Govt presses Coal India to end power shortages

A general view of the Gevra coalmines in Chhattisgarh, Asia's largest opencast coalmine, November 21, 2009.

NEW DELHI (Reuters) - India acted to alleviate chronic power shortages that hinder its economic growth on Wednesday ordering its monopoly coal miner Coal India to guarantee long-term supplies or face penalties.

It asked the world's largest coal miner, state-run Coal India, to sign 20-year fuel supply deals with power projects that are due to be commissioned by 2015 and have an agreement with distribution utilities to sell power.

This would help power plants with an estimated capacity of more than 50,000 megawatts, a government statement said.

The government decision followed intensive lobbying by top executives from India's power companies, who had sought the help of Prime Minister Manmohan Singh to boost supplies of coal.

Domestic coal supply has fallen short of targets, largely due to regulatory hurdles faced by miners, while poor infrastructure hinders the transport of imported coal, leaving many power plants running below capacity.

Until now, Coal India's long term contracts were for a five year period and the last one it signed was in 2009.

Coal India, which accounts for about 80 percent of coal production, aims to produce 464 million tonnes in 2012/13, and has already scaled down output target to 440 million tonnes in 2011/12.

Non-coking coal imports have been growing at about 25 percent since 2003-04 and the estimated imports of 54 million tonnes in the current fiscal year are projected to rise four times to 213 million tonnes in 2016/17.

Coal, which accounts for more than half of India's power generation, will be required for 85 percent of the additional 76,000 MW capacity addition the country targets during 2012-17.

Coal India will have to supply at least 80 percent of the fuel commitment it makes to power producers, failing which it would attract a penalty, the statement said, without elaborating.

IMPORTS NEEDED

The company will have to import fuel to meet the supply commitment.

Some analysts, however, said the attempt to boost supplies to power producers will be constrained by stagnating local coal output and costlier imports.

"Local coal production is not going up and, without that, how is it possible to meet fresh commitments Coal India may make through new fuel supply agreements to power companies," said V. Srinivasan, sector analyst with Angel Broking.

A shortage of fuel has constrained expansion in India's power sector, which consumes about two-thirds of the country's coal output and has a current installed capacity of over 186,000 megawatts.

Its fuel supply problems have been compounded by lower-than-expected natural gas output, high fuel import costs and the inability of distribution utilities to raise electricity tariffs for consumers for political reasons.

Stagnating output at Coal India, which has trouble obtaining environmental clearances and land acquisition approvals quickly, had restricted the miner's ability to assure fuel supply to generators.

A longer fuel supply agreement will encourage banks to lend to power projects, said Ashok Khurana, director general of India's Association of Power Producers, who was part of an industry delegation that met Singh.

"Banks had held back finances earlier because there was no clarity on fuel," he said.

Costlier coal imports may increase costs for power producers, many of whom do not have the ability to pass on the increase in fuel costs.

Shares in top private power producers rose after the statement, with Reliance Power rising 12.9 percent. Adani Power closed up 13.78 percent.

(Additional reporting by Henry Foy in Mumbai; Writing by Krittivas Mukherjee; Editing by Anthony Barker)