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A Study of Impact of the Presidential Directive to Coal India

September 11, 2012

A Study of Impact of the Presidential Directive to Coal India

India currently has plans to ramp up coal based power generation on a massive scale. Domestic supply has consistently fallen short of demand and the gap has been widening. Coal India Limited, a public sector company, mines about 80% of the coal in the country and is being directed by the government via a presidential directive to commit to supplying this through Fuel Supply Agreements. This analysis estimates the impact of the recent presidential directive ordering Coal India Ltd. (CIL) to sign fuel-supply agreements (FSA) with power utilities, guaranteeing 80% of the Annual Contracted Quantity (ACQ). We have assessed likely impacts of the implementation of this directive on CIL under different scenarios. The study is divided into three parts.

  • In part I, we have estimated the financial cost incurred by CIL in order to follow this directive, considering various scenarios of coal production and power capacity addition in the country. We have estimated the addition of power capacity over FY12-17 and projected the likely shortfall for CIL assuming that its production grows at 1%, 5% and 7% over FY2012 production.
  • In part II, we have estimated the likely penalty that CIL will have to bear under various levels of coal demand and production shortfalls.
  • In part III, we have estimated the likely loss CIL would have on account of diversion of e-auction coal for meeting the FSA agreement requirements.

Key Findings

  1. Shortfall: Assuming an optimistic 5% growth rate in CIL’s coal production, Coal India Limited is likely to face an average annual shortfall of ~82 MT over the period 2013-2017. This is if they are set a supply target of 80% Annual Contracted Quantity (ACQ) for all power plants (PPA+non-PPA). Even at a lower target of 65% ACQ, there will be an annual average shortfall of ~44 mtpa. If a target of 100% ACQ were considered, CIL would fall short by a huge annual average of ~132 MT. However, CIL’s production growth rate in the last five years has been much lower and was just 1% between 2010-12. At a 1% production growth rate, the shortfall would be considerably more, ranging from an annual average of ~100 to ~189 MT.
  2. Import Bill: CIL’s coal import bill will amount to an average of Rs. 254,001 mn annually for the period 2013-2017, again assuming a 5% coal production growth and a supply target of 80% ACQ. This is computed for the average of ~82 mt of coal that CIL would have to import annually in order to honour FSAs, at projected international prices for 2015. If CIL’s production growth remains at the current 1%, the import bill would amount to Rs.429,822 mn annually for the five year period. The import cost will have to be borne either by CIL, power producer, or end-consumer.
  3. Penalty: Taking the median scenario of 5% production growth rate, CIL will fall short of the 80% ACQ level by 13% (average) in the period 2013-2017, incurring a penalty rate of 1.5%. The penalty would amount to Rs.9510 mn at current prices. If CIL’s production growth remains at the current 1%, CIL would fall short of an 80% ACQ by 23% (average) in the period 2013-2017. This level of shortage would incur multiple penalty slabs, and would cumulatively amount to Rs. 43,738 mn.
  4. Foregone income due to E-auction coal diversion to FSA: CIL currently sells approximately 11.5% of its coal through e-auction, where it gets a higher price for the coal. If CIL is forced to divert the e-auction coal to meet FSA requirements, the income foregone by CIL will amount to an average annual of Rs 15,890 mn for the period 2013-2017, assuming a 5% production growth rate and e-auction prices remain constant (which is an extremely conservative estimate).
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