Front-loaders arrange stacks of coal as a freight train sits on rail tracks at Krishnapatnam Port in Krishnapatnam, Andhra Pradesh. (Photographer: Dhiraj Singh/Bloomberg)  

Coal India Can Divert Supplies To State-Run Power Producers

Private and captive power producers fear a coal crunch as the government has asked Coal India Ltd., the world’s largest miner of the fuel, to divert supplies to state-run generation companies to meet rising electricity demand.

Citing higher power demand in April, the coal ministry in a May 24 letter to the chairman and managing director of the state-run miner and chairman and managing director of Singareni Collieries Company Ltd. said the power sector’s coal requirement may increase more than anticipated. “To avoid possible shortage of coal at thermal power plants… wherever it is operationally feasible…out-of-turn coal allotment may be made to state and central PSU gencos [public sector generating companies].”

BloombergQuint has reviewed a copy of the letter.

Peak demand in India rose to 1,70,121 megawatts on May 23, about 8 percent higher than a year ago, according to data from National Load Despatch Centre. It was led by northern and western states as temperatures rose. Average coal stocks at thermal power plants, which supply 70 percent of the power consumed in India, fell to 15,234 metric tonnes compared with 17,719 metric tonnes a year ago. Facing a crunch, several states have been buying power from the spot market, sending prices to their highest in at least seven months.

Also read: Coal India Boosts Supplies To Power Plants By 14 Percent In April

A minimum or trigger quantity of coal has to be provided under a fuel supply agreement, which is a commercial obligation, a senior Coal Ministry official told BloombergQuint requesting anonymity. Supply rarely goes above this level and the ministry has suggested that out-of-turn allotment can be made above this threshold or above the annual contracted quantity to meet demand, he said, adding that companies will have to meet the cost of transportation. The ministry is not trying to restrict the supply to state-owned firms, he said.

An e-mailed query sent to Ministry of Coal remained unanswered.

Coal India, which produces 80 percent of India’s coal, meets the demand through supply or linkage pacts. So, out-of-turn supplies to state-owned companies like NTPC Ltd. has left private and captive power producers worried.

“Discrimination based on ownership of assets has put into question the sanctity of commercial contracts signed by Coal India,” said Ashok Khurana, director general of the Association of Power Producers. “This would lead to more stress for the bankers. This is against the Prime Minister’s policy of level-playing field and ease of doing business, he said. “Coal being a finite quantum, if you divert extra coal to public sector, it will be at the cost of private sector.”

The worst affected could be captive power plants of cement and aluminium companies.

The ad hoc decision without any advance notice would bring the industry to a standstill, especially the continuous process-based sectors like aluminium, Rajiv Aggarwal, general secretary at Indian Captive Power Producers Association, said. Long-term fuel supply agreements with Coal India are legally binding, he said.

Of total 40,000-megawatt captive power plant capacity, about 70 percent is coal based and power contributes 30-40 percent of the costs for the manufacturing industry. They require 190 million tonnes a coal per year, according to Aggarwal.

“We will have to shut down some plants and that will impact industries like cement, steel and aluminium,” Aggarwal said. The move, according to him, will have a severe impact on the downstream industry like transmission and distribution, packaging, cement, consumer products, paper and tyre manufacturing, resulting in loss of millions of jobs.

Deepak Khetrapal, managing director and chief executive officer at Orient Cement Ltd., however, said that this isn’t for the first time that govt has ordered Coal India to make out-of-turn allotment to public sector power producers. This usually is the case in summer when the demand peaks, he said, adding that most cement makers factor this and maintain coal inventories for three-six months. Orient Cement sources coal from Telangana’s Singareni Collieries but we won’t be impacted much, he said.

Also read: Higher Demand, Coal Crunch Send Spot Power Prices To Seven-Month High