NEW DELHI: Power developers such as Reliance Power, NTPC, and India Bulls have got support from the most unexpected quarter — the Coal Ministry. The Ministry has supported the developers’ call for review of the new fuel supply agreement (FSA) of Coal India Ltd.
The producers termed the new FSA as having too many escape clauses for the supplier and loaded against the developers.
A meeting is expected to be held between the buyers and the seller on May 10. Mr Ashok Khurana, Director-General, Association of Power Producers, said, “First and foremost, the review clause gives the sole discretion to CoalIndiato terminate the agreement unilaterally, creating uncertainty regarding the tenure of the FSA.”
“It is an easy way for CoalIndiato escape almost scot-free by not supplying its committed quantities,” they say. Earlier, the quantum of penalty was 10 per cent, now it is 0.01 per cent.
The penalty would be operative only after three years from the date of signing of FSA which effectively means that the FSA will start only after three years and will have an effective term of two years thereafter, the producers say.
In the new FSA ,the clause dealing with force majeure trivialises the entire agreement by including frivolous reasons such as ‘shortage/cut in power supply’, ‘non supply/delayed supply of equipments or spares’ etc, he said.
“The net result of this FSA is that it absolves CoalIndiaof its commitments and returns to business as usual (supply on best effort basis),” he pointed out.
Though some of the developers have inked the agreements because of fuel supply constraints, the general consensus is that Coal India is making use of its monopolistic situation, those from the industry said.
On the review of the FSA after five years, power developers say that this clause provides undue liberty to the seller as ‘aggrieved party’ to exercise the right to terminate the agreement. They say that the scope of review should be agreed upon upfront instead of leaving it open-ended. The developers want it to be modified in line with the previous FSAs executed in 2009.
With regard to the clause on compensation on short delivery/lifting, the developers feel the rate of compensation for the ‘failed quantity’ is too little a penalty for non-fulfilment of obligations. It is hardly a disincentive and will not discourage low fuel suppliers.
Till Monday, 10 FSAs were signed. Out of these, four each were signed with Rajasthan Rajya Vidyut Utpadan Nigam Ltd and Bajaj Hindustan Ltd and two with Lanco Anpara Power Ltd.
“There is a list of around 50 power companies. However, FSAs would be signed with 38 of them. This is because, fuel supply pacts can be signed only with producers who have signed power purchase agreements with distribution utilities,” said a Coal India official.
COAL REGULATOR TO HAVE PRICING POWER
NEW DELHI: The government plans to empower the regulator being set up for the coal sector with the authority to decide pricing. The proposal, if implemented, would deprive state-owned Coal India (CIL) the freedom it currently enjoys in fixing and revising prices of its output.
“The regulator’s primary function would be to set the prices of raw coal. A note on the Coal regulatory Authority Bill, 2010, has been sent to the Cabinet,” said a senior coal ministry official. He, however, added the authority would not have the power to grant or cancel mining licences.
Independent regulation of the sector is important to ensure competitiveness of e-auction sales, fixing guidelines for price revision for supply pacts, fixing trading margins and increasing transparency in the allocation of reserves. The draft legislation is likely to be discussed by the Union cabinet in its meeting on Thursday.
Setting up a regulator for monitoring coal resource development was recommended by the Integrated Energy Policy (IEP) framed by former Planning Commission member Kirit Parikh and the T L Shankar Committee on coal sector reforms. The Energy Coordination Committee, headed by Prime Minister Manmohan Singh, had asked the Planning Commission to prepare a paper on the issue.
The prices of coal currently being realised at e-auctions, the majority of which is supplied by CIL, are about 80 per cent higher than the notified price. The IEP had recommended the annual price fixation of coal as one of the roles of the proposed regulator. This would be based on the e-auction price, the free-on-board price of imported coal and the production cost. “Annual revision of coal prices would create some uncertainty, but no greater than the current one, where CoalIndiaperiodically revises coal prices,” the IEP had said.
The regulator’s functions would include specifying the quality and performance parameters, ensuring adherence to the mining plan, recovering penalties, monitoring the utilisation of funds for coal conservation and promoting clean coal technologies.
The Coal Regulatory Authority would comprise a chairperson and four members, one each for the legal, technical, finance and administration wings. The chairperson and the members would be appointed by a selection committee headed by the cabinet secretary.
