The government directed coal monopoly PSU, Coal India Limited to sign 20 year fuel supply agreements with power producers. Coal India Limited (CIL) produces nearly ninety percent of the coal produced in the country.
Government’s move is aimed to support the ailing power firms who were facing coal shortages both from domestic and international sources.
Inadequate coal shortage is the main concern for the government. Many new power projects are yet to start production because of coal shortages. Capacity addition during the eleventh plan period was well short due to coal supply shortages and rise in prices of other fuels. The twelfth plan target also may not be met unless adequate quantity of fuel including coal is ensured. In the new budget, the government has provided many incentives to the power producers including duty free import of coal and LNG.
The interesting element of the present direction to CIL is the 20 years time period for fuel supply. This is quite tough on CIL. In the international market as well as in the domestic market, coal attained the status of a scarce and strategic raw material due to demand pressures and supply constraints.
At present, all coal exporting countries are making tough stand on coal exports. Coal is considered to be a strategic and depleting material and many coal exporting countries including Indonesia have imposed new restriction on pricing and exports of coal.
High consumption by China and India has already resulted to price escalation. Besides, the difficulty of bringing additional forest land for mining limits fresh coal supplies. All these indicate that coal producing firms have an upper hand vis a vis buyers. Hence, long term supply contracts may put CIL in a disadvantageous position especially on the pricing front.
On the other hand, long term supply agreements are highly beneficial for power firms.