The Hindu reported that Coal India Limited may amend the controversial fuel supply agreements with the power sector by accepting to pay a 5% penalty if supplies fall below the guaranteed (trigger) 80% level. The new pact will be applicable to facilities commissioned after March 2009.

According to sources, the amendments, sought by the power producers, may be placed for approval of the CIL board on July 31st 2012.

In the first year, any shortfall in supplies below the trigger and above 65% will attract 5% penalty (on basic value of the quantity in shortfall). The subsequent years will witness rise in incidence of penalty.

CIL previously expressed its inability to supply domestic coal beyond 65% of the proposed FSA quantities, even if it achieves the targeted 7.5% production growth in 2012-13.

To safeguard the company from the financial risk involved in committing 80% supplies as prescribed by a Presidential directive the CIL board on April 16th 2012, diluted penalty to near zero. The decision was taken reportedly at the behest of independent directors.

While it is yet to be seen how the independent directors react to the fresh proposal, the CIL management may propose a mandatory import content of 15% of supplies (that is, for supplies beyond the comfort zone of 65%) in the first year. This would require CIL to import at least 30 million tonnes, through state run MMTC Limited this fiscal. The import content will come down, as the company scales up domestic production in the subsequent years.

Meanwhile, the Centre has advised CIL to pool the cost of imports with domestic coal. The proposal, if implemented, will increase domestic coal prices, leading to higher cost of generation for the old power facilities.

Fully dependent on domestic coal, such utilities are expected to consume nearly three fourths of the projected 393 million tonnes annual coal requirement of the power sector.

Source - The Hindu

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