CHEAPER COAL TO MEET POWER REQUIREMENTS: JAISWAL
NEW DELHI: Coal minister Sriprakash Jaiswal says the government’s priority is to keep cost of power generation and manufacturing at reasonable levels.
Defending the move to force CoalIndiato sign agreements to supply coal to power companies, coal minister Sriprakash Jaiswal on Monday said the government’s priority was to ensure availability of electricity at cheaper rate and it will not be cowed down by threats of legal action by minority shareholder TCI.
In face of opposition from the company board, the government had last month issued presidential directive to CIL asking it to sign fuel supply agreements (FSAs) with power companies, committing to supply 80 per cent of the quantities for which the contract has been signed.
Jaiswal said during question hour thatIndiawas a socialist country where national priorities have to be balanced with goals of a public sector unit.
‘Profitability of CoalIndiaas well as meeting power requirement of the country by supplying coal at cheaper rates was government’s concern,’ he said.
The UK-based Children’s Investment Fund (TCI), the biggest foreign investor in CIL, has threatened legal action against the state-run firm for its alleged failure to protect the interest of minority shareholders.
‘Such threats will not affect the government,’ he said. ‘Our responsibility is also towards the country which needs power at cheaper rates.’
TCI argues that the directive will reduce CIL profits.
‘Supply of coal at notified prices to power and other major sectors is essential to keep the cost of power generation and manufacturing at reasonable levels,’ Jaiswal said.
CIL MAY HIKE PRICES BY 5-10%, SAY ANALYSTS
KOLKATA: Analysts expect state-owned miner Coal India Ltd (CIL) to raise prices by 5-10% in the current quarter to mitigate the impact of a wage hike it agreed to in January after months of negotiation with its workers.
The miner raised wages of its 365,000 workers by an average 25% with retrospective effect from July which, according to an official, required the company to put aside Rs.3,000 crore in the quarter ended March for payment of arrears.
CIL had put aside Rs.750 crore each in the two preceding quarters for the same purpose.
The total provision on account of the wage revision at around Rs.4,500 crore exceeded initial estimates, said the company official cited above, who declined to be named.
If the profit margin is to be maintained at the same level as in fiscal 2012, the firm will have to raise prices, said this person, and this could happen by the end of this month.
For the year ended March, the miner is expected to report 25-30% growth in its net profit over fiscal 2011, largely on account of the price revision in February last year, according to the official.
Newly appointed chairman and managing director S. Narsing Rao refused to comment on a potential price hike when asked about it at a recent press conference.
The revision this time, if cleared by the board and the coal ministry, is likely to affect power producers. The price of coal consumed by power producers was last raised in October 2009.
CIL raised tariffs in February last year only for other consumers such as cement and steel plants. This resulted in a revenue gain of around Rs.6,000 crore in the full year till March, according to the unnamed official cited above.
Analysts at equity research and broking firms such as CLSA Asia Pacific Markets, Motilal Oswal Securities Ltd and Barclays Capital expect the miner to raise coal prices by at least 5% in the current quarter on account of the wage hike.
Analysts at Barclays said in a recent report that they expected an increase of up to 10%, but in view of the “political compulsions”, it was likely to be kept at 5%. Analysts at CLSA also expect the miner to raise prices by the same margin, while those at Motilal Oswal are a little more optimistic—they say the firm could increase prices by up to 12-13%, resulting in 7% growth in annual revenue.
The revision could even be included in the long-term coal supply contracts that the miner is signing with power producers, according to these analysts.
Because of limited growth in production, CIL has no option but to increase prices to maintain profit margin, said Anjani Agarwal, partner and sector leader, metal and mining at consulting firm Ernst and Young.
For the current year, the company has set a production target of 464 million tonnes (mt), up from 436 mt produced in fiscal 2012, which Rao described as challenging. In the current year, it could be selling up to 360 mt, or 77.5% of its production, to power companies, according to Rao.
In view of severe supply constraints, consumers—even power producers—may not oppose a small hike of say 5-7%, said Agarwal.
From 1 January, the firm introduced a new tariff structure based on gross calorific value (GCV) of coal, but consumers protested, saying that it was a veiled price hike. It was forced to hold prices at the same level as at the end of December.
Analysts at CLSA said political pressure could force CIL to postpone the price hike till the next fiscal.
COAL INDIA AGAIN SEEKS EOI FOR MOZAMBIQUE BLOCK EXPLORATION
NEW DELHI: Coal India Ltd has sought expression of interest (EoI) for the third time from companies, to undertake drilling activities at a coal block inMozambique.
