FUEL SUPPLY AGREEMENT

-ANKUR KUMAR (17)

-ANKUR SINGH CHAUDHARY (18)

Objective of the presentation

The new coal distribution policy has replaced the linkage system with the Fuel Supply Agreement. Accordingly the category of consumers and the mode of purchase of coal by each of these consumers have been redefined.

Coal based generation dominates the total installed capacity of India and hence a robust FSA is a must to ensure the progress of generation segment.

However in the recent times the supply shock of indigenous coal has led to an increased dependence on imported coal which in turn has given cost shock to the developers.

The presentation throws a light on the changed policies on coal distribution, associated problems of the coal sector and measures to overcome them.

Flow Of Presentation

• Definition• Characteristics

Fuel Supply Agreement

• Policy of FSA• Customer category & procedure of purchase

Purchase of coal

• Installed Capacity & generation mix• Electricity generation & annual growth rate

Indian Power Sector Overview

• Supply & cost shock

Issues with Indian Coal Sector

• Build CIL’s coal import capability• Increase power tariffs to make imported coal affordable• Enhance domestic coal production

Measures to overcome the issues

Fuel supply agreement

Definition

• FSA stands for Fuel supply Agreement. As per new Coal Distribution Policy(NCDP) Coal supplies are governed by Legally enforceable agreements between the seller (coal companies) and the consumer under specific terms and conditions.

• Various model FSAs for different categories of consumer have been placed in the website

Characteristics of fuel supply

Criteria:

FSAs will be signed with power plants that have entered long term power purchase agreements (PPAs) with distribution companies

Duration:

The FSAs will be signed for a period of 20 years and will be reviewed after every five years.

Commitment and penalties:

The FSAs will be signed with 80 per cent of assured contracted quantity (ACQ) of the committed coal supply.

In the event of supply falling short of 80 per cent, CIL has to pay a penalty at 0.01 per cent of the value of the shortfall quantity.

Further, this penalty clause is said to be applicable only after three years of signing the contract; this means that for the first three years, CIL will not be obliged to supply the contracted quantity.

Coal import:If CIL cannot meet demand through domestic supplies, it can meet the shortfall through imported coal.

If the buyer agrees to accept the imported coal, CIL will import coal for power companies and supply it at the unload port on a cost-plus basis, including service charges.

Thus, CIL would not be responsible for the transportation of imported coal from the port to the project site.

Additionally, if a customer does not accept imported coal, CIL would not be liable to pay any penalties.

Force majeure clause:

The new FSAs - along with existing force majeure events such as natural calamities, strikes and mine fires - includes additional force majeure circumstances to cover the risks arising from third parties.

Additional conditions include the global shortage of imported coal, lack of response to enquiries, the breakdown of equipment, delays by contractors, power shortages, and obstruction in the transportation of coal, from pithead to sidings, by agitations/mob-violence/riots.

Purchase of coal

Policy of FSA

• As per the ‘New Coal Distribution Policy’ approved on 18th October, 2007 by the GOI.

• Does away with the existing classification of consumer as Core & Non-core. Instead it treats each sector/consumers on merit.

• Replaces linkage system: Existing consumers under the linkage system during the year 2006-07 with

requirement 4200 tones or more would have to enter FSAs with coal companies not later than six months from a date to be notified by CIL.

Other valid linked consumers will have the option to opt out of FSA regime and enter into FSA within six months. On opting out, they may access their coal requirement through various channels like e-auction, distribution network of state nominated agencies etc.

Failure to enter into FSA will result in discontinuation of supplies at fixed prices. All existing FSAs, as prevailing on the date of introduction of this policy, will continue. However, they would need to be modified in view of the provisions.

Nature of customer & procedure of purchase

• Supply of coal through legally enforceable Fuel Supply agreements (FSA).

• New consumer will have to approach existing Standing Linkage Committee(LT) under Ministry of Coal for recommendation for issue of Letter of Assurances(LOA) by Coal companies as per provision of NCDP (NEW COAL DISTRIBUTION POLICY) and recommendation of Administrative Ministry .

• LOA is issued on furnishing Commitment Guarantee(CG) followed by execution of FSA on fulfilment of LOA conditions in the stipulated period of time.

