Coal India To Sign FSAs, But Not Without Serious Concerns

In a recent move the government has initiated a presidential directive to force Coal India (CIL) to sign fuel supply agreements (FSAs) with the power companies with a promise of 80 per cent fuel supply. The same clause was earlier initiated by the prime minister’s office (PMO). CIL was asked to sign the FSAs on or before March 31, 2012 with the power companies who have commissioned their power plants on or before December 31, 2011. Besides, CIL was also asked to sign the FSAs with other power companies who have entered into long-term power supply agreements with the distribution companies.

The trigger level was set at 80 per cent, implying that missing the target would attract financial penalties. Coal India, however, has missed the deadline to sign the FSAs as it expressed inability to ramp up the production with immediate effect. These FSAs, when they come true, would fire up a total of 50,000 MW of power generation capacity of which 28,000 MW already is idle due to lack of fuel while another 22,000 MW is lined up for the current fiscal.

Any other fuel for thermal plants, such as gas, has become scarce in the country and the CEA has already asked the power producers not to add any gas-based generation capacity. Besides, imported coal has become very costly and hence there will be more dependence on coal-based stations.

We believe that merely signing the FSAs would not solve the current problem. One also needs to look at the coal production numbers of Coal India which in itself is a worrying factor. It should be kept in mind that CIL is the largest coal mining company in the world. It alone accounts for about 80 per cent of coal production in the country and hence its coal production numbers matter most for the power sector.

In FY12 CIL produced 435.54 million tonnes (MT) of coal which was just 1 per cent more than what it produced in FY11. This was about 3 per cent off the original set target of 447 MT. CIL seems to be struggling to maintain the production numbers as there are stringent environment norms, natural challenges like rainfall, inadequate transport system, etc. For the next year CIL has set a production target of 470 MT which is 8 per cent higher to this year’s production. For the next five-year plan the capacity addition target is set at 75,785 MW, for which about 250 MT of additional coal would be required. Under the circumstances mentioned above, one can only guess how CIL will meet the ever growing demand of the power sector.

In the current scenario CIL is expected to sign the FSAs in the next two days. It is now left to the board of directors of CIL to decide the penalty in case it fails to meet 80 per cent of the coal supply requirement. As far as the power sector is concerned, we believe that NTPC, Tata Power, Adani Power and JSW Energy may tend to benefit. BHEL would also see a growing order book. For Coal India, however, there are only hiccups ahead.