NEW DELHI: As many as 18 upcoming power projects with an aggregate capacity of over 25,000 MW might be forced to violate their tariff commitments and seek a much higher price from consumers. This is because the coal ministry has rejected a request from the developers of these projects for assured coal linkages and they might have no other option but to resort to the open market for fuel.
The projects to be affected include Essar Power’s Mahan, Adani’s Tiroda and GMR Energy’s Kamalanga stations. With no “tapering coal linkage” in sight, the developers of these projects won’t have the option of getting coal at (lower) notified prices from Coal India (CIL) until production commences at their captive mines.
These projects are expected to be commissioned at various points of time during the 12th Plan period (2012-17).
Union power secretary P Uma Shankar confirmed the development but said there was no cause for panic. “These projects (which have been denied tapering coal linkages) are fairly spaced out and can meet their fuel requirements through e-auction/imports on a temporary basis,” he told FE.
CIL’s e-auction price is nearly double the notified price charged by it for the supply of coal under fuel supply agreements (FSAs) while the price of imported coal is more than three times the notified price.
However, projects like Mahan, which are being developed through tariff bidding route, might not get to revise tariffs to accommodate an increase in fuel costs and may feel an impact on their bottom lines, according to analysts.
These projects had sought tapering fuel linkage, citing their difficulty to meet their projects’ fuel requirements from allocated blocks due to delay in mining work.
Sources said the coal ministry has rejected these developers’ requests, saying that CIL has already issued letters of assurance for projects worth 80,000 MW where it is obligated to sign FSAs with developers for assured supply of coal during the 12th Plan. The ministry has said that the list has been finalised and it would not be possible for it to accommodate any variation at this stage without jeopardizing the process of signing of FSAs.
“If the development of captive mines is delayed due to genuine reasons, then power developers should strategise to secure coal from other sources including imports, e-auction and memorandum of understanding with state mineral development corporations,” said Dilip Kumar Jena, senior consultant and knowledge manager, mining, PWC.
Essar was banking on a tapering coal linkage to meet the fuel requirement of the 1,200-MW Mahan project in Madhya Pradesh. The company had told its investors in February that it had applied for fuel allocation for the Mahan project under CIL’s tapering linkage system. Hindalco, which is setting up a 750-MW captive power plant based on coal supply from the Mahan mine where it is a joint developer, will also have also to arrange coal supply on its own to fire the project.
Central and state projects are also among those denied tapering coal linkage by the coal ministry.
Rude shock
* Around 18 upcoming power projects with over 25,000 MW capacity might be forced to violate tariff commitments
* Projects that won’t benefit include Essar Power’s Mahan, Adani’s Tiroda & GMR Energy’s Kamalanga station
* CIL’s e-auction price is nearly double the notified price charged by it for supply of coal under supply agreements
POWER PRODUCERS TAKE ON CIL OVER LOPSIDED FUEL SUPPLY PACTS
NEW DELHI: Frustrated by uncertainty over fuel supply despite a presidential decree, top power generation firms have adopted a confrontational approach towards Coal India and decided to complain to the competition regulator against the state-run giant’s “monopolistic” rejection of liabilities for default.
The power ministry is sympathetic to the concerns of private firms seeking fuel from the state monopoly and has sought the intervention of the prime minister’s office (PMO) to quash CoalIndia’s Fuel Supply Agreements (FSA). Power producers say the agreements are so heavily tilted in favour of CoalIndiathat banks are refusing to fund projects that depend on such contracts for fuel, officials said.
CIL was forced to offer supply pacts to power producers after industrialists led by Ratan Tata and Anil Ambani sought the PMO’s intervention to resolve the fuel scarcity. When CoalIndia’s board did not approve new FSAs, the government issued a presidential decree, forcing it to sign the pacts, but the state monopoly offered diluted agreements, which guarded the monopoly from penalties if it defaulted
A senior power ministry official said the ministry is against any alternations in the previous FSA as the Presidential decree only allowed changes in trigger level – the threshold level of coal supply to prevent penalties — to 80% from 90%.
