The document discusses India's transition from a coal linkage system to a Fuel Supply Agreement (FSA) framework. Under the FSA framework, coal is supplied to electricity generators and other bulk consumers through long-term agreements between coal companies and consumers. However, domestic coal supply shortages have increased reliance on more expensive imported coal, posing financial challenges. Measures are needed to boost domestic coal production and CIL's import capabilities, as well as increase power tariffs, to make imported coal more affordable and ensure the stability of India's power sector.

1. FUEL SUPPLY AGREEMENT
-ANKUR KUMAR (17)
-ANKUR SINGH CHAUDHARY (18)

2. Objective of the presentation
The new coal distribution policy has replaced the linkage system with the Fuel
Supply Agreement. Accordingly the category of consumers and the mode of
purchase of coal by each of these consumers have been redefined.
Coal based generation dominates the total installed capacity of India and hence
a robust FSA is a must to ensure the progress of generation segment.
However in the recent times the supply shock of indigenous coal has led to an
increased dependence on imported coal which in turn has given cost shock to
the developers.
The presentation throws a light on the changed policies on coal distribution,
associated problems of the coal sector and measures to overcome them.

3. Flow Of Presentation
• Definition
• Characteristics
Fuel Supply Agreement
• Policy of FSA
• Customer category & procedure of purchase
Purchase of coal
• Installed Capacity & generation mix
• Electricity generation & annual growth rate
Indian Power Sector Overview
• Supply & cost shock
Issues with Indian Coal Sector
• Build CIL’s coal import capability
• Increase power tariffs to make imported coal affordable
• Enhance domestic coal production
Measures to overcome the issues

4. Fuel supply agreement

5. Definition
• FSA stands for Fuel supply Agreement. As per new Coal
Distribution Policy(NCDP) Coal supplies are governed by
Legally enforceable agreements between the seller (coal
companies) and the consumer under specific terms and
conditions.
• Various model FSAs for different categories of consumer have
been placed in the website

6. Characteristics of fuel supply
 Criteria:
FSAs will be signed with power plants that have entered long
term power purchase agreements (PPAs) with distribution
companies
 Duration:
The FSAs will be signed for a period of 20 years and will be
reviewed after every five years.

7.  Commitment and penalties:
The FSAs will be signed with 80 per cent of assured contracted
quantity (ACQ) of the committed coal supply.
In the event of supply falling short of 80 per cent, CIL has to pay
a penalty at 0.01 per cent of the value of the shortfall quantity.
Further, this penalty clause is said to be applicable only after
three years of signing the contract; this means that for the first
three years, CIL will not be obliged to supply the contracted
quantity.

8.  Coal import:
If CIL cannot meet demand through domestic supplies, it can meet the
shortfall through imported coal.
If the buyer agrees to accept the imported coal, CIL will import coal for
power companies and supply it at the unload port on a cost-plus basis,
including service charges.
Thus, CIL would not be responsible for the transportation of imported
coal from the port to the project site.
Additionally, if a customer does not accept imported coal, CIL would
not be liable to pay any penalties.

9. Force majeure clause:
The new FSAs - along with existing force majeure events such as
natural calamities, strikes and mine fires - includes additional
force majeure circumstances to cover the risks arising from third
parties.
Additional conditions include the global shortage of imported
coal, lack of response to enquiries, the breakdown of equipment,
delays by contractors, power shortages, and obstruction in the
transportation of coal, from pithead to sidings, by agitations/mob-
violence/riots.

10. Purchase of coal

11. Policy of FSA
• As per the ‘New Coal Distribution Policy’ approved on 18th
October, 2007 by the GOI.
• Does away with the existing classification of consumer as Core
& Non-core. Instead it treats each sector/consumers on merit.

12. • Replaces linkage system:
 Existing consumers under the linkage system during the year 2006-
07 with requirement 4200 tones or more would have to enter FSAs
with coal companies not later than six months from a date to be
notified by CIL.
 Other valid linked consumers will have the option to opt out of FSA
regime and enter into FSA within six months. On opting out, they
may access their coal requirement through various channels like e-
auction, distribution network of state nominated agencies etc.
 Failure to enter into FSA will result in discontinuation of supplies at
fixed prices. All existing FSAs, as prevailing on the date of
introduction of this policy, will continue. However, they would need
to be modified in view of the provisions.

