At least 10 pct supply penalty cost likely for Coal India-sources

NEW DELHI, April 3 Tue Apr 3, 2012 5:03am EDT

NEW DELHI, April 3 (Reuters) - State-backed Coal India may have to pay power companies between 10 and 40 percent of the average cost of 20 percent and more shortfall in supplies under new guaranteed fuel pacts the government is forcing it to sign, ministry sou r ces said.

The world's biggest coal miner, however, stands to gain equal levels of rewards even if it meets only 90 percent of its commitments under these pacts with power plants that are due to be commissioned by 2015 and generate 50,000 megawatts of power.

Coal India's production has stagnated due to regulatory and infrastructure hurdles. In 2011/12, it missed even a scaled down output target, producing about 436 million tonnes. It now aims to produce 470 million tonnes in 2012/13.

The under-performance by the coal monopoly has worried Prime Minister Manmohan Singh, already struggling with a slowing economy, and he is now pushing the company to boost output which could help many power plants that are running below capacity.

"What is being proposed is if the company fails to provide less than 80 percent then it will be penalised in a graded manner," said a senior source in the coal ministry on condition of anonymity as the proposals are still being finalised.

"Between 75 to 80 percent supply (of the contracted amount), it will be fined 10 percent of the average cost of the shortfall. For 70-75 percent of supply the penalty will be 20 percent and below 70 percent supply will attract a 40 percent penalty."

Average domestic coal prices are 1,600-1,700 rupees ($31.76-33.74) per tonne and are anywhere between 40-70 percent below international spot prices as they are capped by the government which is keen to provide cheap electricity.

Indonesia spot coal prices -- the biggest source for India's imports -- are currently around $65 per tonne.

Singh's decision to force Coal India to sign guaranteed fuel supply pacts followed intensive lobbying by top executives from India's power companies, who had sought his help to boost supplies of coal. Singh's office has said Coal India will have to ensure supplies, including by imports if needed.

Coal India has also said it needs more clarity on who will foot the bill for any imports before it commits to major purchases needed to meet supply obligations to power producers.

India's coal demand is set to jump to 981 million tonnes by 2017, official data shows, but output in this period may only be at 715 million tonnes, leaving imports to bridge the gap.

Coal accounts for about half of India's power generation.

Last month, a government auditor's draft report said India lost up to $210 billion in revenue by selling coal deposits too cheaply, in another headache for Singh's government which has spent almost all of its second term fighting graft allegations. (Editing by Jo Winterbottom)

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