“FSAs are legal documents like power purchase agreements. When we cannot amend the documents without deliberations and requisite approvals, how can CoalIndiachange the documents?” he said.
However, a top CoalIndiaofficial said the FSAs were revised keeping in mind interest of the company and its shareholders as there is acute shortage of coal in the country.
Power ministry has conveyed to the PMO that central power generating companies NTPC and Damodar Valley Corp will not sign the revised FSAs. The ministry has urged the PMO to instruct the coal ministry and CoalIndiasign model FSAs of 2009 within a month.
“The FSAs have been diluted to such an extent that it will have no impact on CoalIndiain the event of non-supply. It took CoalIndiaa year to draft the earlier FSAs in 2009 as it held consultations with stakeholders on all clauses. Now CoalIndiais deciding the issues on its own and in case of disagreement it threatens discontinuation of supply,” the power ministry official said.
Power firms said the draft documents defeat purpose of the Presidential decree as bankers have refused lending money on the basis of the FSA that do not guarantee firm coal supplies.
Association of Power Producers, a body of 24 electricity generators, said it would approach the Competition Commission of India citing abuse of monopoly by CoalIndia.
“We have spoken to lenders like the State Bank ofIndiaand Rural Electrification Corp who have refused debt saying the FSA was not bankable as it does not hold CoalIndiaresponsible for anything,” association’s director general Ashok Khurana told ET.
The power ministry official said 13 power units have signed FSAs with CIL under financial pressure.
About 50 power units were expected to sign FSAs with CIL after the Presidential decree was enforced upon the state miner as its board failed to abide by a PMO directive.
POWER MINISTRY WANTS PMO TO RESOLVE FSA IMPASSE
NEW DELHIl: With uncertainty continuing over coal supplies, the power ministry has sought the intervention of the Prime Minister’s Office (PMO) to resolve the issues related to CoalIndia‘s (CIL) new fuel supply agreement, sources said.
Most of the power producers have reservations about certain clauses, including those related to penalty, in the revised Fuel Supply Agreement (FSA) put forward by CIL.
Against this backdrop, Power Minister Sushilkumar Shinde has written to the PMO seeking intervention on the issue, the sources said.
Shinde’s communication came after the central electricity authority (CEA) held discussions with various power generators on 9 May to gather their views on the FSA problem.
According to sources, the power minister has requested the PMO to instruct the coal ministry and CIL to sign FSAs within a month based on the 2009 format. Last month, the government had issued a directive asking CIL to ink FSAs with an assurance for minimum 80 per cent fuel supply to power plants.
However, power producers have said various conditions in the new FSA such as on penalty and bringing ordinary business difficulties under force majeure are not acceptable.
Another concern is that for new units at the same plant, the developer has to ink the revised FSA while coal supply would be based on earlier pact for old units.
Meanwhile, the Coal Ministry has issued a directive to coal companies to supply fuel to power plants commissioned till 31 March 2012 as well as those to be commissioned during 2012-13 through the Memorandum of Understanding (MoU) route till the FSA issues are resolved.
An MoU is not a legally binding document.
NTPC’S CAPACITY ADDITION PLANS COULD GO AWRY
NTPC Ltd managed to improve its operating performance in the March quarter. It increased power generation by 4% from a year ago compared to a 0.7% gain for the full fiscal. Yet, problems of fuel availability and a slow pace of capacity addition dog the company, much like other power generators.
Despite being in a better position to get fuel from domestic sources by virtue of being a state-owned company, NTPC faced higher costs. Fuel costs as a percentage of net sales have risen from 62.7% in fourth quarter of 2010-11 to 64.2% in March quarter last fiscal.
