getting more coal for these units by the time the FSA is signed,” said an NTPC official. The power ministry didn’t reply to BW’s queries.
 

But CIL is now mulling not supplying coal based on just MoUs, thus, forcing power producers to sign the FSAs. “If they continue to get coal through MoUs and not sign FSAs, they will be the losers since there is no obligation on our part to supply coal,” says Rao. The MoUs do not have a penalty clause. The CIL board is serious about converting the MoUs to FSAs; it is expected to take a final ‘this far and no further’ decision on 12 December.
 

Rao says CIL is not in a position to continue supplies under the conditions of the old FSAs because of the shortage of coal vis-à-vis the demand. “Despite CIL expressing its inability to supply coal, the Letters of Assurance have been issued by the government,” he says. But this shortage isn’t because CIL doesn’t have enough coal resources. Evacuation is the fundamental issue. 
 

To address the problem, the company, under its subsidiary Mahanadi Coalfields, is looking to set up a 1,600 MW power project in Orissa. “The logic is to utilise coal from mines where they are unable to evacuate coal,” says Rao, adding that the proposed project will not interfere with CIL’s responsibilities towards other power producers since the Mahanadi plant will require just 8 million tonnes of coal per annum. 
 

At present, CIL is supplying 39 mt as per the terms of 33 new FSAs and 306 mt according to old FSAs. Production has grown by 6.9 per cent compared to last year, while offtake has increased by 8.1 per cent.

(This story was published in Businessworld Issue Dated 17-12-2012)