The Government of India’s action to provide alternative means of coal supply to power producers if captive coal blocks (CCBs) are de-allocated subsequent to the recent Supreme Court (SC) judgement declaring the allocations illegal, will be crucial, according to India Ratings & Research.

The SC judgment has held the 195 CCB allocations since 1993 as illegal. According to the judgment, the process followed for the award of such coal blocks was not transparent and was ad-hoc and casual. The judgment however has for the time being not de-allocated the blocks.

As a solution, the government could look at assigning the de-allocated blocks to Coal India Limited (CIL) to provide long-term fuel linkages to the power sector and minimise the economic ramifications of this judgment,” India ratings said in statement. 

The immediate impact of the SC judgment on the power sector would be low, even if the mines were to be de-allocated. Till 31 December 2011, only 15 mines of the 80 CCBs allocated to the power sector reached production.  

The SC has reserved September 1, 2014 to decide the further course of action. “The credit profiles of involved entities could undergo a shift depending upon the decision on coal block allocation and solution proposed to solve coal availability issues. There appear to be at least three possible outcomes with respect to a further course of action,” the rating agency said. 

The first alternative could be selective/complete retention of CCBs with additional recoveries for the government based on certain milestones with respect to end-use plant or mine development. However, as the SC has declared the process of allocation as illegal, any additional cost imposed in the form of either an increased payout to the government based on quantity mined or a one-time payout could alter the economics and credit profile of the linked end-use plant. The impact of such a payout would be severe for merchant power plants based on CCBs, which would see a reduction in the supernormal profits.

The second alternative, India Rating opines is that a complete/partial de-allocation cannot be ruled out. However, in both cases, the government could look at providing coal linkages to end-use plants.

Thirdly, the government could also look at re-allocating the de-allocated CCBs to Coal India Ltd for development which could use mine development operators for speedy development and production with the end use plant being the same. The government could fast track the clearances required for production from such mines. This alternative could result in problems if the clearances take time or mine development operators take longer time to operationalise the mines.

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