Still, after hiccups in the earlier part of the year, the company was able to up capacity utilization in its factories. The plant load factor increased to 91% in the March quarter compared to 84% in December. However, note that it is three percentage points lower than what the company had registered a year ago quarter and the load factor is not likely to witness any significant improvement in the near future.
Despite the rise in costs, the company was able to increase its operating margin, thanks to a sharp drop in provisions and other expenses. Operating margins improved 1.8 percentage points to 21.4% in the March quarter. Nevertheless, the 14.9% rise in operating profit did not translate to an improvement in the bottom line. Interest costs rose by more than a third and tax expenses jumped 124% to Rs. 1,063 crore. This crimped net profits, which fell by 6.7%.
The solution to the fuel supply impasse seems straightforward: it has to either import more or source more coal domestically, an unlikely prospect given Coal India Ltd’s continuing problems despite government diktats. NTPC is expected to consume 164 million tons (MT) of coal in current fiscal, 15.5% or 22 MT more than in 2011-12. Of this, the company is planning to import 16 MT of coal in current fiscal, an expensive proposition despite coal prices falling slightly in recent months.
It is looking to source more coal from its captive mines. But the mine it is currently developing at Pakri Barwadih in Jharkhand is expected to come on stream only in the next fiscal.
Thus, its capacity addition plans could go awry. The company was able to add only 58% of the targeted capacity in the last fiscal. For the current fiscal it is aiming to commission 4,160 MW. Overall, it plans to add 14,000 MW in the five years through March 2017, down from the 29 GW it planned previously. That, plus the fact that lower capacity utilization will hurt the incentives it gets for operational efficiency, means that earnings will continue to be under pressure.
COAL CRISIS TO HIT 12,500-MW CAPACITY ADDITION: NTPC
NEW DELHI: Country’s largest power producer NTPC may not be able to add at least 12,500 MW of generation capacity, if the coal supply issues are not resolved in the next couple of months, a top company official said.
Faced with non-availability of gas for its envisaged plants, the state-run power producer has already scaled down its target of having 70,000 MW generation capacity by the end of the current Plan period (2012-17) to 65,000 MW.
“We would not be able to add at least 12,500 MW capacity by 2017 if the coal issue is not resolved in the next couple of months, because we are already in the 12th Plan,” NTPC Chairman and Managing Director Arup Roy Choudhury told PTI in an interview.
With acute coal shortages hurting even the existing generation, NTPC might be forced to bring down the target to little over 50,000 MW for the current Plan period.
The company has an installed generation capacity of 37,514 MW, including coal and gas-fired projects among others, which it had initially planned to raise to 70,000 MW by 2017.
“Now, we are rethinking on capacity addition for the next five years. If I am not getting coal, why should I spent money and set up capacity,” Choudhury said.
“Our capacity addition target for 12th Plan is around 65,000 MW. Out of that, there is about 1,300 MW hydro projects,” he added.
He said current coal sector issues are hurting the company.
“We could have generated eight billion units more of electricity last year. Around 7.8 billion units (of power generation ) that was lost… It would be around 4.5% (of total generation),” he noted
To bridge the gap of fuel availability, NTPC may also import up to 14 million tonnes of coal in the current financial year.
“Our imported coal requirement for this fiscal would be 12 to 14 million tonnes depending on requirement. Last fiscal, we imported 12 million tonnes,” Choudhury said.
Stressing that the country has enough coal reserves, he said that production should be ramped up.
Further, Choudhury pointed out that domestic coal cannot be priced equivalent to international coal.
“It never happens anywhere in the world that they charge domestic resources for internal purposes at international prices,” he added.
NTPC — NOTHING TO CHEER ABOUT
Capacity addition unlikely to accelerate from current levels in the next few years: NTPC added 9.6GW during the last five years (11th Plan) and we expect the pace of capacity addition to remain at 3.3-3.5GW (giga watt) per annum over the next five years (12th Plan), which is lower than our original estimate of 5.4GW pa. We reduce our estimates on the company’s poor track record of capacity addition in the past few years as well as due to increasing fuel pressures. While capacity based on coal in India increased 20% year-on-year in FY12, matching domestic coal supplies from Coal India and SCCL increased by only 3.5% y-o-y in FY12, impacting the utilisation levels of power generators, including NTPC. The coal demand/supply mismatch is unlikely to improve in the next three-five years.
