Coal India says no option but imports: But who will pay?

New Delhi: Coal India Ltd (CIL) will need incremental production of at least 64 million tonnes this fiscal to fulfil its obligations under the Fuel Supply Agreements (FSAs) it is slated to sign shortly with power producers.

As per a presidential directive, CIL has to sign FSAs with those power producers whose plants were commissioned between March 2009 and December 2011. But since CIL managed only 24 million tonnes of incremental production in 2011-12, the target of 64 million tonnes in a single year certainly looks ambitious. No wonder then that senior coal ministry officials have now begun to allude to the possibility of having to import coal to meet FSA obligations. But they hasten to add that imports would be the last resort.[caption id=“attachment_270458” align=“alignleft” width=“380” caption=“Hard times for Coal India. Reuters”]  [/caption]

Till last week, ministry officials have been indicating that CIL may divert some supplies from “high margin” customers (from e-auctions and non-power customers) to fulfil these FSA obligations. It had denied the possibility of having to import coal to meet the shortfall.

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CIL’s new Chairman-cum-Managing Director-designate S Narsing Rao said on Monday that imports may be the only way out. Speaking to Firstpost, he said: “I believe every effort should be made to step up production and imports should be used as a last resort. But incremental production of 64 million tonnes in a single year is difficult to achieve. Now it is for the Coal India board to see whether they want to import coal themselves or want to rely on designated government agencies like MMTC or STC for imports”.

Rao is expected to assume charge by 23 April. He told The Economic Times last week that CIL will pass through the higher cost of imported coal to its consumers in a bid to protect its financial health and investors’ interests. Rao also said that once he takes charge, CIL will identify some coal blocks where mass production is possible to increase overall coal production.

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Meanwhile, a senior coal ministry official admitted that importing coal would not only raise prices substantially but would also be contrary to global norms. “Globally, only 15 percent of coal is traded and the remaining 85 percent is consumed by producing countries. Imports are not the answer to the country’s problems,” he said.

The row over CIL’s FSA obligations follows objections by independent directors on its board who had said that signing FSAs would be tantamount to subversion of shareholder interest. Ultimately, the government had to force the issue with a presidential directive which mandates CIL to supply at least 80 percent of the requirements of these power producers.

Narsing Rao said the 64 million tonnes incremental production estimate for 2012-13 had been arrived at after taking the 80 percent trigger level into account.

While CIL is being forced to sign FSAs, it is free to decide what penalties and trigger levels will apply in case it fails to fulfil its obligations. It will also decide what penalties power producers will have to pay in case they do not pick up the mandated supplies of coal.

Ministry officials said that the 64 million tonnes figure would be valid only if power producers sign 100 percent power purchase agreements (PPAs) with distribution companies. The CIL board is scheduled to meet on 16 April to decide on penalties and other formalities of the FSAs. The FSAs need to be signed within a fortnight of the presidential order.