Coalgate Verdict: Worst Fears For Power Companies Come True

MUMBAI: For over a year, promoters and executives of power companies and their lenders had sleepless nights, wondering what the Supreme Court would decide about coal blocks allotted to them.

On Wednesday, their worst fears came true when the apex court cancelled all but four of the 218 coal blocks allocated since 1993. While industry experts lauded the verdict as a precursor to coal sector reforms, the nightmare for the power companies isn’t over yet.

“We are relieved that the uncertainty is over. But now where do plants attached to these mines get coal from? What happens to the expenses already incurred? The government needs to give clarity on the modus operandi,” said Sushil Maroo, a director of Essar Energy and CEO of Essar Power. The company stands to lose three coal blocks.

Companies had expected the court to take a more lenient view on the 40 coal mines that had started operations and not cancel them. Instead, the court gave companies with operational mines six months to transfer their assets to the government.

“This move will have an extremely negative impact on power, steel and cement companies as an issue that is almost 21 years old is being addressed now and a lot of investments have gone into these blocks, which will now get impacted. Most companies will have no option but to bid in the new round of auctions as one cannot only depend on imported coal,” said Issac George, Group Chief Financial Officer at GVK Power & Infrastructure, which had been allotted two blocks.



The power sector has already investedRs 2,86,677 crore toward exploration, mining and end-use projects, equivalent to almost 3% of the GDP.

Coal-based projects represent about 59% of India’s total installed power generation capacity. Apart from the cancellation, operational mines will have to pay a penalty of Rs 295 for every tonne of coal extracted since they started.

This will aggravate the finances of power companies, which are already grappling with stretched balance sheets.

“The penalties imposed by the Supreme Court are very exacting and will take a big toll on the finances of some of these companies. How will the companies cough up this kind of cash without seriously compromising their cash flows or indebting themselves further?” George of GVK asked.

According to Citigroup, the other grey area is how production and sale of coal will be affected when Coal India takes over these mines. “Will Coal India be able to produce in the same quantity, and how will sale of that coal happen? Will JSPL get the requisite coal even after Coal India starts operating its mines?”

In 2013-14, Coal India produced 462 million tonnes of coal, missing the target of 482 million tonnes. The coal ministry anticipates that local supplies will fall as much as 185 million tonnes short of the country’s projected demand of 950 million tonnes in 2016-17. The gap could widen if the cancelled mines don’t produce the projected volumes of coal.