Operating parameters continue to be weak: Data from the Central Electricity Authority (CEA), suggest that NTPC’s plant load factor (PLF) fell by around 580bps in the last two years due to supply and demand pressures. We expect NTPC’s plant availability factor (PAF), which is a good indicator of supply pressures, to have fallen by round 320bps in FY12. We expect this to result in a lower increase in power generation, which we estimate to increase at 6.8% CAGR, with capacity addition at 9.2 % CAGR over FY13-14.
Q4FY12 preview: We expect NTPC to report a moderate quarter with power generation of 60.2 billion units in Q4 (up 4% y-o-y) despite a capacity increase of 6% y-o-y to 32.7GW as PLF continues to decline (-445bps y-o-y) largely attributed to fuel pressures. For FY12, power generation probably remained flat at 222.4 billion units (up 0.9% y-o-y), the second consecutive year of flat generation despite capacity addition of around 3.8GW over last two years. We expect net profit of R23.8 bn in Q4, a decline of 14% y-o-y due to base effects.
Cut EPS by 1.5-6% for FY13-14e to account for lower capacity addition resulting in lower volumes – power generation decline of 5.5-7% for FY13/14e (estimates). We expect moderate EPS (earnings per share) growth of 5% in FY13 which should pick up in FY14 to 10% as more capacity kicks in.
Maintain Neutral but cut our DCF-based target price to R172 (from R185) as we lower our estimates and roll over our valuation to FY2014. Key upside risks are faster-than-expected execution of projects under construction and upside from profits from captive coal mines. Downside risks include non-availability of fuel, impacting operations and efficiency gains.
Valuation and risks: Our target price implies a potential return of 10.2%, which is within the Neutral band. Potential return equals the percentage difference between the current share price and the target price.
GOVERNMENT MAY AUCTION OFFSHORE WIND FARMS
NEW DELHI: The government has initiated the process of putting in place a policy to auction, or award, offshore wind farms in a way that could be similar to the auction of oil and gas blocks. The ministry of new and renewable energy has constituted an inter-ministerial panel of secretaries, which also includes heads of pertinent organizations such as Coast Guards, to frame policy guidelines, approve and oversee execution projects and identify private or public sector partners.
The panel is using the petroleum ministry’s exploration block auctions as a model. Sources said it was too early to say whether sites would be auctioned or allotted. They added the ministry’s move has been sparked by “a slew of requests from various quarters for allocation of sites” . Indian companies’ appetites have been whetted due to financial incentives that make wind farms an attractive way to meet the Renewable Portfolio Standards, under which it’s mandatory to source a certain percentage of energy from renewable sources.
A feasibility study conducted in collaboration with Scottish Development International, aScotlandgovernment initiative to push commerce and trade, identified Kerala, Karnataka and the hills ofGoaas potential sites.
It showedGujaratcoastal areas as having reasonable potential too, but prone to severe cyclonic conditions. Wind farms cannot work in wind speeds of less than 8 kmph or over 55 kmph. At present,Indiahas an installed wind power capacity of 13,066MW. The ministry’s strategy paper for 2011-17 pegs the potential for generating power from wind farms at 48,500MW. It has set a target of increasing the contribution of renewable energy to the country’s total energy mix to 6% by 2022, with about 10% contribution to the total electricity mix.
The International Wind Turbine Manufacturers Association estimates 65GW of wind power could be installed inIndiaby 2020 and the capacity could reach 160GW by 2030. Wind power costs between Rs 3.50 and Rs 4 per unit against Rs 2.50 a unit for electricity from coal-fired plants. In case of wind farms connected to the grid, the power is made affordable by pooling them with normal supplies.
