Why Coal India Ltd. Is Dragging Its Feet on Supply Contracts

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Continued from Part One

Coal accounts for 41 percent of global power generation, but the Indian scenario is more critical. Available figures suggest that coal accounts for more than half of power generation by India.

Most thermal power companies in India depend on CIL for over 60 percent of their supply. But Coal India’s annual output growth of 2 percent has not been able to keep pace with the 10.6 percent rise in coal linkage-based power projects in 2010.

The Power Ministry has set a target for adding 76,000 MW of electricity capacity in the 12th Five-Year Plan (2012-17) and 93,000 MW in the 13th (2017-2022). Reports indicate the ministry has sent the recommendation to the Plan panel.

The government had earlier set a goal for adding 78,577 MW of electricity capacity during the 11th Five-Year Plan, which was scaled down to 62,000 MW by the Planning Commission in its mid-term review, citing environmental and land acquisition hurdles.

India is the third-largest producer of coal, but CIL is unable to fulfill the demand and since the last few years, the coal miner is under pressure because of a huge demand/supply gap.

The shortage of coal, coupled with rising cost of imported coal, forced some power companies to postpone their expansion plans even as some analysts say that coal prices may go up in India in the near future.

CIL is bound to sign FSAs with the power producers but the coal major is using every trick in the book to ensure that the fuel pact is stripped of all possible penal provisions that could pin it down in case of a default in supplies.

The new draft FSA made available by CIL, apart from providing a merely 0.01 percent penalty in case of supply shortfalls, includes six force majeure insertions that, according to power developers, cannot be termed as force majeure in any contract.

Force majeure under Clause 17.1 (J) of the FSA draft includes breakdown of equipment, failure of contractors to deploy machinery or spare parts, shortage of explosives and even power cuts. The force majeure clause releases a party to a contract from liability if some unforeseen event beyond its control prevents it from performing its obligations under the pact.

With these clauses clearly tilting the balance of the pact in favor of the coal major, power developers have refused to sign the FSAs. Of the 48 FSAs that were to be signed — for power plants that were commissioned till December 2011 — less than a dozen have been inked until now.

 

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