Power cos to meet Coal India on FSA, but deadlock may persist

The push by power companies for better fuel supply agreements (FSAs) with Coal India seems pointless.

Not only is Coal India (CIL) bound by the conditions in the FSAs since these were approved by its board after a presidential decree, the world’s largest coal company also has a virtual monopoly over coal supplies within the country.

Ever since CIL’s board cleared FSAs with clauses such as a mere 0.01 percent penalty in case of supply shortfalls, power companies have been resisting. Of 48 FSAs that were to be signed - for power plants that were commissioned till December 2011 - only seven or eight have been signed until now.

NTPC, Damodar Valley and other large power public sector undertakings (PSUs) are holding out and so are a majority of the others, including some private-sector power suppliers. They all want the penalty clause to be more stringent on supply shortfalls and coal supplies to plant sites instead of ports and coal. NTPC also wants coal to be supplied according to the older useful heat value (UHV) norm, instead of the gross calorific value (GCV) method CIL has adopted now.

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CIL’s newly appointed chairman and MD S Narsing Rao told Firstpost that a team from NTPC would arrive in Kolkata over the next few days for detailed negotiations.

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He also made it clear that while CIL would be willing to listen to NTPC’s concerns, it was virtually impossible for the coal company to alter conditions set in FSAs by its board of directors. “How can the penalty clause be altered? It has been approved by our board,” said Rao. “Also, the insistence on UHV instead of GCV cannot be addressed. The government issued a statutory notification on GCV, how can we defy that? Besides, following GCV norms is ultimately in the interest of NTPC only.”

Despite several attempts by Firstpost, NTPC’s chairman and MD, Arup Roy Choudhury, was unavailable for comments.

Rao explained that earlier, there was less incentive for coal companies to improve the coal quality because there were eight large bands, but now 17 bands have been created, which would mean NTPC gets access to better quality of coal.

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Meanwhile, a report in today’s Economic Times says that the chairman of the Central Electricity Authority (CEA) has called a meeting of Coal India officials, power companies and officials from the coal and power ministries to break the deadlock over fuel supply agreements (FSAs). The meeting, scheduled next week, will be chaired by CEA chairman Arvinder Singh Bakshi.

The ET report quoted a senior Damodar Valley official saying that “the new fuel supply agreement is heavily skewed in favour of Coal India to the extent that the 80 percent trigger level considers 85 percent capacity utilisation. This means the actual coal that would be supplied will be 68 percent of the total coal required for running any plant at 100 percent capacity utilisation.”

But a coal industry veteran pointed out that the issue power suppliers have with penalties on supply shortfall is less practical and more symbolic. “What would NTPC rather have - some token penalty like Rs 100 per tonne or more coal to fuel its plants?

“The two stakeholders, CIL and power companies, need to ensure fuel supplies instead of harping on penalties. Besides, CIL is a virtual monopoly so where is the question of benefiting by penalties?”

The ET report also quoted a senior NTPC official saying that the seller also has the authority to terminate FSA in case of disputes. “This is grossly in favour of Coal India. It should have been normally, through an arbitration process.”

Meanwhile, Rao said his company was thinking over whether to set a deadline for the remaining power companies to sign FSAs with CIL. CIL’s board is already seeking answers to questions like how to draft FSAs for power plants that were commissioned after December 2011 since there is no mention of these plants in the presidential order issued early April. CIL has sought clarity on the matter from the Coal Ministry.

It is already known that Coal India will need incremental production of at least 64 million tonnes this fiscal to fulfill its obligations under the 48 FSAs to be signed 2012-2013. 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 the financial year ending March 2012, the target of 64 million tonnes in a single year certainly looks ambitious. Also, the target for the current financial year has been arrived at after taking the 80 percent trigger level into account (i.e., if no penalty has to be paid by CIL if it supplies 80 percent of contracted quantity).