ONGC has identified one location each at Bombay High South and Tapti basin nearSuratfor setting up wind farms on its abandoned and unmanned oil and gas pumping platforms.
SUSTAINABLE DEVELOPMENT — BRIGHT SIDE OF A DIM SCENARIO
Fight climate change with green energy
Intergovernmental Panel on Climate Change (IPCC) has emphasised on the need for incorporating renewables in the energy matrix for climate change mitigation and for reducing greenhouse gasses.India’s national agenda on climate change is to reduce carbon emissions by 25% by 2020 in tune with itsCopenhagencommitment.
The renewable energy agenda is now part of the developing world strategy. Nearly half of the renewable power capacity is in the developing world. Renewables have played a major role in the revival of economies and creation of jobs, apart from augmenting energy security for the overtly fossil fuel-dependent economies.
Among renewables, solar is the most potent solution to meet this target. The focus area for many a nation and corporation is initiatives that make national and global economies greener through renewable energy. More than half the GHG emissions are from power stations, industrial processes and the transport sector.
Indiais endowed with vast solar energy potential; 5,000 trillion kWh per year energy is spread overIndia’s land area, with most parts receiving 4-7 kWh per sq. m per day with an average of 5.5 kWh, along with 300 clear sunny days in most parts of the country. HenceIndiacan use solar PV and solar thermal technologies to provide huge scalability for solar power inIndia. Solar also provides the ability to generate power on a distributed basis and enables rapid capacity addition with short lead times.
Solar PV is one of the most talked about emerging technologies amongst the renewable energy solutions that can combat the adverse effects of climate change. Unlike most other forms of electricity production, PV is effectively limitless as long as the sun is available. The life span of an installed PV module is expected to be in excess of 25 years. Tata BP Solar has significant strengths in this sphere, thanks to its state-of-the-art PV technology, system design, engineering and construction abilities.
An increasing appetite for solar adoption by commercial establishments, manufacturing and corporates has been witnessed in recent times. There are policies which actively encourage usage of solar power in areas like telecom towers, railways, highways, etc. Emissions can also be reduced through wide-scale deployment of solar traffic lights, rail signals, and innovative applications like solarised ATMs and charging stations for E-bikes.
A green-savvy company successfully integrates the issue of climate change in its business strategy and does not treat it as one of the many issues. Climate change is still in its nascent stage, and it therefore pushes companies into an unexplored territory. This needs a new business approach, and companies need to look at products and services from a life-cycle perspective. Carbon audits and benchmarking to international standards are a must. This will help companies find out how they compare with others within the country and across the world in their sector or within a product range. The optimistic scenario suggest that carbon emission can be reduced from 5.2 billion tonnes with a coal dominance scenario in the power sector to around 3.6 billion tonnes with greater reliance on renewable sources, energy efficiency improvement and demand side management.
The writer is CEO, Tata BP Solar
ENERGY SECURITY — DEVELOPING A NEW MATRIX
Renewables and energy efficiency need more attention
In order to sustainIndia’s economic growth, it is essential to take a hard look at its energy security.India, with less than 1% of the world’s proven oil reserves, is among the largest importers of fossil fuels in the world.
Moreover, according to the 2011 ‘World Energy Outlook’ of the International Energy Agency, India would be the largest importer of coal globally by 2035, accounting for 30% of the total imported coal. To address the energy security challenge, both the government and Indian corporations need to focus on two key areas; energy efficiency and renewable energy.
The large demand-supply gap in electricity has led many Indian corporations to adopt different approaches to overcome the supply and quality issues. Many organisations have invested in energy generation and energy efficiency measures alike. Here, we have observed three major trends in the past decade.
