Coal shock looms for state power producers..

Thermal power producers may be set for a jaw-crusher.

In a huge policy shift, the government plans to change the terms of  fuel supply agreement (FSA) in its new coal distribution policy.

The proportion of coal supply assured for power plants could now fall to 50% against 90% so far.

“Looking at the current situation of coal assets in the country, Coal India (CIL) is not in a position to sign FSAs with 90% fuel security. It will have to pay a penalty if it fails. That is why we have mooted the idea of providing only 50% fuel security under the new FSAs that would be signed,” said a coal ministry official, who was part of the review meeting of the New Coal Distribution Policy.

The ramifications are imaginable — tying up supplies from overseas; working the entire logistics chain through shipping, ports and transport; hedging prices and supplies and so on.

Till now, a power producer had to secure only 10% of raw material requirement that CIL, the state-owned monopoly coal producer, didn’t sign an FSA for and is therefore under no obligation to meet.

Now, it would have to worry about as much as 50% of the raw material requirement.

Unpleasant as it is for the power producers, the trend has been in the making for a while now.

The last two years have seen as many as 33 thermal power projects commissioned, for which no FSA was signed between CIL and the developers. While CIL is supplying coal to these plants, in the absence of FSA, it is not bound to maintain a minimum supply throughout the year.

Despite the power ministry’s pressure, Coal India has desisted from signing FSAs with power companies.

Interestingly, bringing down the FSA requirement to 50% could help private sector power projects at the cost of state-owned companies. This is because the government tends to favour Central and State sector companies while allocating coal.

“We have not been getting even 50% of our coal requirement for our power plants. If the government assures us 50% fuel, it will make our situation better,” said an official of a private sector company.

CIL has proposed to supply 343.5 million tonne (mt) coal to the power utilities during 2011-12, of which 306 mt is already committed for the units commissioned till March 31, 2009 under the fuel supply agreement. Thus, additional availability of coal for newly commissioned units during 2009-12 would be 37.5 mt only. That leaves a shortfall of 30 mt coal for the power sector.