Similar EoIs were sought in 2010 and 2011. However, the previous tenders were cancelled and no company was selected for the job due to technical reasons.
“The earlier difficulties (on tendering process) have been removed. We hope to give the contract this time,” Mr S. Narsing Rao, Chairman, CoalIndia, told Business Line.
The last date for submission of EoI is May 25. The tender has been floated inMozambiqueby CIL subsidiary, Coal India Africana Limitada (CIAL).
The blocks were bagged by CoalIndiain 2009 that has coal reserves of nearly one billion tonnes.
The blocks are expected to commence production from 2015. According to preliminary plan, production would begin with nearly 2 million tonnes per annum.
It would be ramped up to 20 million tonnes every year on full scale production.
SURPLUS COAL MAY BE SOLD AT PRODUCTION COST
NEW DELHI: Fearing profit-making by private miners through the sale of surplus coal produced at captive mines, the government plans to impose a policy guideline asking captive mining companies to sell the surplus coal to Coal India (CIL) at production cost, or without any margin.
The proposal, if implemented, would make Sasan coal diversion by Reliance Power an exception, and discourage the production of surplus coal.
The proposal is part of the new policy on the usage of surplus coal, likely to be finalised by the government in a month. An empowered group of ministers (EGoM), headed by Finance Minister Pranab Mukherjee had, on April 29, decided to stick to an earlier decision to allow Reliance Power to divert surplus coal produced from mines allotted for the Sasan project in Madhya Pradesh to another project nearby.
“Any surplus coal produced shall be transferred to the nearest CIL subsidiary. The price payable by CIL to the allocatee would be either the cost of production or the notified price of CIL for the corresponding grade of coal, whichever is lower,” said the draft policy floated by the coal ministry for inter-ministerial consultations. The draft policy also states the coal so transferred would be sold by CIL through an e-auction.
The government had made coal mining the exclusive domain of the public sector by enacting the Coal Mines Nationalisation Act in 1973. Later, through a series of amendments to the Act, it had allowed private companies to mine coal for specified captive use in end-use projects. Currently, 28 operational captive mines contribute about 35 million tonnes (Mt) of the total 530 Mt of coal produced inIndia.
Another legislation to allow the entry of private companies into coal mining and sale—the Commercialisation of Coal Mining Bill—has been hanging fire in Parliament since 2000. An EGoM had allowed Reliance Power to divert coal meant for the Sasan plant for use in the company’s Chitrangi project in 2008, raking up a controversy over the special dispensation.
“Our worry is private companies with captive mines would now deliberately produce surplus output to make profits, circumventing the existing law that which does not allow these to profit through coal sales,” said a senior coal ministry official, on condition of anonymity.
UNLOCKING THAT COAL
As per the latest core sector growth figures, coal output expanded only 1.2% in 2011-12, although it improved from last year’s negative 0.2%. Even as we move into the Twelfth Five Year Plan with an ambitious target of adding 75GW of power capacity, the continuing coal crunch threatens to trip the power sector and may impact the country’s growth story. Industry experts peg the immediate shortfall in coal supply for the power sector at 100-120 million tonnes per annum (mtpa) and the situation is only expected to worsen in the future. The incremental coal supply from both domestic as well as imported sources is likely to fuel only 45-55GW of capacity addition in the 12th Plan period, leading to a shortfall of 20-30GW.
Therefore, options to secure the supply of approximately 100-120mtpa of coal need to be urgently explored. This entails a mix of short- and long-term measures, comprising improving coal production and making bulk imports at reasonable prices sustainable.
Over the next 6-18 months, first, it is necessary to ramp up production from operating mines of Coal India Ltd (CIL). This can be done by benchmarking CIL mines with best-in-class mines to identify sources of losses (for example, labour and equipment productivity, technology gaps, etc) and the implementation of an operational transformation programme to enhance production. Increased emphasis on underground mining is another step in this direction. Monitoring progress and de-bottlenecking will lead to a 5-10% production improvement. Other steps include using private sector mine operators, amending the Contract Labour (Regulation & Abolition) Act to include outsourcing and contract works under any sphere of mining activity and eliminating illegal mining interfering with on-site production.
