After a two-year break, state-run Coal India will soon start signing fuel supply agreements (FSAs) with power producers that have been commissioned till last December. These fuel supply agreements have to be completed by end of March.

Prime minister’s office has also directed Coal India to sign fuel supply agreements with power plants that have to be completed by March 2015. If Coal India fails to supply agreed quantity of coal, it would have to meet the shortfall through imports or through other state-run companies.

These drastic steps are a result of the meetings of the committee of secretaries, chaired by principal secretary to the prime minister, Pulok Chatterjee.

The FSAs will be signed for full quantity of coal mentioned in letters of assurance for 20 years. Coal India will be penalised if the supply is below 80 per cent. On the other hand, it will get incentives for achieving 90 per cent of supply, prime minister’s office said in a statement on Wednesday. This step would benefit power plants with an estimated capacity of more than 50,000 mw, it added.

The FSAs determine the quantum of coal to be supplied to the power producers. The cost of the coal would be based on Coal India’s notified price for different grades of the commodity.

In case coal has to be procured from overseas to meet any shortfall, the increase in price would be passed on to the procurer as a part of linkage coal cost.

“The signing of FSAs for full quantity will give confidence to bankers, who were reluctant to disburse funds to projects under construction, for want of credible FSAs. Prime minister Manmohan Singh has fulfilled his promise that he made to us on January 18,” said Ashok Khurana, director general of Association of Power Producers (APP).

Prime minister’s office mentioned that this move would help achieve power generation capacity targeted in the 12th plan and also contribute to the targeted growth of GDP. India aims to commission nearly 78,000 mw of power generation capacity between 2012 and 2017. Stocks of private power companies such as Tata Power, Adani Power and Reliance Power shot up after the announcement made by the PMO through social networking platform, Twitter, on Wednesday.

Ratan Tata-promoted Tata Power scrip went up by six per cent to close at Rs 110.45 a share on the BSE on Wednesday. Similarly, Gautam S Adani-led Adani Power saw 13.08 per cent rally on BSE with the scrip closing at Rs 78.65. Anil Ambani-promoted Reliance Power also moved up 12.74 per cent to close at Rs 122.55.

Most of the private power producers are waiting for domestic linkages to cut cost of imported coal. Coal brought from overseas has become expensive after supplier such as Indonesia and Australia imposed export and carbon tax on thermal coal.

“The move will help industry gain access to quality fuel and to help meet the country’s power requirements,” Tata Power said in a statement.

B Hariharan, director-finance with Avantha Group, told Financial Chronicle, this is a positive development and will address a pending concern of fuel security. “It also approves our first phase of fuel supply with Coal India. Now we plan to commence production from first 600 mw unit, out of 2,460 mw under implementation, beginning January 2013. The construction of the power plant started two years back,” Hariharan said.

Two other senior officials from Adani Group and Essar, on conditions of anonymity, said the announcement is a boost to the power sector. “This will give immediate relief to all projects commissioned after March 2009, about 25,000 mw, and those were operating at sub-optimal capacity due to inadequate supply of coal against the confirmed LoAs (letters of award),” Khurana of APP added. APP is a lobby group of private sector power producers.

“We and APP members would look forward to similar intervention from the PMO and other secretaries towards issues related to compensation by way of pass through for imported coal. This subject is also critical for helping the country meet its power generation goals as defined in the 12th plan,” Tata Power said.

At the same time, the Pulok Chatterjee-led committee will now shift its focus to other medium and long-term issues affecting the power sector.