Coal block de-allocation risks less in short term, painful in future: India Ratings

Another alternative that could emerge is government looking to reallocate the captive coal blocks, if they are de-allocated by SC

In the wake of a Supreme Court  (SC)order declaring all coal block allocations illegal since 1993, India Ratings & Research (Ind-Ra) has identified the adverse impacts of the order and suggested the government to provide an alternative solution to the power producers.

However, India Ratings said the impact of the order would not be much in the short term. “The immediate impact of the SC judgment on the power sector would be low, even if the mines were to be de-allocated,” said the report, adding till December 31, 2011, only 15 mines of the 80 captive coal blocks allocated to the power sector reached the production stage.

The total output from the mines was 26 million tonnes, which can be used to generate only an estimated capacity of 4.6GW-5GW. “This capacity could be fired from imported coal/e-auction/tapering linkage with necessary changes in the power purchase agreements,” said the report.

However, a lot hinges on the decision that the apex court would take on September 1. “Complete/partial de-allocation cannot be ruled out. However, in both cases, the government could look at providing coal linkages to end-use plants,” said the report.

Another alternative that could emerge is the government looking to reallocate the captive coal blocks, if they are de-allocated by SC.

“These captive blocks could be then given to Coal India Limited, which could use mine development operators for speedy development and production with the end-use plant being the same,” said India Ratings. It added that such an alternative, however, could lead to problems if the clearances take time or mine development operators take longer time to operationalise the mines.

In the event of the court deciding for selective/complete retention of captive coal blocks, with additional recoveries for the government, India Ratings said the impact of such a payout would be severe for merchant power plants based on these coal blocks, which would see a reduction in the supernormal profits.

“For plants based on cost-plus tariffs, such increased cost would most likely be recovered from end-consumers without impacting the credit profiles of such plants,” said the report.