New pacts unlikely to improve India coal supply-power cos

NEW DELHI, April 17 Tue Apr 17, 2012 6:56am EDT

NEW DELHI, April 17 (Reuters) - Coal India's offer to pay a paltry penalty for missing supply obligations will not force the state-run monopoly to ramp up production quickly to meet burgeoning demand in energy-starved India, power producers said on Tuesday.

The world's biggest coal miner has been ordered by the government, which owns 90 percent of Coal India, to sign contracts agreeing to supply at least 80 percent of the coal requirement of utilities that have been hobbled by scarce fuel.

The company's board approved the proposal on Monday and offered to pay a penalty of 0.01 percent if it fell behind schedule.

"This is a task well begun, but only half done," said A. Issac George, chief financial officer at GVK Power, referring to the supply contracts that were proposed after industry captains such as Ratan Tata and Anil Ambani approached Prime Minister Manmohan Singh for an end to fuel shortage.

The penalty would apply only after three years and so changes almost nothing in the short term for many power plants, which have been running below capacity due to fuel shortage over the past year.

Hemmed in by regulatory hurdles and land acquisition problems, Coal India's production has stagnated over the past three years and power companies were hoping a stringent penalty clause in the fuel supply pact would have goaded the company to take measures to boost output.

Coal India expects to raise its output to 464 million tonnes in 2012/13, after producing about 436 million tonnes in the fiscal year that ended in March - missing its scaled down target.

It would need an additional 64 million tonnes in the current fiscal year to meet obligations under the new fuel pacts. But the company may not be able to boost production in line with demand and may have to resort to imports.

Coal India is expected to sign fuel supply pacts with power producers for 20,000 MW capacity this week. Agreements for an additional 40,000 MW capacity will be signed later.

"There is no repercussion in not meeting the shortfall. Once again, the assurance is on a best effort basis, as before," said Ashok Khurana, director general at Association of Power Producers.

The company, which went public in 2010, has been under pressure from a shareholder - The Children's Investment Fund Management (TCI) of the UK - not to give in to the government diktat to supply coal cheaply to power producers.

Domestic coal is usually at least 40 percent cheaper than global prices. Typically, supply guarantees come with an additional charge to the consumer. It is not immediately clear if Coal India would levy such a charge.

Some power producers such as state-run NTPC, India's top utility, and private sector Lanco Infratech see the revival of binding fuel supply contracts as a positive sign that would help companies get easy funding for their projects.

"At least agreements will be in place. And now we can keep working at ensuring there is more credible penalty," said K. Rajagopal, CEO-thermal at Lanco Infratech, whose operational 1,800 MW plants would immediately benefit.

Lenders have been averse to funding projects that do not have assured long-term fuel supply, delaying the ventures and escalating their costs. "The fuel supply agreements will give lenders more confidence," said Rajagopal.

India plans to add 76,000 MW capacity to its existing 191,000 MW in the next five years and would need to significantly raise its coal output to fuel these plants. At present, more than half of the total capacity is fueled by coal. (Editing by Ranjit Gangadharan)

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