The Presidential Directive to Coal India (CIL) will do little to relieve domestic coal shortages in the near term, said Fitch Ratings.
In the long term, the directive could resolve some of the bottlenecks preventing higher coal production. However, much depends on the Government finding a solution to environmental restrictions that prevent extraction of coal lying under forests. It will also depend on the size of fines that could be levied on CIL.
Fitch, however, thinks that the fuel supply agreement (FSA) to be signed will have little effect on domestic coal supply as the reasons for lower output – infrastructure bottlenecks, lack of environmental clearances, problems in land acquisition and labour issues – need long-term solutions.
Coal will remain the dominant fuel for the Indian power sector due to lower-than-expected gas production from existing fields and no new major gas discoveries, said the rating agency.
PRICING IMPORTS
Import of coal by CIL to meet its enhanced supply obligations will be an option but pricing of such coal will need to be worked out. A key minority shareholder of CIL is also likely to contest the directive, fearing the negative impact binding supply commitments could have on CIL's contingent liability.
This would shift the action to the legal arena and at the same time highlight the constraints faced by Indian power producers in their efforts to secure fuel supplies.
The presidential directive is part of the Government's efforts to save investments in the power sector from going bad.
Although improvements in coal supply over the medium to long term could help save investments that were recently completed or are in the pipeline, fresh investments in the coal-fired power generation sector are likely to remain subdued, it said.
CIL has not signed FSAs with power generators since March 2009 due to supply constraints.
The Government has directed CIL to sign FSAs with all new power plants commissioned by December 2011 or ones that will be constructed by March 2015. The directive came after CIL's board failed to sign FSAs by the March 2012 deadline set by the Prime Minister's office.