FSA with power cos: Who does it really benefit?

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FSA with power cos: Who does it really benefit?

Prime Minister Manmohan Singh approved a plan wherein Coal India would sign a fuel supply agreements (FSA) with power plants. The FSAs will be for the full quantity of coal for a period of 20 years

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Excerpts from Bazaar on CNBC-TV18 Watch the full show » ALSO READ See latest News about Coal India See previous management interviews See what other Experts & Brokerages are saying about Coal India Coal India BSE | NSE 29/05/12 Are Mutual Funds betting on Coal India? Other Stocks in this news JSW Energy |

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.