Power sector companies on Wednesday won their long-drawn battle over coal shortages with Coal India Ltd (CIL), the country’s near monopoly coal producer.
Taking a tough stand on the unprecedented dip in fuel availability, Prime Minister Manmohan Singh directed the state-owned miner to meet the full supply commitments earlier made to projects run by power companies.
The diktat would help bring up to 50,000 Mw of generation capacity on stream by putting to rest doubts over their economic viability. But, it would also spell further problems for CIL, struggling to emerge from a historic drop in output.
According to the decision by the Prime Minister’s Office (PMO), CIL will have to sign supply agreements with all power plants that will get commissioned over the next three years ending March 2015. The company has been asked to sign agreements for supply within a month for plants commissioned up to December 31.
“The agreements will be signed for the full quantity of coal mentioned in the Letters of Assurance (LoAs) for a period of 20 years with a trigger level of 80 per cent for levy of disincentive and 90 per cent for levy of incentive,” the PMO said.
| POWER STOCKS REAP GAINS The market gave power companies the thumbs up after the PMO move | ||
| Company | Price (Rs) | %* chg |
| Adani Power | 79 | 14 |
| Indiabulls Power | 16 | 19 |
| JSW Energy | 67 | 7 |
| Reliance Power | 123 | 13 |
| Tata Power Co | 110 | 6 |
| Torrent Power | 235 | 9 |
| Jaiprakash Associates | 86 | 8 |
| Larsen & Toubro | 1,455 | 5 |
| Bharat Heavy Electricals | 277 | 5 |
| GVK Power & Infrastructure | 19 | 6 |
| BGR Energy Systems | 295 | 8 |
| PTC India | 62 | 9 |
| *From previous day’s close Source: Stock exchanges | ||
To add to the problems of CIL and the coal ministry, the miner has been asked to compulsorily meet the domestic shortfall even if it means tapping overseas options, a move both have been opposing. “In case of any shortfall in fulfilling its commitment under the agreements from its own production, CIL will arrange for supply through imports or through arrangement with state or Central PSUs who have been allotted coal blocks,” the PMO said.
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The decision was taken after a meeting of the Committee of Secretaries (CoS) headed by the PM’s principal secretary, Pulok Chatterjee, on February 1 weighed supply options to resolve the coal crisis. The CoS was set up after an 18-member delegation comprising heads of the country’s most powerful corporate groups knocked on the doors of the PM on January 18. The group included Tata Power chairman Ratan Tata, Lanco Infratech chairman
L Madhusudan Rao, Reliance Power chairman Anil Ambani and Naveen Jindal, a Congress member of Parliament and chairman of Jindal Power Ltd.
Usually, Coal India first signs LoAs with consumers, which get converted to fuel supply agreements (FSAs) after the consumer meets certain project development obligations within a time frame. The LoAs specify the terms and conditions of supply on the basis of a mutually agreed variation in the annual contracted quantity (ACQ). Historically, LoAs have been signed by CIL at a trigger level of 90 per cent. That means, CIL would face a penalty for a shortfall below 90 per cent and be incentivised for supply in excess of 90 per cent.
However, the world’s largest coal miner has, of late, started insisting on signing FSAs at only 50 per cent of the ACQ, fearing a penalty, because of a severe dip in production. Only three FSAs have been signed by CIL since March 2009 as delayed environment clearances took a toll on production.
The domestic power industry welcomed the PM’s intervention, saying it would remove uncertainties regarding the tenure of FSAs. “The signing of FSAs for full quantity, with a trigger level of 80 per cent and tenure of 20 years, will give confidence to bankers, who were reluctant to disburse funds to projects under construction for want of credible FSAs,” said Ashok Khurana, director general of the Association of Power Producers.
CIL’s output remained flat at 431 million tonnes the last financial year.
The company’s share price on the Bombay Stock Exchange on Wednesday closed at Rs 339.4, up 1.4 per cent from the previous close.