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Fuel-supply pact: Coal India's dark future

The government has asked the coal miner to sign fuel supply deals with power projects that have an agreement with distribution utilities. Coal India may underplay the damage to its finances due to the government's diktat but the hit to its profit margins in the future looks certain.

K.R. Balasubramanyam        Last Updated: February 21, 2012  | 20:05 IST

KR Balasubramanyam
KR Balasubramanyam
Can India's burning coal issues be resolved by a quick order of the government? The United Progressive Alliance (UPA) regime's initiatives seem to suggest so. According to a press release issued by the Prime Minister's Office on February 15, the public sector Coal India Limited (CIL) will sign fuel supply agreements, or FSAs, with power stations having long-term power purchase agreements (PPAs). The stations include both existing and those set for commissioning by March 2015.

Coal India will sign the FSAs for full quantity of coal mentioned in the Letters of Assurance (LoAs) for a 20-year period with trigger level of 80 per cent for levy of disincentive and 90 per cent for levy of incentive.  In case of any supply shortfall, the PSU has to arrange the balance through either imports or from the State/Central PSUs owning coal blocks though it does not specialize in negotiating and bringing in coal from overseas mines.

The arrangement, the government thinks, would provide relief to power plants with estimated capacity of more 50,000 MW-plus and will likely boost investors' confidence in India's power sector. 

Coal India makes up four-fifth of India's coal production and hopes to end the current financial year with a production of 440 million tonnes, short of 12 million tones from its target. Nevertheless, this is slightly higher than last year's production.

While Coal India always falls below targets, many of the reasons are beyond its control. Searing heat in summer and floods in monsoon dampen the mining activity. Then, there are issues related to availability of land and clearances from forest and environment authorities. In Odisha and Jharkhand, there are serious law and order issues: either Naxals come in the way or villagers block transportation of coal, demanding jobs. If Coal India officials are to be believed, many a times the Railways play spoilsport by not providing the required number of rakes to move the coal from rail-heads to power plants. The PSU says it wants 175 rakes every day at its mining subsidiaries. In 2010-11, the daily average availability was 161 rakes. In peak seasons, Coal India requires 190-200 rakes a day. Coal India, of course, often battles serious logistics issues in moving its coal from pit-heads to rail-heads. 

Coal India officials tell BT that when the next fiscal year opens, it will have an opening stock of 70 million tonnes. This means so much quantity would not have reached the hands of buyers in spite of demand, due to issues wholly related to logistics. In April 2011, Coal India had a stock of 64 million tonnes lying at pitheads. At another extreme, as on January 31, 2012, 30 power stations had stock of less than seven days requirement.

Coal India has not signed any significant FSA since April 2009, but the PSU does not want to accept the blame for this. Its officials say they were always ready to sign the FSA, but the developers were not keen as they demanded taller supply commitments. The PSU, they say, was ready to supply up to 50 percent of a power plant's requirement and the rest it must source from overseas.

On February 16, the Coal India stock (Rs 323) had slipped by 4.5 per cent as against the Sensex fall of 0.5 percent. The Centre's moves are clearly in favour of the power sector and not so much in favour of Coal India. When the PSU went in for its IPO in October 2010, it was oversubscribed by 15 times. The company may underplay the damage to its finances due to the government's diktat. The hit to its profit margins in future looks certain.     

Untitled Document

Coal India Production 

Plan Period

Production in terminal year (in million tonnes)

 Average Annual Growth Rate (%)



















Eleventh (Estimate)



Twelfth (Projected)



Source: Coal India Limited

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