>COAL LINKAGE (MOTILAL OSWAL)

Standing Committee allocates coal linkages for Eleventh Plan projects, mandatory condition of financial closure within three months of LOA: The Standing Committee on Coal Linkages (SLC) made further allocations for coal linkages in its meeting held in January 2010 (as follow up to the earlier meeting in November 2008). In the January round also, linkages were considered only for projects to be commissioned in the Eleventh Plan (FY08-12) and to identify 'non-serious players/defaulters' to better allocate linkages to firm projects, based on the review submitted by Central Electricity Authority / Ministry of Power.

Also, the current linkages are subject to key milestones being achieved by the project developer, including financial closure within three months from the date of Letter of Assurance (LOA), failing which the LOA shall stand withdrawn. In terms of the timeframe, notice inviting Commitment Guarantee (CG) will be issued within 30 days of the SLC meeting, followed by one month time for submission of the CG and LOA would be issued within three weeks thereafter.

Coal India to face shortage of 110m tons in FY11 assuming all LOAs fructify into FSAs: Coal India (CIL), in its briefing to SLC, has informed that based on the LOAs issued till January 2010, there could be "net negative balance" of 110m tons in FY11. The shortfall is likely to go up further to 235m tons in FY12, 305m tons in FY13 and then decline to 186m tons by FY17. This is based on the presumption that all LOAs issued by CIL / coal companies fructify into Fuel Supply Agreements (FSAs), which are signed over a period of 24-30 months based on project milestones. CIL has requested for faster environment/ forest clearance and expedition in land acquisition to enable it to ramp up production capacity. The shortfall is partly expected to be met through increased imports by Coal India.

Sterlite, Adani, Lanco amongst the key gainers: SLC has allocated "Tapering" as well as "Long Term" linkages to projects (or units) which are feasible for commissioning in the Eleventh Plan period. Key players that have been allocated coal linkages include Sterlite Energy (1.8GW), Adani Power (1.5GW), Lanco Infratech (1.3GW), Jindal Power (1.2GW), and Patel Engineering (1GW). Cumulatively, Adani Power will now have ~60% of its fuel supply for initial 6.6GW of planned capacity from domestic sources (v/s 39% earlier); increased linkages lower the fuel risks.

Coal import likely to remain high in near future: Non-coking coal imports to India have steadily increased from 8.7m tons in FY04 to 35m tons in FY10, an increase of 4x. We believe that the coal supply issues are likely to impact the Indian Power sector in the near term, given (1) failure on the part of CIL to ramp up production, (2) non expeditious clearance for development of new coal blocks, (3) land acquisition issues for captive coal blocks, etc.

To read the full report: COAL LINKAGE