13. Nature of customer & procedure of purchase
• Supply of coal through legally enforceable Fuel Supply agreements (FSA).
• New consumer will have to approach existing Standing Linkage Committee(LT)
under Ministry of Coal for recommendation for issue of Letter of
Assurances(LOA) by Coal companies as per provision of NCDP (NEW COAL
DISTRIBUTION POLICY) and recommendation of Administrative Ministry .
• LOA is issued on furnishing Commitment Guarantee(CG) followed by execution
of FSA on fulfilment of LOA conditions in the stipulated period of time.
Power Utilities including Independent Power
Producers (IPPs) and Captive Power Plants (
CPPs), cement and sponge iron including Steel,
• Coal will be supplied by coal companies through FSA.
Fertilizer

14. • As per government order
Defence
• Customers to get coal under FSA through Letter of Assurance (LOA) route as per
laid down procedure.
Customers belonging to sectors other than what has been
mentioned above (requiring coal beyond 4200 MTPA)
• Such consumers may buy coal from the state nominated agencies. Such nominated
agencies get coal through FSA with the coal supplying companies
Customers having requirement of coal less than and up to
4200 MTPA
• Coal can be purchased only through Spot E-Auction- Scheme
Trader

15. Indian power sector overview

16. Installed capacity & generation mix
Nuclear
2%
Hydro
17%
RES
12%
Coal
59%
Gas
9%
Diesel
1%
Thermal
69%
Source: CEA
Source Capacity
(GW)
Hydro 40.20
Nuclear 4.78
RES 29.46
Coal 140.72
Gas 21.38
Diesel 1.2
Total 237.74
Clearly coal as a source of fuel dominates and makes it imperative for a robust supply of fuel

17. Electricity generation & annual growth rate
723.8 771.6 811.1 876.9 912.1 231.5
2.7
6.6
5.6
8.1
4.01
2.84
0
1
2
3
4
5
6
7
8
9
0
100
200
300
400
500
600
700
800
900
1000
(%)
Energy (BU) Growth (%)• The electricity generation target for
the year 2013-2014 was fixed as 975
Billion Unit (BU). i.e. growth of
around 6.9% over actual generation of
912.056 for the previous year (2012-
2013). The generation during April-
June, 2013 was 238.66 BU as
compared to 231.497 BU generated
during April-March 2013, representing
a growth of about 2.84%.
• The electricity generation target for
the year 2012-13 has been fixed at 930
BU comprising of 767.275 BU
thermal; 122.045 BU hydro; 35.200
nuclear; and 5.480 BU import from
Bhutan
Source: MoP

18. Supply & cost shock
2008
-09
2009
-10
2010
-11
2011
-12
2012
-13
Demand-
Supply gap
17 14 88 93 113
0
20
40
60
80
100
120
MT
Demand-Supply gap
60.88
75.6
70.4
105.21
140.63
0
20
40
60
80
100
120
140
160
Coking Coal
Non-Coking
Coke
Total
Source: Ministry of coal

19. Measures to overcome the issue

20. Build CIL’s coal import capability
• CIL is primarily a producer and has little experience in
importing large quantities of coal. Yet, given the growing
dependence on imported coal, CIL need to build its import
capabilities.
• Initially, CIL could import coal with the help of the MMTC and
STC and gradually develop the capability and infrastructure
(logistics) to import large volumes of coal.
• To increase imported coal acceptability, CIL could consider the
price-pooling of imported coal with domestic coal and supply
coal to power companies at an average price. This could help
lower the cost disparity among power producers. However, for
this mechanism to be efficient, the pooled price should be
available to only those power plants that have coal linkages
with CIL and are not based on imported coal.

21. Increase power tariffs to make imported coal affordable
• There is a need to increase power tariffs for the end consumer
to make imported coal-based power plants economically
viable.
• Further, the government should address the issues of power
plants that are stuck with low price PPAs and their fuel cost
has increased considerably due to regulatory changes in coal
exporting countries such as Indonesia and Australia.
• To protect these developers, the government could allow at
least a partial ‘pass-through' of fuel costs for projects awarded
under tariff-based competitive bidding. This would increase
end-consumer prices but help in avoiding stranded capacities
and is necessary to retain private players’ interest in the power
sector

22. Enhance domestic coal production
• To increase productivity from existing fields, it is important to
deploy the latest technology and professional assistance.
• Further, there is need to accelerate the process of land
acquisition and environmental clearances, to increase the total
area under exploration.
• Further, the government could adapt the NELP model (used
for oil and gas blocks bidding) and allow global mining majors
to participate instead of limiting the bidding to only end users
(such as steel, cement and power plants).This route, along
with much needed investment, can be expected to bring global
technology and capabilities to the Indian mining sector.

23. Reference:
• www.coal.nic.in
• www.cea.nic.in
• www.planningcommission.nic.in
• www.powermin.nic.in
• KPMG report: Coal India’s fuel supply agreement