Coal India Limited Cuts Supplies to 60 Power Plants

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Written by Richard Finlayson, Senior International Editor for Industrial Info Resources (Johannesburg, South Africa) -- Coal India Limited's (BSE:533278) (CIL) (Kolkata) supply policies to India's thermal power sector seem sometimes contrary and often confusing, both to companies in the Power Industry and to other observers who are hoping that the dysfunction between coal supply and power generation will be solved to the benefit of industry, commerce and the general public.

CIL has cut off coal supplies to 60 captive power plants run by companies such as Tata Power Company Limited (BSE:500400) (Mumbai, India) and state-controlled Durgapur Projects (Burgapur). A percentage of Tata Steel's power needs were coming from a captive power plant. At the beginning of June, CIL sent out a list of 62 power plants to its subsidiaries, instructing them to immediately discontinue supplies due to failure to pay commitment guarantees within a stipulated period.

In a meeting in February, CIL said that out of a total of 135 long-term agreements issued by standing linkage committee to power plants, commitment guarantees had been paid by all except Tata Power and Durgapur Projects. Out of a total of 237 long-term agreements issued, 177 had been paid up.

Under the new set of controversial fuel supply agreements, CIL has done away with asking for a commitment guarantee, retaining the concept of security deposits equivalent to 6% of the annual contracted quantity of coal, based on the price of the grade promised. For existing long-term agreements, the commitment guarantee would be converted into a security deposit calculated under this formula, and the balance would be adjusted.

Certainly, there is some room for confusion and contention, and further intervention, in those procedures.

Running parallel to the cut-offs drama, CIL has entered into fuel-supply pacts with 27 power units.

The government earlier this year ordered CIL to sign agreements with power producers guaranteeing to meet 80% of their coal requirements. Power companies were slow to sign as CIL's penalty for defaulting on agreements only had a low token value.

Some agreements were signed before a meeting scheduled for this week by the prime minister's office to sort out problems, and the penalty clause in particular, which had stopped companies the National Thermal Power Company (BSE:532555) (New Delhi) from signing supply agreements with CIL. The meeting will be attended by senior coal and power ministry officials, CIL top management, and power industry executives. The issues at stake, including the nation's power supply, may be too clear and pressing for a committee to find a simple and effective solution quickly.

For related information, see June 11, 2012, article - Coal India Targets 615 Million Tons in 2017 -- Blue Sky for Power Sector?

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