Coal India Ltd. Must Break Fuel Supply Pact Deadlock

State-owned Coal India Limited (CIL) is likely to resolve its fuel supply agreement (FSA) issue with power producers in next two weeks, according to a report in Business Line.

The report says that CIL has so far signed pacts with 18 power plants for supply of the fuel, amid power producers’ reservations about certain clauses of the fuel supply agreement.

Obviously, guaranteed coal supply and resulting coal prices are of concern not only for power generations, but for primary metal smelters and producers.

CIL is scheduled to sign supply pacts with as many as 48 thermal power plants, commissioned between April 2009 and December 2011, in the current round.

So far, CIL has entered into fuel supply pacts with private sector companies such as Reliance Power for its Rosa Power project, Lanco Anpara Power, Bajaj Hindustan and CESC, among others.

Interestingly, National Thermal Power Corporation (NTPC), the largest power producer in India, has yet to sign the FSA. However, NTPC’s hesitation in signing the FSA with CIL will not impact the country’s largest power producer, as CIL will not restrict supply of fuel in the current financial year 2012-13, even if the agreements are not signed.

Last year, CIL supplied 36 million metric tons of coal to NTPC, and in the current fiscal year the projected requirement was 90 million metric tons based on 80 percent supply.

But some reports suggest that NTPC and Coal India have agreed to sign new fuel supply agreements on 2009 terms. The only change is the trigger level, which has been scaled down to 80 percent from 90 percent, as directed by the Prime Minister’s Office.

The power producer will sign fuel supply pacts for 4,300 megawatts. Currently, it is sourcing coal based on a memorandum of understanding signed with Coal India for these projects.

The present deadlock between power producers and the CIL started when the Indian federal government had issued a directive last month to the coal miner to commit itself to a minimum of 80 percent of fuel supply to power producers — if the company failed, it would attract penalty.

The government issued the directive following a meeting between the power sector honchos and the Prime Minister’s Office.

How will these moves affect India’s — not to mention the global — coal market? To be continued in Part Two.

BY TC Malhotra