CIL board okays fuel supply agreements

But, to dismay of power producers, offers only limited self-penalty for not committing at least 80% of promised supply

Abiding by the Presidential directive, the board of directors of government-owned Coal India Ltd (CIL) has decided to send draft fuel supply agreements (FSAs) to power companies before April 20, though with a negligible penalty clause if it is unable after three years to meet an 80 per cent supply commitment.

The board has decided on a penalty of 0.01 per cent of the value of shortfall, if the firm fails to deliver 80 per cent of the committed coal. It will also go soft on the earlier decision on not to import or enter into the business of imports and may chart an import policy.

“We will be signing the FSAs within the time limit before April 20 — that is by 15 days of the issue of the Presidential directive. Power companies with long-term power purchase agreements will have to come forward now,” said acting chairman and managing director Zohra Chatterji.

Power producers say keeping such a low penalty defies the Presidential directive on assured supply. "The low quantum of penalty, and the fact that it will come into force only after three years, nullifies the concept of assured supply. This is a reversal to the earlier regime of supply-at-will by Coal India," said Ashok Khurana, director-general of the Association of Power Producers.

According to a senior board member, the independent directors on the board were not in favour of any penalty clause.

Taking a U-turn on her earlier stance on imports, Chatterji said, “Imports would have to be decided upon at a later stage. Import is one way of meeting the shortfall and we will have to discuss the whole import policy for CIL separately.”

Sources said the company would require at least 70-80 million tonnes of additional coal if one went by the FSAs. “For the first two years, we are confident of meeting the target required by the FSAs. But in the third and fourth year, the demand would be high if the power plants are in place. Then we must look for imports, if at all CIL has to meet the target,” said a senior CIL executive. The firm is tipped to sign FSAs with at least 50 companies. Sources confirmed CIL may keep e-auction coal volumes stagnant for some time, so that the percentage of such coal dipped from the current 10 per cent to seven per cent by 2015.

Chatterji said power companies will have to respond to the draft FSAs by providing the documents they’d signed for long-term power purchase agreements. The issue started picking up after an 18-member delegation of the country’s most powerful companies in the power sector – including Tata Sons chairman Ratan Tata and Anil Dhirubhai Ambani Group chairman Anil Ambani – had flagged concerns over constrained supply in a meeting with Prime Minister Manmohan Singh. Singh had later asked CIL to supply coal at 80 per cent commitment.

When the CIL board refused to abide by the PMO order, following pressure from independent directors, the government had to issue a Presidential directive. According to sources, long-term PPAs for seven years are already in place with some power firms. This year, coal supply to the power sector is expected to increase from 382 mt to 406 mt.

"The lower penalty set by the Coal India board in on Monday's meeting is justified. This is because the company in working in an environment where its production in future would be heavily dependent on factors beyond its control. These factors include timely clearances, availability of sufficient railway rakes and unforeseen natural conditions like heavy rains," said a former Coal India chairman, who did not want to be named.