SC coal ruling lacks clarity on commercial use, say analysts

Aug 27 2014, 00:59 IST
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SummaryThe Supreme Court's ruling to the effect that coal allocated for an ultra mega power project (UMPP) cannot be diverted for commercial use “lacks clarity”, say analysts pointing out that the term “commercial use” includes sale of coal as well as setting up additional projects and could be “open to interpretation”.

The Supreme Court's ruling to the effect that coal allocated for an ultra mega power project (UMPP) cannot be diverted for commercial use “lacks clarity”, say analysts pointing out that the term “commercial use” includes sale of coal as well as setting up additional projects and could be “open to interpretation”.

Coal mines assigned to Reliance Power’s Sasan UMPP, have come under the scanner, as the company sought to divert the excess coal from the mines to either the Sasan Phase II project or its Chitrangi plant, also located in Madhya Pradesh. “As per Reliance Power’s interpretation, excess captive coal use for Chitrangi, an expansion project of Sasan UMPP will not be affected by the order, though we believe there is a lack of clarity in this respect. At least commercial sale of excess coal is ruled out,” JP Morgan analyst Sumit Kishore wrote.

Reliance Power did not respond to mail sent by FE seeking its comment on the issue.

The judgment, issued on Monday, which deemed all coal block allocated since 1993 as illegal will have an impact on approximately 13 gw of power generation capacity, partially or wholly dependent on such reserves, analysts estimate.

About 10 gw of generation projects operated by private players or independent power producers (IPPs), are dependent on the coal from the blocks under the scanner, according to Kishore.

“In a separate ruling, the SC’s stand conveyed that it is against the modification of past competitively bid contracts – a blow to private IPPs saddled with long-term power purchase agreements which have been rendered non-remunerative due to adverse movements in import coal prices or steep currency depreciation,” Kishore said.

Of the power utilities adversely impacted by the judgment are projects owned or operated by Jaiprakash Power Ventures, JSW Energy, Essar Energy, GVK Power, Tata Power and Reliance Power.

Jaiprakash Power Ventures’ under construction 1320 mw Nigrie power plant located in Madhya Pradesh, had been allocated coal from Amelia (North) and Dongri Tal – II coal blocks with reserves of 250 mt of coal. 86% of the plant’s capex has already been incurred, according to Kishore. The Amelie block had commenced coal dispatch from May while the Dongri Tal block was expected to start production by Q3FY15.

“Since 50% of the capacity is tied to long-term PPAs, where coal cost is passed through, the impact will be partially mitigated,” BNP Paribas analyst Girish Nair said in an Aug 26 report.

GVK power’s 540

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