Forced by a Presidential directive, state-controlled Coal India Ltd (CIL) today initiated the process of signing fuel supply agreements (FSAs) with power companies. It issued model FSA documents to its subsidiary companies, for signing with electricity generators.
The move would break a three-year hiatus on coal supply and help raise fuel availability for power plants with a combined 28,000 Mw capacity. It could, however, impact CIL’s financial health.
To meet the demand, CIL has also kept clauses for import in the document, a change in its earlier stance. Power companies poised to gain from the increased fuel supply include Reliance Power, Tata Power, Vedanta subsidiary Sterlite and NTPC.
No new FSA has been signed between CIL and power companies since March 2009, as the miner suffered from a decline in production due to delayed clearances on various projects. Coal India has since been supplying only half the requirement for new power plants, on the basis of memoranda of understanding that are not legally enforceable.
Irked at the reduced supply, a high-level delegation comprising heads of over a dozen power companies – including Tata Sons chairman Ratan Tata and Anil Dhirubhai Ambani Group chairman Anil Ambani – had met the PM in February. The PM had then asked CIL to sign FSAs for power plants commissioned between March 2009 and December 2011 by March 2012.
“Coal India has sent the finally approved FSA document to its seven subsidiaries, which will now sign FSAs with power companies,” Union coal secretary Alok Perti told reporters. CIL, from the FSAs, commits itself to supplying at least 80 per cent of the stated quantity. CIL had been insisting on signing FSAs at only a 50 per cent commitment, but had to give way after the Union government, owning 90 per cent of its equity, issued a directive forcing the minimum 80 per cent supply clause.
“In case we are unable to supply the scheduled quantity, we have the option to supply the remaining quantity through import, to be delivered at the unloading port at cost-plus pricing, including our service charges,” a top CIL executive said.
However, the FSA draft also says if the quantity offered for imported coal is not accepted by the purchaser, no penalty shall be applicable for the shortfall. The company’s board had set a minor penalty clause of 0.01 per cent of the value of shortfall if the company failed to meet the 80 per cent commitment mark.
The Presidential decree had directed CIL to abide by the earlier instruction of the Prime Minister’s Office and sign FSAs in 15 days with companies that had set up plants by the end of 2011. “We have done our part; now the onus is upon the power companies. The subsidiaries will forward the draft to power companies and FSAs will be signed as soon as possible,” the CIL official said. The agreements would be for 20 years’ supply. Either party can review the contract with a prior notice of 30 days, after five years from the first delivery date.
The model FSA documents were issued today for private power companies and state electricity boards. Sources said separate documents would be issued for companies with coal blocks. “The contract with them will be for a lesser time period,” said the CIL source. Major differences between these FSAs would be the clauses on arbitration and security deposit.
CIL is planning to send FSAs to around 50 power units for a quantity of 70 million tonnes. “FSAs with all these 50 units may not be signed, as they have to meet certain criteria. For example, they should have long-term PPAs (power purchase agreements) of at least seven years in place. If they fail to meet those, we may not be able to sign FSAs," the CIL official said.
Power companies miffed
The power industry has dismissed CIL’s latest move as “mere window-dressing”. The industry expressed concern over at least three provisions – the low penalty level of 0.01 per cent of the value of shortage, the penalty clause to come into effect only after three years and the force majeure clause (the escape one if circumstances beyond the company’s control derail supply) in the new FSA.
“The new FSA is completely loaded against the developer and hedges CIL against all eventualities, even to the extent of failure of a contractor to supply spare parts. CIL has not followed the presidential directive in its intent and spirit,” Ashok Khurana, director-general of the Association of Power Producers, told Business Standard.
Power producers were also miffed at the non-binding of CIL to any supply commitment. “We don’t have any choice than accepting their clauses. The penalty of 0.01 per cent also makes no sense, as there is no guarantee on commitments. I hope it will be able to supply our requirements,” said R N Sen, chairman of Damodar Valley Corporation.
