Coal India may barely manage to supply the mandatory 65% of annual coal requirement of power projects this fiscal but could flounder in the next two years and invite a R880-crore penalty, says an internal assessment by the coal ministry.
The analysis, factoring in CIL’s production augmentation plans, comes in the wake of mandatory fuel supply agreements (FSAs) being finalised between the monopoly coal producer and power companies at the behest of the Prime Minister’s Office.
The ministry feels CIL can meet only 54% of coal required by power projects in 2013-14 and 63% in 2014-15, involving shortfalls of 19 million tonnes and 4 million tonnes, respectively. Going by the new formula to fix penalty, the company could end up paying about R800 crore (40% of coal price in short supply) and R80 crore (20% of coal price under short supply) in 2013-14 and 2014-15, respectively. The big difference in likely penalty amounts for the two years is because in 2013-14, the slippage would be higher, attracting higher rates of penalty. The penalty is based on the average price of R1,000 per tonne the power sector pays CIL.
“CIL will not be in a position to supply even 65% of coal in two of the five years in which it has to supply agreed quantities of coal under the directions of the PMO. Special efforts will be required to prevent CIL from paying the penalty for supplying lower quantities,” said a coal ministry official asking not to be named.
The PMO had given fresh directions to CIL after a meeting on June 22 to further revise terms and conditions of its contentious FSA. Under the revised norms, CIL will be required to pay much higher amounts in penalty in case of any shortfall in coal supplies, although in the first three years, it will have to supply only 65% of the coal requirement of power projects, as against 80% prescribed earlier.
The quantity of mandatory fuel supply will rise to 72% in the fourth year before reaching the 80% level in the fifth year of supplies.
CIL would have missed the target supplies in four out of five years if the 80% trigger level was maintained in the FSAs.
The company's board is likely to clear the proposed changes at its board meeting on July 10.
“The shortages could be met through imports if advance planning is done. But power projects should be ready to absorb higher prices of overseas coal and accordingly, necessary provisions should be inserted in FSAs,” said a CIL official. CIL has not imported coal so far but has indicated that they could ask other government agencies to meet its requirements in future.
“The proposal to reduce coal commitment from CIL is disastrous for power projects. Even at the 80% commitment level, the plant load factors of power projects were reaching up to 68% level. This will fall further if changes in FSA is implemented,” Association of Power Producers director general Ashok Khurana said. Meanwhile, the government is making all efforts to quickly step up CIL production. The PMO has directed easing of environment and forest clearance norms for 12 of the PSUs coal projects. Fast track clearance to these could enable achievement of 25% additional production by CIL. But the production benefit could reach only after five years, the normal time to bring a under developed mine under production.
India's coal production is growing at about 6% this year and this trend is likely to be maintained even though coal ministry hopes growth will be higher at 7.5%. Even at these levels, meeting the growing requirement of power projects would be difficult.
The analysis, factoring in CIL’s production augmentation plans, comes in the wake of mandatory fuel supply agreements (FSAs) being finalised between the monopoly coal producer and power companies at the behest of the Prime Minister’s Office.
The ministry feels CIL can meet only 54% of coal required by power projects in 2013-14 and 63% in 2014-15, involving shortfalls of 19 million tonnes and 4 million tonnes, respectively. Going by the new formula to fix penalty, the company could end up paying about R800 crore (40% of coal price in short supply) and R80 crore (20% of coal price under short supply) in 2013-14 and 2014-15, respectively. The big difference in likely penalty amounts for the two years is because in 2013-14, the slippage would be higher, attracting higher rates of penalty. The penalty is based on the average price of R1,000 per tonne the power sector pays CIL.
“CIL will not be in a position to supply even 65% of coal in two of the five years in which it has to supply agreed quantities of coal under the directions of the PMO. Special efforts will be required to prevent CIL from paying the penalty for supplying lower quantities,” said a coal ministry official asking not to be named.
The PMO had given fresh directions to CIL after a meeting on June 22 to further revise terms and conditions of its contentious FSA. Under the revised norms, CIL will be required to pay much higher amounts in penalty in case of any shortfall in coal supplies, although in the first three years, it will have to supply only 65% of the coal requirement of power projects, as against 80% prescribed earlier.
The quantity of mandatory fuel supply will rise to 72% in the fourth year before reaching the 80% level in the fifth year of supplies.
CIL would have missed the target supplies in four out of five years if the 80% trigger level was maintained in the FSAs.
The company's board is likely to clear the proposed changes at its board meeting on July 10.
“The shortages could be met through imports if advance planning is done. But power projects should be ready to absorb higher prices of overseas coal and accordingly, necessary provisions should be inserted in FSAs,” said a CIL official. CIL has not imported coal so far but has indicated that they could ask other government agencies to meet its requirements in future.
“The proposal to reduce coal commitment from CIL is disastrous for power projects. Even at the 80% commitment level, the plant load factors of power projects were reaching up to 68% level. This will fall further if changes in FSA is implemented,” Association of Power Producers director general Ashok Khurana said. Meanwhile, the government is making all efforts to quickly step up CIL production. The PMO has directed easing of environment and forest clearance norms for 12 of the PSUs coal projects. Fast track clearance to these could enable achievement of 25% additional production by CIL. But the production benefit could reach only after five years, the normal time to bring a under developed mine under production.
India's coal production is growing at about 6% this year and this trend is likely to be maintained even though coal ministry hopes growth will be higher at 7.5%. Even at these levels, meeting the growing requirement of power projects would be difficult.
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