India Ratings & Research (Ind-Ra) expects the Government of India (GoI) 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.
As a solution, GoI could look at assigning the de-allocated blocks to Coal India (CIL) to provide long-term fuel linkages to the power sector and minimise the economic ramifications of this judgment, the rating agency said.
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 total output from the mines was 26mMT, enough to fire an estimated capacity of 4.6GW-5.0GW which is small in relation to the total capacity. This capacity could be fired from imported coal/e-auction/tapering linkage with necessary changes in the power purchase agreements.
The SC has reserved 1 September 2014 for deciding on 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 first alternative could be selective/complete retention of CCBs with additional recoveries for GoI based on certain milestones with respect to end-use plant or mine development, it opined. 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. For plants based on cost-plus tariffs, such increased cost would most likely be recovered from end-consumers without impacting the credit profiles of such plants.
Ind-Ra opines 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. In case of operational plants, the ability of the government to provide an optimum amount of coal through CIL under the linkage route could be limited in the short term as CIL’s coal output growth has been low. Lower availability of coal could affect the plant availability and plant load factor and thus the profitability of such plants.
The government could also look at re-allocating the de-allocated CCBs to CIL 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.