Power Utilities including Independent Power Producers (IPPs) and Captive Power Plants ( CPPs), cement and sponge iron including Steel,

• Coal will be supplied by coal companies through FSA.

Fertilizer

• As per government order

Defence

• Customers to get coal under FSA through Letter of Assurance (LOA) route as per laid down procedure.

Customers belonging to sectors other than what has been mentioned above (requiring coal beyond 4200 MTPA)

• Such consumers may buy coal from the state nominated agencies. Such nominated agencies get coal through FSA with the coal supplying companies

Customers having requirement of coal less than and up to 4200 MTPA

• Coal can be purchased only through Spot E-Auction- Scheme

Trader

Indian power sector overview

Installed capacity & generation mix

Nuclear2% Hydro

17%

RES12%

Coal59%

Gas9%Diesel

1%

Source: CEA

Source Capacity (GW)

Hydro 40.20

Nuclear 4.78

RES 29.46

Coal 140.72

Gas 21.38

Diesel 1.2

Total 237.74

Clearly coal as a source of fuel dominates and makes it imperative for a robust supply of fuel

Electricity generation & annual growth rate

2008-09

2009-10

2010-11

2011-12

2012-13

2013-14

0

100

200

300

400

500

600

700

800

900

1000

0

1

2

3

4

5

6

7

8

9

723.8 771.6 811.1 876.9 912.1 231.5

2.7

6.6

5.6

8.1

4.01

2.84

Energy (BU) Growth (%)

(%)

• The electricity generation target for the year 2013-2014 was fixed as 975 Billion Unit (BU). i.e. growth of around 6.9% over actual generation of 912.056 for the previous year (2012-2013). The generation during April-June, 2013 was 238.66 BU as compared to 231.497 BU generated during April-March 2013, representing a growth of about 2.84%.

• The electricity generation target for the year 2012-13 has been fixed at 930 BU comprising of 767.275 BU thermal; 122.045 BU hydro; 35.200 nuclear; and 5.480 BU import from Bhutan

Source: MoP

Supply & cost shock

2008-09

2009-10

2010-11

2011-12

2012-13

Demand-Supply gap

17 14 88 93 113

1030507090

110

Demand-Supply gap

MT

2008-09

2009-10

2010-11

2011-12

2012-13

0

20

40

60

80

100

120

140

160

60.88

75.670.4

105.21

140.63

Coking CoalNon-CokingCokeTotal

Source: Ministry of coal

Measures to overcome the issue

Build CIL’s coal import capability

• CIL is primarily a producer and has little experience in importing large quantities of coal. Yet, given the growing dependence on imported coal, CIL need to build its import capabilities.

• Initially, CIL could import coal with the help of the MMTC and STC and gradually develop the capability and infrastructure (logistics) to import large volumes of coal. 

• To increase imported coal acceptability, CIL could consider the price-pooling of imported coal with domestic coal and supply coal to power companies at an average price. This could help lower the cost disparity among power producers. However, for this mechanism to be efficient, the pooled price should be available to only those power plants that have coal linkages with CIL and are not based on imported coal.

Increase power tariffs to make imported coal affordable

• There is a need to increase power tariffs for the end consumer to make imported coal-based power plants economically viable.

• Further, the government should address the issues of power plants that are stuck with low price PPAs and their fuel cost has increased considerably due to regulatory changes in coal exporting countries such as Indonesia and Australia.

• To protect these developers, the government could allow at least a partial ‘pass-through' of fuel costs for projects awarded under tariff-based competitive bidding. This would increase end-consumer prices but help in avoiding stranded capacities and is necessary to retain private players’ interest in the power sector

Enhance domestic coal production

• To increase productivity from existing fields, it is important to deploy the latest technology and professional assistance.

• Further, there is need to accelerate the process of land acquisition and environmental clearances, to increase the total area under exploration.

• Further, the government could adapt the NELP model (used for oil and gas blocks bidding) and allow global mining majors to participate instead of limiting the bidding to only end users (such as steel, cement and power plants).This route, along with much needed investment, can be expected to bring global technology and capabilities to the Indian mining sector.

Reference:

• www.coal.nic.in• www.cea.nic.in• www.planningcommission.nic.in• www.powermin.nic.in• KPMG report: Coal India’s fuel supply agreement