You are here
Supreme Court verdict on Coal block allocation may plunge future of power firms into darkness
In 1996, the promoter of a steel and power company walked into the coal ministry seeking supply from Coal India. He met a joint secretary who told him to consider getting a coal block allocation instead. At the end of three hours of a very convincing pitch by the joint secretary, the head of the private firm was ready to take the plunge and was confident that investing in a coal mine would augur well for his firm's future.
In that year alone, government officials convinced half-a-dozen such promoters to agree to allocations of coal blocks. These investors now regret their decision as the government has in the last three years banned companies from selling electricity in short-term markets from captive coal blocks, de-allocated 80 of them, mostly for reasons outside their control and now plans to impose additional royalties on them. In the latest blow, the fate of about 200 coal blocks allocated between 1993 and 2009 hangs in the balance as the Supreme Court on Monday said that the allocations made by the government were "arbitrary and illegal".
"Between 1993 and 2000, the government was encouraging private companies to take coal block allocation and awarding it easily because they wanted to increase their participation.
This led to a rush for mines and the private sector invested heavily. The sector is in an uncomfortable position now that the SC has called these allocations illegal. It will hurt investment sentiment for some time," said Essar Energy CEO Sushil Maroo said.
His peers share the sentiment. Power developers are jittery as they have invested a total of Rs 2,86,677 crore toward exploration, mining and attached end use projects, which represents almost 3% of GDP. Coal-based projects represent 58.75% of India's total installed capacity.
The Supreme Court has not objected to the allocation of 12 blocks to the UMPPs since this was done on the basis of competitive bidding, but has barred these UMPPs from diverting coal to other projects. This verdict could set a precedent for the ongoing case between Reliance Power and Tata Power, where the latter has challenged government's permission for Reliance Power to use coal from mines linked to Sasan UMPP in its other projects.
Companies such as Jindal Steel and Power and R-Power declined to comment on the SC verdict. Requesting anonymity, a power company's senior executive told ET, "There are delays and cost overruns but we are hopeful that the government will take the level of investments into accounts while going for the fresh coal block allocation. Developers are already under severe pressure from the financiers and their failure to serve the debt will affect over all finance sector of the country."
Sector players and experts said that the SC may order cancellation of allocation for mines where no major investment has been done while they hope for a more lenient approach towards those where the projects are completed or nearing completion.
"If the SC cancels the coal block allocations, the companies would have to tap other sources of coal which may not come cheap and could impact their profitability. In case of UMPPs, too, profitability could be hurt in case the developers had factored in profits coming from diversion of coal to other projects which would have been above the profits from the UMPP itself," said Salil Garg, director-corporate ratings at India Ratings & Research.
Besides, the cancellation may also increase burden on Coal India to supply fuel for projects that may have otherwise sourced coal from mines allocated to them. In 2013-14, Coal India produced 462 million tonnes of coal as against the target of 482 million tonnes. Coal ministry anticipates local supply to fall as much as 185 million tonnes short of the country's projected demand of 950 million tonnes in 2016-17.
Debasish Mishra, senior director-consulting, Deloitte Touche Tohmatsu India, says: "Given the long time taken for developing a coal block for want of land acquisition, clearances and permissions, only starting FY15, it was expected to get some significant production from these allocated blocks. If there is a blanket cancellation of all blocks, these user industries would have to be given around 100 to 150 mt of additional coal linkage from CIL."
P Uma Shankar, former power secretary, believes that the SC verdict would bring about the much needed transparency in the sector. "In case the SC decides to cancel the allocations, the upside would be that there would be more coal block available to be bid out through a transparent auction," he said.
"The judgement deepens the power sector crisis further. Immediate remedial steps are required to be put in place by the government to mitigate the adverse implications of the judgement, i.e., the expected fall of output from these mines. If these steps are not taken, the coal deficit situation will worsen further," said Ashok Khurana, director-general of the association of independent power producers.