NTPC’s MoUs with CIL to lapse in Dec, fuel pacts yet to be signed - Quoted in the Mint

The memoranda of understanding (MoUs) signed between NTPC Ltd and Coal India Ltd (CIL) for the supply of fuel to some of the plants of the nation’s largest power producer are set to lapse in December, putting at risk proposed fuel supply agreements (FSAs), even as differences between the two state-owned firms continue over the terms of these agreements.

NTPC hasn’t signed the fuel-supply agreements (FSAs) and is worried about the future of the MoUs these are to be based on. CIL is non-committal about extending the MoUs.

 

A fuel supply accord guarantees coal supply to a power producer and is a legally binding document that requires Coal India to supply at least an agreed amount of the contracted volume. This comes in the backdrop of the coal miner failing to produce enough fuel to feed the growing demand for the raw material in the country.

 

“The letter of assurance or memorandum of understanding typically forms the basis for signing of commercial fuel supply agreements that are also legally binding. In the absence of such a sanction from the standing linkage committee or the coal consumer and CIL, there may be an issue in finalizing fuel supplies,” said Dipesh Dipu, partner at Jenissi Management Consultants, a Hyderabad-based energy and resources-focused consultant.

 

NTPC had deducted money from the October fuel bills raised by the coal miner on grounds that it had been supplied low-grade coal. NTPC’s contention is that while it is being supplied coal having a calorific value of 3,500 kilocalorie per kg, it is being billed for fuel of 4,500 kilocalorie per kg to 5,000 kilocalorie per kg.

 

“There are two basic issues that we have with Coal India. The first is about the fuel-supply agreements and their terms and conditions and the second is about the quality of coal supplied to us,” said a senior NTPC executive, requesting anonymity. “We are working towards resolving all the issue and sign the FSAs by December. The MoUs for coal supply for projects after March 2009 are expiring in December. This is for capacity of around 8,500MW. We want CIL to extend the MoUs if the FSAs are not signed by this month.”

 

Coal India chairman S. Narsing Rao confirmed the development. “We are waiting for the NTPC board meeting on 26 December. We expect them to approve some 13 odd FSAs. We will take a call on the MoUs after the NTPC meet. I cannot say anything right now,” Rao said.

 

NTPC is capable of generating 39,674MW of electricity with 16 coal-fuelled projects with an annual coal requirement of 160 million tonnes (MT), of which it will have to import around 16 mt. The balance comes from miners such as Coal India and Singareni Collieries Co. Ltd.

 

“We are looking at steps such as joint sampling of coal to resolve the differences,” said the NTPC executive.

 

IDFC Institutional Securities said in a 22 November report: “While we believe CIL is relatively protected under most of the clauses for newer FSAs, we see a proposition of joint sampling by NTPC at loading and unloading points as a potential risk. Unlike in older FSAs, where joint sampling is done only at the loading point, NTPC has requested for a joint sampling at both loading and unloading points under the new FSAs. While the sampling would be only for quality/grade check and not for weight, we still believe it has the potential for minor grade slippage, thus exposing CIL to grade penalty risks.”

 

India has an installed power generation capacity of 207,876MW and plans to add around 88,537MW during the Twelfth Plan (2012-17). Of this, a major portion will be fuelled by coal.

Coal India, the world’s biggest coal miner, produced only 431 mt in 2010-11 against a target of 461.5 mt, because of stalled projects. It failed to meet its 2011-12 target of 440 mt as well, mining 435.84 mt, but has set a target of producing 468.74 mt in 2012-13 amid environment-related hurdles and is under pressure from power companies for more supplies.

 

India’s finance ministry, in its mid-year economic analysis, said that as of 30 September, “Fuel supply agreements with 30 power plants out of 118 power plants commissioned after 31.07.2012, have been concluded. Remaining FSAs (are) under consideration by Coal India Ltd in consultation with ministry.”

 

CIL has pledged supply to 172 power projects through so-called letters of assurance. The generating capacity involved is 108,878MW. The number doesn’t include assurances for projects commissioned before March 2009.

 

“CIL expects total supply to older FSAs to gradually come down from 96-97% earlier to 90%, as supplies would be switched to newer plants to meet the 65% domestic supplies target,” the IDFC report said.