On 18th January, 2012, power producers met the Prime Minister and sought his immediate intervention on several issues related to the sector including the lack of coal supplies. They informed that Coal India Limited has been insisting on signing the fuel supply agreements (FSAs) with assurance of only 50% of the required quantity. As a result no FSAs have been signed since April 2009.
Yesterday Prime Minister Manmohan Singh approved a plan wherein Coal India would sign a fuel supply agreements (FSA) with power plants that have long-term PPAs and have been commissioned or would be comissioned by March 2015. For power plants commissioned up to 2011, FSAs will be signed before March 31, 2012. The FSAs will be for the full quantity of coal for a period of 20 years with trigger level of 80% for levy of disincentive and 90% for levy of incentive.
Also read CIL CMD's interview: Will sign FSA based on 12th Plan
What does this mean for Coal India or power companies like Lanco Power and JSW Energy? In a discussion on CNBC-TV18, Harshvardhan Dole, VP Research (Institutional Equities) at IIFL, K Rajagopal, CEO at Lanco Power and NK Jain, Vice Chairman at JSW Energy weighed the pros and cons of the FSA.
According to Harshvardhan the key challenge would be the availiblity of domestic coal. Going by Coal India's production targets, it appears that the company will have import coal to meet power companies' demands. The second challenge would be ascertain, in case of coal imports, which party actually subsidises the cost, asks Harshvardhan. He said the FSA development signals towards a period of uncertainity that Coal India is likely to enter.
Defending the government's decision, Lanco Power's K Rajagopal said in the event of CIL having to import coal, the incremental cost incurred can be passed on. JSW Energy's Jain believes the FSA decision was a good one which speaks about the government's intention of helping out the power sector.
Below is the edited transcript of the interview. Also watch the accompanying video.
Q: Do you think it is a feasible plan with issues like Coal India not being able to ramp up production or deliver coal or having to import expensive coal, which you may not be able to buy?
Rajagopal: It is very much a feasible plan. Today the shortages of 40-50 million tonne for the plant are already commissioned and if they have agreed to divert a part of their e-auction coal then shortage remains hardly 30-40 million tonne for the coming year, which is already in the process of import. I do not see any problems in implementing the plan of action decided by the PMO and the coal ministry.
Q: Can you narrow it down to the actual impact though for Lanco both with reference to your Anpara project & Amarkantak. I think those two are impacted. How much does it constitute of your total capacity?
A: Coal based generation constitutes over 75% of our generation operating capacity. Anpara project is 1,200 mw plant located around 20 km from the northern coal fields. Today with this decision, we are sure of signing the FSA for the entire linkage quantity. I would like to clarify that the FSA being signed for the entire linkage coal is equivalent to 85% PLF for the plant operations. Second, it is one of the conditions that 80% satisfaction level to disincentives Coal India or incentivises over 90%.
Coal India is supplying 100% of the linkage quantity, which will meet 85% enormity PLF as envisaged in the tariff recovery. Second, Amarkantak is also 30 km from the south eastern coal fields. We have two units of 300 mw. We have been currently getting coal from the south eastern coal fields. In the absence of FSA there is no guarantee of the level at which we can receive the coal. Now with this and with the execution of the FSA, it will improve the coal availability for both these plant.
Q: There is some scepticism among analysts on the impact of this decision has on a company like yours?
Menon: I would say this is a welcome decision as far as the sector is concerned. It shows the positive intent of the government and brings in clarity for the stakeholders to the power projects are concerned. Though it may not directly have any impact as far as JSW Energy is concerned because primarily today we have projects, which are operating on imported coal or the lignite from our own mine.
However, there are various issues, which are affecting this sector. The government had taken some decisions based on the meeting with the PMO. Now those issues are getting resolved and that is the key message as far as this particular decision from the government is concerned.
Q: In the event that Coal India is not able to produce or deliver the entire amount of coal required through this FSA, they will have to import coal and that maybe expensive coal. Do you have a provision to pass down if you pay that much for coal? Also whether you would be in a position to pay much higher for imported coal and if you do would your PPAs allow you the flexibility to pass down any of these higher prices?
Rajagopal: As far as Anpara project is concerned, it is a case to bidding project with 100% coal as pass through. In fact we already have an approval from the government of Uttar Pradesh (UP) to import coal in case of shortages. It is even more welcome and easier if Coal India imports and then supplies the coal, whatever is the additional cost due to these imports will be 100% reimbursed by the UP government, which is the power purchaser.
Second, our Amarkantak plant is supplying the power from unit one in the merchant route. Even in the present scenario, we have been either sourcing the shortages through e-auction or imports. If it is done through Coal India, it can get some bulk discount and it may not make much impact on the cost of generation of this plant. As far as second unit of Amarkantak is concerned, we are supplying power to Haryana and Chhattisgarh as per CERC mechanism. Any increase in the coal price particularly when it is supplied by Coal India, there should be no problem in passing on the entire additional cost because of imports to the power purchaser.
Q: What are the key problems or hurdles that you see in implementing the FSA that was mooted yesterday? Do you think companies like Lanco and Adani Power will materially benefit or do you think there could be some slips?
Dole: The key challenge here is of course availability of domestic coal. We all know that supply of domestic coal is way below the total requirement. Leave aside the plant, which are operating now. Perhaps the FSAs can be signed and these plants can be made to function and PPFs can be made workable. However, the larger question is close to about 70-80 gw capacity is under construction. The way in which commissioning is happening we are incrementally delivering about 16,000-17,000 mw capacity each year.
This capacity requires a double digit production growth in Coal India for these linkages to work through. Now the basic question is the supply growth has been much lower than that and going by Coal India