Many companies in the manufacturing and industrial goods sectors, for example, set up captive power plants to meet their electrical demand and to improve the reliability of electricity used. The latest data from the Central Electricity Authority shows that captive power generation accounts for close to 20 GW or about 10% of the electricity generated inIndia. This figure excludes power generating units with a capacity of less than 1 MW. Many office buildings and commercial establishments have diesel generator units for electrical backup.
In the second trend, we have seen that some sectors like cement and iron & steel have invested in techniques such as waste heat recovery systems that have significantly improved their operational efficiency.
And lastly, the Perform, Achieve and Trade (PAT) mechanism has ushered an era of regulatory compliance. Organisations identified as designated consumers under PAT by the Bureau of Energy Efficiency are some of the largest consumers of electricity. They will be required to reduce their energy consumption by a specified minimum threshold under PAT. We believe that PAT will have a significant impact on energy efficiency measures adopted by the corporate sector. PAT provides policy level support in creating a market mechanism that will give financial incentive for investing in energy efficiency measures.
While the trends are commendable, it is time Corporate India adopted a more holistic approach towards energy efficiency, and not just from an operational efficiency, strategic or regulatory compliance point of view. This will help companies justify investments in energy efficiency measures to their stakeholders, and identify priority areas where capital investments are needed to upgrade or replace ageing systems.
The writer is vice president & energy ambassador, Schneider Electric India
WIND POTENTIAL — IN TOP FLOW
Emergence of wind IPPs has revived investment rationale for sector
Despite policy and regulatory uncertainties, tight credit situation and cautious market sentiment, wind energy remained a preferred investment proposition of renewable investors inIndiathrough 2011.
Of the total investment of $10.2 billion in renewable energy, $4.6 billion was invested in wind energy.Indiahad the third-most new installations in 2011, behindChinaand theUS. Overall the country added a record 2,827 MW against 2,140 MW in 2010. An additional 2,500-3,200 MW of new wind power installation is expected in 2012.
While venture capital and private equity companies made a strong comeback with about $400 million investment, asset financing at $3.8 billion topped wind energy investment inIndia, despite higher lending rates.
As for the investment themes within the sector, wind IPPs (independent power producers) remained the buzzword for the investor community; for example, Mytrah EnergyIndiareceived funding from PTC, IDFC and others, INOX Group got funding from IFC etc. Secondly, wind equipment manufacturers with attributes like strong order books and sales diversification could also attract investment e.g. Regen Powertech from TVS Capital and Summit FVCI, Azure Power from Deutsche Investitions and others.
The emergence of wind IPPs on the Indian energy landscape has resuscitated the investment rationale for the sector and it could primarily be ascribed to the policy and regulatory environment over the last decade. Notably, the sector has undergone a paradigm shift from non-specialist organisations entering the space to reap benefits of tax legislation to specialised wind developers who base their strategies on improved incentive structures and better asset economics, thus, making it a strong investment case.
On the policy/regulations front, although the Accelerated Depreciation policy has been withdrawn, Generation-based Incentives (GBI) and State Feed-in-Tariffs have taken precedence as the primary policy instruments to enhance generational efficiencies. Furthermore, the introduction of domestic carbon certificates, or renewable energy certificates (RECs), have provided wind IPPs an option of selling power to state utilities at subsidised tariff. Policy initiatives i.e. implementation of open access to third parties (intra/inter-state), concessional wheeling charges and introduction of zonal tariffs (Maharashtrahas already introduced) are expected to facilitate creation of an efficient wind power market.
Favourable incentive structures have led to the adoption of different business/revenue models e.g. preferential tariff model, REC model and captive model, by the wind energy developers in order to maximise revenue/returns.
However, to sustain the growth momentum at the last five years’ CAGR of 19%, the wind energy sector would require a level of preparedness at the central/state government level with respect to creating appropriate financial structures, sufficient grid/evacuation infrastructure, implementation of open access and clarity around applicable charges by concerned agencies in the case of inter-state/intra-state transmission and announcement of zonal tariffs.
