Coal India Limited (CIL) is the largest coal miner in the world. Coal production has however stagnated over the past 2-3 years and Indian power companies were left in the lurch. Like most companies in the sector, the miner's performance has been marred by regulatory hurdles and land acquisition problems.
To try and address this supply lacuna, CIL has been ordered by the government, to sign contracts agreeing to supply at least 80% of the coal requirement of utilities that have been crippled by inadequate fuel supply. If CIL does not meet this requirement, it will have to pay a paltry penalty of 0.01% (with no penalty in the first three years) of the value of shortfall.
But, such an insufficient penalty clause reduces the efficacy of the fuel supply agreement (FSA). The carrots and sticks approach could have worked wonders. But in this case, there are no carrots to increase production and the meager penalty for not meeting targets will not force the monopoly to ramp up production. Thus, coal supply will continue to be a problem for power producers in energy starved India. Since the penalty only kicks in after three years, almost nothing has changed in the short term for energy producers such as Tata Power, National Thermal Power Corporation (NTPC), GVK Power, etc.
Coal India expects to raise its output to 464 million tonnes (MT) in FY13, after producing about 436 MT in FY12, an increase of only 6%. It would need an additional 64 MT in the current fiscal year to meet obligations under the new fuel pacts. Since the company may not be able to boost production in line with demand, it may have to resort to coal imports. Domestic coal is typically 40% cheaper than global prices. Who will bear the extra burden in case of a shortfall is not clear.
India plans to add 76,000 MW capacity to its existing 191,000 MW power production capacity in the next five years. Thus it would need to rapidly increase coal production to feed these power plants. Currently more than half of the total capacity is fueled by coal and there is still no suitable alternate.
While the penalties on Coal India for not meeting its target may not be very harsh, there is one silver lining on the horizon. Some producers see the revival of binding fuel supply contracts as a positive sign. This may help these companies get necessary funding for their products. Bankers who had earlier refused to disburse loans without long-term supply arrangements in place may now be more willing. This, coupled with the recent 0.5% repo rate cut may ease some of the pains of power producers.