Industry says consumers forced to sign MoU as miner fails to meet target.
The domestic power industry, currently bearing the brunt of a severe coal shortage, has lashed out at the state-owned coal producer Coal India Ltd (CIL) for violating the provisions of the New Coal Distribution Policy (NCDP).
In separate letters to Planning Commission member B K Chaturvedi and the coal ministry, industry body Association of Power Producers (APP) has accused CIL of violating the provisions of the policy by forcing consumers to sign memoranda of understanding (MoUs), which enable the miner to reduce supply obligation for new projects to 50 per cent of the commitment and supply at its discretion.
“This completely negates the objectives sought to be achieved by the ministry through NCDP, which only speaks of Fuel Supply Agreements (FSAs). Therefore, such a document (MoU) is apparently an instrument to circumvent the law or the policy of the state,” APP said.
Until the introduction of NCDP in October 2007, coal supplies were made on the basis of linkages which acted only as assurances of supply and not contractual obligation. NCDP sought to address this issue by mandating FSAs between the seller and the buyers.
While Coal India is expected to meet 100 per cent of the requirement of the power sector according to the FSAs, the miner has failed to meet its guaranteed supply owing to production constraints. The company has, therefore, been insisting on reducing the commitment level to 50 per cent.
New power projects have refused to sign FSAs as a result. Supplies to such projects are being made under MoUs.
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The point of contention is Clause 7 of the MoU document which states, “The quantum of supply of indigenous coal under the agreement shall be at the sole discretion of the seller, but not exceed 50 per cent of the Annual Contracted Quantity (ACG) in any case.”
Through the MoUs, CIL has also reduced the trigger level for paying compensation, in case of a default, to purchasers by half of what is provided in the FSAs. The trigger to pay compensation has been brought down to 25 per cent of the ACQ.
The coal ministry, the parent body of CIL, however, argues that the realities of shortages in production have made signing of these MoUs essential. “The basic assumption in MoUs is that currently we have a shortage and, thus, we can provide only a part of the commitment. Later when production resumes, supply will be increased. This is a completely interim arrangement. If consumers in a sector are not comfortable with MoUs, they can choose not to take coal from us,” said a senior ministry official. The ministry has already undertaken an exercise to review the provisions of NCDP to make amendments based on the constrained production and availability of coal.
While coal supply has grown by four per cent in the last five years, demand for the fuel rose 7.5 per cent during the same period. Coal shortage in India currently stands at around 80 MT against an annual demand of over 600 MT.
The shortage is set to jump to over 200 MT by the end of the 12th Plan period in 2017. The shortage has led to stranded power capacity of 40,000 Mw currently. While the supply target by CIL for the power sector during the current fiscal stood at 382 MT, the company has reduced the target to 343 MT.