For next three-five years, owing to factors like scalability, cost effectiveness, strong wind potential and inherent strengths in the manufacturing segment, wind energy is expected to present compelling growth opportunities in the form of project-based opportunities and value chain enablers.
Kalpana Jain is senior director and Bibhas Kumar, manager, with Deloitte Touche TohmatsuIndia
STATES AGREE ON DRAFT TERMS ON COAL BLOCK ALLOCATION TO PSUs
NEW DELHI: State governments have agreed with the Centre on draft terms and conditions for allocation of coal blocks to public sector companies, sources said today.
“The chief secretaries of state governments have agreed to draft terms and conditions for allocation of coal blocks to government companies during a meeting organised by the Coal Ministry,” a source in the know said.
The meeting came against the backdrop of a ministerial panel deciding not to review the earlier decision allowing Reliance Power to use excess coal from the Sasan Ultra Mega Power Plant (UMPP) mines for its another project.
The terms deliberated during the meeting, chaired by Coal Secretary Alok Perti, included ensuring utilisation of coal, the source added.
In February, the Coal Ministry had notified rules for allocation of coal blocks through competitive bidding process in order to bring transparency in allotment.
On allocation of blocks to government companies, it had said that the Centre will identify areas and fix a reserve price.
The Ministry had said it will circulate a list of areas containing coal for inviting application from eligible government companies for allocation of blocks to states and the Power Ministry.
COAL BLOCKS OUTSIDE BIDDING TO BOOST PROFITS OF CPSEs
NEW DELHI: Central public sector undertakings that are set to be allocated new coal blocks under a special dispensation outside the bidding route will be allowed to sell 10% of the fuel in the open market through the highly profitable e-auction route. This will help these companies bolster their bottom lines in two ways — higher margins and reduced costs.
According to government sources, companies such as NTPC, NMDC and SAIL will be among the beneficiaries of the move. These firms, experiencing pressure on their business volumes and margins due to the economic slowdown, would find e-auction of surplus coal an alternative revenue model promising assured profits.India’s monolithic coal producer Coal India (CIL), which is currently allowed to sell 10% of its produce through e-auction, has found this route highly lucrative with roughly 20% of its revenue already coming from this business.
For coal users like power and steel companies, the new coal blocks will reduce their costs significantly, the sources said.
The coal ministry is currently finalising the rules and regulations for competitive bidding and also those for the special dispensation for government companies (central and state PSUs) where these firms are allocated blocks outside the bidding route but after a reserve price is set.
E-auctioned coal fetched 85% higher prices for CIL than those offered to customers under the notified prices determined by state-owned coal companies and the government. Since 2007-08, CIL has seen the contribution of e-auction to its overall revenue rise sharply, despite the 10% cap.
If other government companies manage e-auction of just 5 million tonnes of coal annually, their revenues would jump by about Rs 1,000-1200 crore annually, analysts said.
Under the government dispensation route, the coal ministry can allot mines to state and central government companies and public sector enterprises for commercial coal mining. This means that these entities could utilise their captive coal block allocations either for their own use or sell coal on the lines of CIL to consumers.
“This is a good development that can help in de-risking our business. It will give us alternative revenue stream that will be important at times like these when demand in the market is low and prices are flat,” said an official of a public sector steel company, asking not to be named.
An NTPC official said that the new policy could come handy when production from their mines peaks and surplus is available for sale to outside consumers. NTPC over the past seven years has been awarded a total of eight coal blocks that have reserves of over 5 billion tonnes. While most of the coal from these blocks would be used for NTPC’s own use, it would reserve the right to sell it to other consumers. But its past record of going slow on already allocated mines could hamper the plan.
