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Home News Power Sector News CIL board cuts penalty on fuel supply shortfall

CIL board cuts penalty on fuel supply shortfall

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CILThe board of state-run Coal India Ltd (CIL) drastically reduced the penalty the company will incur on any shortfall in fuel supplied to power producers to 0.01% of the value of this deficit from the current 10%. The move comes after CIL was issued a presidential directive to sign fuel supply agreements (FSAs) with power producers binding the state-owned monopoly producer to ensure that electricity producers have enough fuel. The directive was issued after CIL's independent directors opposed the penalty clause at a time when mining projects in India are being put on hold owing to delays in environmental clearances.

Following the resistance on the part of the independent directors, the government allowed the company to decide the penalty amount. The government ordered the signing of FSAs after power producers met Prime Minister Manmohan Singh in January and conveyed their concerns over coal supplies. Singh assured them that a viable solution would be found.

The current clause stipulates a 10% penalty on the value of the shortfall if 80% of the agreed coal isn't supplied. The new clause reduces that to 0.01%.

The new FSA also stipulates that the company will not be liable to pay any penalty for the first three years from the date of the FSA signing. CIL is likely to sign FSAs with power producers on 20 April, said Zohra Chatterji, additional secretary in the coal ministry and acting managing director of CIL.

A senior coal ministry official in New Delhi said the new penalty structure effectively meant that CIL had hedged itself against any possible penalty in the foreseeable future.

"Even if there is a shortfall, being a government company it can always invoke force majeure and avoid the penalty," this official said, referring to the so-called act-of-God clause in contracts.

The CIL board's decision follows a PTI report on Sunday citing an official of the UK-based hedge fund The Children's Investment Fund Management (UK) Llp (TCI) that his fund would initiate action against the coal miner within the week, for failing to protect the interests of minority shareholders.

TCI, the biggest foreign investor in CIL, is opposed to the new FSAs as it wants the company to sell coal at market rates. International coal prices are at least 20% higher than CIL's prices.

The board decision may not make much of a difference to CIL, said Chintan J. Mehta of Sunidhi Securities and Finance Ltd, Mumbai.

"Frankly, penalty was never an issue. CIL has never paid penalty. In fact, for the next two years, the company is unlikely to face any shortfall in coal supply. In FY13, it can face a shortfall of 50 million tonnes (mt), but only if all proposed power plants come on stream, which itself is far-fetched," he said. "Power producers want CIL to import coal as they feel that unlike middlemen, a corporate (firm) will not mix imported, superior-quality coal with inferior-grade domestic coal."

CIL will be able to supply coal to power companies in the current fiscal year as per the proposed FSAs without having to resort to imports, according to a company official who did not want to be identified.

"The power plants will also have to show that they have signed power purchase agreements with the power distribution companies," Chatterji said.

CIL has set itself a target of producing 464 mt of coal in 2012-13. It has pithead stocks of 72 mt, of which it will sell 30 mt this year, the company official cited above said. It could sell the remaining pithead stock via the e-auction route, he added.

The coal miner will, however, face a production shortfall beginning 2014-15, which the company could make good through imports.

The amount of the shortfall in 2014-15 will be 26 mt and that in 2015-16 will be 28 mt, the official said. CIL could get the rest from overseas, depending on whether customers agree to pay higher import prices. "The additional price could be shared by all customers evenly," the company official said.

CIL is expected to produce 530 mt of coal in 2015-16, at a "normal production growth rate" of 5%, he said.

Chatterji, however, said that no decision had been taken on imports at Monday's meeting.

Apart from power, the state-run miner supplies at least 100 mt of coal every year to other sectors, including steel and cement. From 2016-17, however, CIL expects to meet the entire demand of customers on its own.

"We expect to meet the entire demand in the country on our own starting from 2016-17, as environmental clearances for some of the proposed projects are likely to fructify during that time," the official said. It aims to produce 556 mt of coal in 2016-17.

Power companies' installed capacity is slated to increase to 128,000 megawatts (MW) in the next three years from 90,000MW now.

The power companies will require 475 mt of coal in 2015-16, the official said.

CIL may increase the price of coal "while remaining within the ambit of gross calorific value calculations", to nullify the recent increase in wages, he said. "Otherwise, our margins would be under stress."

Source- Mint


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