Second, accelerating production and supply from captive blocks should be encouraged. This can be done by incentivising mines producing less than their potential to sell excess production to CIL, creating a robust pricing methodology that helps the developer gain a reasonable premium on the extra mined coal and creating either a single-window clearance or at least a coordinated approach for clearances among various ministries. Reallocating captive coal blocks to the distribution utility of respective states where the distance between the power plant and the captive block is over 1,000 km will also help in increasing production as it will reduce infrastructure and logistic bottlenecks.
For blocks allocated to government companies and having most clearances in place but yet to start production, the introduction of a Mine Developer & Operator (MDO)-based structure, which would mine on behalf of the mine owner and get mining charges in return, would be beneficial. Coal could be sold to CIL till the commissioning of the designated end-use project, following which the coal could be diverted back to the designated end-use project.
For the other allocated blocks that are yet to start production, again, creating either single-window clearance or at least a coordinated approach for clearances among various ministries will expedite monetisation. In addition, reserving a certain proportion of coal blocks for the power sector and expediting the competitive bidding of captive coal blocks will give a fillip to coal production.
Third, strategic/sovereign sourcing of imported coal should be seriously considered. Setting up a well-capitalised procurer entity, with partners from CIL, financial institutions and other select players (NTPC, MMTC, etc) to import at scale will reduce the cost of mining by an estimated 10-20% with doubling of output, increase the likelihood of getting better contracts (and will also make it possible to make investments in infrastructure, if required). Approaching suppliers incentivised to supply over longer term through index-based contracts (price linked to a basket of international indices having individual weightage) and developing a robust allocation and pricing policy for centrally-procured imported coal are other key strategies.
Finally, infrastructural and financial implications related to coal imports must be strategically addressed. These can be eased by re-structuring tariffs to hold power companies responsible for capital costs, plant efficiency and fuel availability, but allowing for the impact of changes in laws and regulations in the coal source countries, allowing bulk coal imports for power plants located near coastal areas and allocating domestic coal to inland plants to optimise transportation availability and reduce procurement costs.
A number of steps are needed to ensure fuel security in the long term. Private participants, selected through competitive bidding, can help expand coal exploration and achieve the annual target of 15 lakh metres of drilling. Such blocks may be allocated to private developers tied up with designated power projects as end-use. A coal regulatory body is essential for transparency and pricing.
For streamlining the supply chain, the development and import of Indian-owned foreign resources must be encouraged. Port and handling infrastructure for coal imports can be expanded through the facilitation of investments in overhauling coal berths at greater sea depths, deeper ports and new coal berths. Concurrently, dedicated railway freight corridors and roads for movement of larger trucks can ensure hinterland connectivity.
A trading platform to be anchored by CIL for the sale of e-auction coal and excess coal from captive mines would facilitate trading. Finally, commercial mining must be progressively de-linked from end-use.
It is imperative to adopt these measures to ensure that the growth in the power sector is not derailed and power companies are not compelled to scale down their capacity addition targets.
The author is director general, CII
CIL SIGNS FUEL SUPPLY FACT WITH 13 POWER UNITS
NEW DELHI: CoalIndiahas so far entered into fuel supply pacts with 13 power units, including Reliance Power’s Rosa Power project, while some have refused to sign it objecting the penalty clause.
“Till now Coal India (CIL) has entered into agreements with 13 power units including Rosa Power,” a source privy to the development told PTI.
The development comes close on the heels of power sector planning body Central Electricity Authority (CEA) seeking PMO’s intervention on fuel supply agreements (FSAs) as a few firms have refrained from entering into pacts with CIL amid differences over penalty to be paid by the coal behemoth if it fails to supply 80% of the contracted fuel to them.
Power producer NTPC is among the companies that have refused to sign FSAs.
So far other power firms with which CIL has entered into pacts includes Lanco Anpara Power and Bajaj Hindustan.
Last month, the government had issued a directive to CIL to commit a minimum of 80% of fuel supply to power producers, failing which it would attract penalty.
The directive was issued following a meeting between the power sector honchos and the Prime Minister’s Office.
On when will the Maharatna firm be able to sign FSAs with all the 48 power units, a source with CIL had earlier said: “It is difficult to give a time frame as CIL is signing pacts as and when the power companies are coming forward.”
The state-owned firm is likely to enter into pacts with firms having a capacity of less than 30,000 MW.
The model FSA format includes clauses like suspension of supply of coal to power firms if they were found diverting the dry fuel for any purpose other than the specified end-use plant.
It also includes clauses like 80% trigger level and penalty of 0.01% in case of failure to adhere to the agreement.