As per the guidelines for allocation of coal blocks under the government dispensation route, the coal ministry would identify blocks to be offered under this route and fix a reserve price for a block. This would then be offered to government entities having the best mining plan and a good track record on payment of the reserve price. The allocatee company will have the right to mine and sell coal from the block to approved end users under a linkage formula similar to the one being followed by CIL. It would also notify coal prices from time to time. The company may sell 90% of the production under the said route and could e-auction the balance 10%. If the allocatee company appoints a mine developer and operator (MDO) for coal block development, its selection should also be through competitive bidding process.
The government has so far allocated close to 200 captive mines to various end-use companies with total reserves of over 45 billion tonnes.
CIL CAUGHT IN A COBWEB
Seldom in recent times has the public sector Coal India Ltd. (CIL) been caught in a predicament as it finds itself now. The Maharatna company, which marked its footprints in the equity markets with aplomb in November 2010, is now virtually entangled in knots over myriad issues, including some major policy matters such as changeover to the GCV (gross calorific value) system of pricing, and the imbroglio over the fuel supply pacts.
It has faced unprecedented actions such as having to roll back prices and being forced to hammering out fuel supply agreements (FSAs) under government directive. And now, there is a possibility that it may have to rework some of the clauses in the FSAs which its main customer labels as biased. In the meantime comes yet another directive, this time to supply fuel to power companies on basis of the earlier memorandum of understanding route as FSAs remain largely deadlocked.
At a time when increasing production and sorting out logistic problems should have been one of its prime tasks, the CIL top-brass, led by its less than month-old chairman, is busy smoothening ruffled feathers of its prime customers such as NTPC over issues such as gross calorific value (GCV) and certain clauses in the FSA which NTPC is uncomfortable about.
The initial discomfort over an absurdly low penalty for non-supplies (at 0.1 per cent leviable after three years) has now given way to plain dismay about the way the draft FSA has sought to protect the coal behemoth from virtually every conceivable factor that may disrupt production, ranging from non-availability of regulatory clearances to equipment failures.
The Central Government had said that CIL would sign fuel supply agreements with power plants identified by the Central Electricity Authority /Union Power Ministry which have entered into long-term power purchase agreements with distribution companies. These power plants should have been commissioned or would get commissioned till March 31, 2015.
However, despite successive meetings (some of them stretching for seven hours), the board was unable to arrive at a consensus. In an unprecedented move, the Coal Ministry issued a Presidential Directive on April 4, seeking implementation of the fuel supply pacts. After another marathon board meeting, the independent directors, who were raising a voice of dissent on the issue of making CIL enter into binding commitments when its production plans were at the mercy of several factors not always in its control, eventually came around. The draft FSA was put up on CIL’s website on April 20.
Progress since then has been tardy to say the least and against the 50-odd FSAs that should have been signed, only 13 have so far been sealed.
Coal sector experts felt that by framing the pact in that manner, the Maharatna PSU had actually frittered away an opportunity of turning in its favour a tough situation, and it could have scripted a draft that was more acceptable and kept the government on its side to get the clearances necessary to raise the production for meeting the output obligations.
It was also felt that it made sense to sign FSA for a particular project after identifying the likely coal sources and also setting in as clauses, the hurdles that lay before the project. The penalty level and the force majeure clause have to be specific to each FSA and the pact should be signed with the approval of the CIL subsidiaries.
The chairman of NTPC, the company which buys 311 million tonnes of the 400-odd million tonnes that CIL produces annually, raised the GCV issue as forcefully as he dwelt on the FSA.
In line with the best international coal trading practices, CIL had switched over to the GCV classification of non-coking coal, in place of useful heat value (UHV)-based grading and pricing system in January this year.
However, haphazard inputs from the CIL subsidiaries have believed to have led to a situation where prices of some categories of coal increased abnormally. This had to be rolled back following the minister’s intervention. But, more importantly, lack of infrastructure necessitated by the GCV system is creating problems.
In the case of FSA, the NTPC chief voiced his concerns about the force majeure clause and indications are that, at an appropriate time, the CIL board may have to review those clauses which, user sectors believe, indemnifies the coal major, without leaving the user sectors with any safeguard.
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