Coal Block Cancellation Constitutes ‘Change in Law’ Under Power Purchase Agreement: Supreme Court Allows Compensation with Carrying Costs

Held: The Supreme Court held that cancellation of a captive coal block pursuant to the judgment in Manohar Lal Sharma v. Principal Secretary and the subsequent enactment of the Coal Mines (Special Provisions) Act, 2015 constitute “Change in Law” events under the Power Purchase Agreement, entitling the affected power generator to compensation along with carrying costs. However, the Court clarified that compensation cannot be granted for additional coal procurement from alternate sources prior to the occurrence of the Change in Law event where the PPA contains a clause indemnifying the purchaser against escalation arising from sourcing coal from non-captive sources.

Summary: The dispute arose out of a Power Supply Agreement between West Bengal State Electricity Distribution Company Ltd. (WBSEDCL) and PTC India Limited for supply of electricity, with a back-to-back Power Purchase Agreement between Adhunik Power & Natural Resource Ltd. (APNRL) and PTC for generation and supply of power. The project was premised on coal supply from the Ganeshpur captive coal block allotted to APNRL. Since the coal block was not operationalized, APNRL initially sourced coal through tapering linkage and supplemented the shortfall through e-auction and imports. After this Court’s decision in Manohar Lal Sharma cancelling coal block allocations and the enactment of the Coal Mines (Special Provisions) Act, 2015, APNRL claimed compensation on account of increased fuel costs. The Central Electricity Regulatory Commission partly accepted the claim but declined to treat cancellation of the coal block as a Change in Law event. On appeal, the Appellate Tribunal for Electricity reversed this finding and held that cancellation of the coal block and the subsequent legislative changes constituted Change in Law events under Article 10 of the PPA/PSA, entitling APNRL to compensation. Before the Supreme Court, WBSEDCL argued that the PPA did not expressly identify the Ganeshpur coal block as the designated source and relied on an indemnity clause preventing escalation claims arising from procurement of coal from alternate sources. The Court rejected this contention, holding that the identity of the captive coal source could be determined from surrounding circumstances, including minutes of negotiations and correspondence between the parties. It further held that the cancellation of the coal block and the legislative framework governing reallocation of coal mines materially affected the generator’s contractual obligations and therefore fell within the definition of Change in Law under the agreement.

Decision: The Supreme Court partly allowed the appeals by setting aside the portion of the Appellate Tribunal’s order granting compensation for coal procured through e-auction or imports to meet shortfall in tapering linkage prior to cancellation of the coal block, while affirming the award of compensation for Change in Law events arising from the cancellation of the Ganeshpur coal block with effect from 25 August 2014 along with carrying costs, and directing the Central Electricity Regulatory Commission to modify its consequential order accordingly within four weeks.