A rare presidential directive issued on Tuesday by India’s government orders national coal supplier Coal India to sign fuel supply agreements (FSAs) with power producers, imposing penalties if supplies dip below 80% of the commitments. The directive responds to concerns from the nation’s coal generators, which say chronic coal shortages are stalling plans to build new plants.

India has been besieged by a coal shortage of unprecedented severity that has forced privately owned and money-strapped state-owned coal-fired power plants alike to rely on expensive imports from Indonesia and South Africa to replenish woefully inadequate stocks.

The government directed Coal India to sign FSAs with all new power plants commissioned by December 2011 or that will be constructed by March 2015. According to the Economic Times, a meeting between Coal India and ministry officials also determined that only independent power producers that had contracted power sales for 20 years would be guaranteed fuel supply.

Supply constraints had barred Coal India from signing any FSAs with power generators since March 2009. Tuesday’s directive was issued after state-run Coal India—which is responsible for 80% of the nation’s coal output—missed a deadline set in February by Prime Minister Manmohan Singh to sign the agreements by March 31. The nation’s biggest generators had lobbied for the measure.

But ratings company Fitch Ratings on Wednesday said in a short-term coal report that the directive would do little to relieve domestic coal shortages in the near term. “Over the long term, the directive could resolve some of the bottlenecks preventing higher coal production, although this will also require further action from the government. If [Coal India (CIL)] fails to increase its output to the desired levels it will face penalties,” it said.

To relieve coal shortages, India must address other factors that resulted in lower coal output—including infrastructure bottlenecks, lack of environmental clearances, and problems in land acquisition, coal handling, and labor, the agency said.

“Indian non-coking coal production grew by a mere 13 million tons over FY09-FY11, sufficient to fire only 2.3 GW of coal capacity, whereas over the same period thermal capacity addition was nearly 16 GW,” Fitch said. “We believe coal will remain the dominant fuel for the Indian power sector due to lower-than-expected gas production from existing fields and no new major gas discoveries.”

Importing of coal by CIL to meet its enhanced supply obligations will be an option, but pricing of such coal will need to be worked out, Fitch  said. Among other outcomes is that “A key minority shareholder of CIL is also likely to contest the directive, fearing the negative impact binding supply commitments could have on CIL’s contingent liability,” it said.

“This would shift the action to the legal arena and at the same time highlight the constraints faced by Indian power producers in their efforts to secure fuel supplies and put into perspective the limitations on the options available to the government.”

Sources: POWERnews, Economic Times, Fitch Ratings