Coal India's modified FSA

New power producers are unlikely to agree to the cost-plus model as their costs will be higher

Coal India Ltd’s (CIL) board approving the modified Fuel Supply Agreements (FSAs) does not mean power plants will start getting assured supplies of coal to generate power, as new producers might not agree to the pricing under the FSA. The board approved payment of penalties in the range of 1.5 per cent to 40 per cent in case of a shortfall below 80 per cent. Thus, only if the company is not able to meet its commitment of supplies will it pay higher penalties. This is where the board seems to have conceded some ground. After the Presidential directive, the board had recommended only zero penalties for the first three years and 0.01 per cent later for supply shortfall below 80 per cent. CIL has cleverly lowered the trigger level to its comfort zone of 65 per cent (with the remaining 15 per cent being imports) and increased penalties.

Import has been the issue of contention through the crisis. The government had cleared power plants without clarity on how the coal would be supplied. CIL’s output has been stagnating due to issues of its own, as well as the lack of logistical support. To meet the difference, power producers were expected to import coal. But new producers were expected to pay the same price as existing ones, and were reluctant to import, unless there were other players willing to share the price burden. Thus, they were looking at price pooling, where all consumers of coal pay the same amount.

This would have resulted in coal prices rising six to seven per cent, which in turn would mean higher cost of power. This move would naturally face resistance from existing power producers, who have not been able to pass on higher coal costs from earlier price revision of Coal India due to possible political fallout. The only way out was a cost-plus model where the power producer using imported coal pays the actual price. Newer producers obviously objected to this model, as their cost of power produced would be higher than of existing players.

This brings us back to where it all started. Who will bear the higher cost of imported coal? Coal India has cleared the final draft FSA with the cost-plus model for imported supplies. The company expects plants that have already signed FSAs after the Presidential directive to sign the modified one. But it does not seem to be confident of finding any takers to clear the long overdue logjam, as it has referred the matter back to the Central Electricity Authority and power producers for their opinion.