The fate of the Rs 1,000-crore investment made by Vedanta Aluminium Ltd (VAL) in setting up a power plant in Odisha is hanging in balance. A high-level inter-ministerial committee that recommends coal allocation for power units has refused to take up the vexed issue of linkage for VAL’s plant in view of the legal nature of the matter.
VAL, which is a unit of London-listed Vedanta Resources Plc, had earlier asked the committee to renew a letter of assurance (LoA) for supply of coal to the 270-Mw capacity plant by Coal India subsidiary Mahanadi Coalfields Ltd (MCL). This, after an LoA had lapsed when VAL failed to achieve project milestones.
“The standing linkage committee has noted the developments in this case,” according to an official close to the development. “It has decided that it is a legal matter — one that cannot be opined upon by the committee,” he told Business Standard. A senior VAL executive refused to comment.
It was in 2008 that the Vedanta subsidiary was issued an LoA by MCL for supply to four units of 135-Mw capacity each – of its captive power plant in Jharsuguda district in Odisha. The power from the plant was to be fed to a 0.5-mtpa (million tonne per annum) alumina smelter of Vedanta at the same site. LoAs generally get converted to firm fuel supply agreements (FSA) after the project developer achieves certain milestones within a timeframe.
In this case, the LoAs, which were valid for two years, expired in June 2010. VAL was able to achieve milestones according to the terms of the LoA for unit 1 and unit 2, and FSAs were concluded by MCL for the two units.
However, for units 3 and 4, VAL did not approach MCL for signing of FSAs within the validity period, as the state government’s Pollution Control Board refused to give its consent for operation.
Meanwhile, to further add to the complexity of the matter, the condition mandating the state’s “consent to operate” was eliminated from the list of milestones to be achieved by project developers. Since FSA was not signed for units 3 and 4, and milestones too were allegedly not achieved by VAL, Mahanadi Coalfields forfeited the commitment guarantee for the two units.
The standing linkage committee, in its meeting in April last year, asked MCL to take a legal opinion in the matter. India’s Attorney General (AG), in his opinion, had justified MCL’s move to invoke the bank guarantee. In response, VAL approached the coal ministry again in July last year along with the legal opinion of Additional Solicitor General Gopal Subramanium. The ASG had opined that MCL’s action was “not in accordance with law, and is arbitrary”. The government again asked MCL to take AG’s advice. The AG had, in November, opined that the renewal of LoA and signing of FSA might not be possible, as MCL has cancelled the LoA and invoked the bank guarantee.
On its part, VAL is crying foul. It is arguing that the economic viability of the project has gone for a toss in the absence of firm coal supply. “VAL is somehow managing to run the two units by procuring costly coal either from e-auction of imports,” said a source close to the development. The company is procuring coal at an average rate of Rs 2,500 per tonne from the spot market, against the low cost of Rs 1,100 per tonne that could be available from MCL.
The company’s production cost has exceeded$ 2,400 per tonne, as a result of costly coal usage against the global price of $ 2,000 per tonne of aluminium metal. The Orissa government is now understood to be taking up the issue with the centre.