New policy realigns coal distribution

Facilitates supply of assured quantities to various consumers

NEW DELHI: The government has unveiled a coal distribution policy to facilitate supply of assured coal quantities to various consumers at pre-determined price.

It also announced re-introduction of e-auction of coal with modification to encourage emergence of proper coal market in the country.

The policy takes into consideration the regulatory regimes in which various sectors of the economy are functioning for classification of consumers and prioritisation of coal supplies.

The existing classification of consumers into core and non-core sectors has been discarded though fertiliser, power, defence and railway sectors will be assured of 100% requirement.

Steel, cement, paper, aluminum, central PSUs and exports have lost the core category status which allowed them a special price dispensation under e-auction though 75% of their requirement will be met through fuel supply agreements (FSAs).

All the existing linked coal consumers who have been granted linkages are required to enter into FSAs with respective coal companies in six months failing which coal supplies can be discontinued. New customers will be required to sign FSAs.

Reacting to the policy, Partha S Bhattacharya, chairman and managing director, Coal India Ltd, told DNA Money that with the announcement the distribution policy would not be restrictive.

“It is a very pragmatic policy and imposes a lot of responsibility on CIL,” he said.

Under the current system, an inter-ministerial committee under the Union coal ministry used to grant linkages (coal allocation) to consumers without any formal FSA.

Through FSAs, there will now be agreements with take or pay clause enjoining upon both supplier and customer to sell and buy the agreed quantities.

Such FSAs may allow CIL to charge price that is more in line with market rates. Coal to be supplied under FSAs will be charged at the notified prices of CIL.

For supplies to small and medium consumers, state government designated agencies would be entitled to charge actual freight and 5% as service charge over and above the basic price charged by the coal company.

CIL already has FSAs with steel companies with annual price clause. While stating that it may help CIL get reasonable returns, Bhattacharya said they could start production from mines that were unviable for production earlier since they might be able to get better price.

State governments will be asked to put in place institutional mechanisms for coal supply to small and medium sector consumers. In respect of small and medium sector consumers, the existing annual 500 tonne cap for coal will be increased to 4,200 tonne.

“It will be difficult exercise for CIL to reach out to small consumers. There is need to create institutions. Like in West Bengal, there is West Bengal Mineral Development Corporation that can be used for the purpose. Similarly, the Centre can also nominate any agency for the purpose,” said Bhattacharya.

State governments will enter into FSAs with public sector coal companies for sourcing coal. To begin with, annual quantity of 8 million tonne coal will be made available to meet the requirements of the small and the medium sector consumers.

The concept of letter of assurance to project developers will replace the present system of granting coal linkages. Such LOAs will be converted into FSAs after specific milestones are achieved by the project promoters in a period of two years in case of power plants and one year in case of other consumers.

Consumers granted LOA will have to furnish a bank guarantee equivalent to 5% of their annual requirement of coal which will be forfeited if the suggested milestones are not achieved within the stipulated period.

“Bank guarantee system is being introduced to encourage only genuine consumers and to prevent pre-emption of coal linkages without developing the end-use projects in time as has been happening currently,” said an official statement.

Under the new policy, Coal India Limited will be at liberty to import coal to meet their supply commitments to various consumers and in such case necessary price adjustments will be made by the coal companies.

E-auction will be re-introduced with certain modifications like there will be no floor price for bidding. Coal PSUs will, however, have the liberty of having a reserve price which is not lesser than the notified prices of coal for appropriate commercial decision making.

There will be two platforms for e-auction, one for coal supply for a longer period of one year or more, and the other for supply of coal for shorter periods as per the frequency of offer of e-auction.

To encourage economic and efficient use of coal by the consumers, norms of consumption for all the major sectors like power, steel and cement will be
reviewed taking into account continuous improvements in technology,
manufacturing process and other developments.