Cabinet clears coal linkage policy 'Shakti' to end India Inc's fuel woes

The Cabinet on Wednesday approved a long-awaited coal linkage policy, in a breather to the thermal power sector. 

Named Shakti or the Scheme to Harness and Allocate Koyla (Coal) Transparently in India, it aims to auction long-term coal linkages to power companies. It is expected to revive 30,000 Mw of power plants in the country, which are awaiting fuel supply. 

Major beneficiaries in the private sector are Reliance Power, Adani Power, Lanco Infratech, GMR Energy, DB Power, CESC and KSK Energy. With this policy, the government also aims to reduce dependence on imported coal. 

The policy was languishing for over a year, as it was difficult to reach consensus of several stakeholders. 

“Power plants would now stop procuring imported coal. Production has increased in the country to meet demand and will continue to grow. In the past three years of the (Prime Minister Narendra) Modi government, power prices have not increased. Our effort is (to ensure) they would not in future. All plants will now get coal supply in time,” said Piyush Goyal, Union minister of state (independent charge) for coal, power, mines and new and renewable energy.

Under the policy, coal linkages would be awarded to designated state-owned power distribution companies (discoms). These, in turn, would assign linkages to state or central power generation companies via allocation, and through auction to private units. 

The independent power producers (IPPs) participating in the auction will bid for discounts on the existing tariff and this would be adjusted from the gross coal bills, said a government statement

The power requirement of a group of states can be aggregated; procurement of power on tariff-based bidding would be by a designated agency. Linkages would be earmarked for such agencies. 

Of the planned 108,000 Mw power generation after 2009, coal demand for 78,000 Mw is being met. 

Coal India meets 67 per cent demand; it will increase to 90 per cent this financial year. About 30,000-Mw power is yet to be allocated. Of this, 20,000 Mw of plants would come up soon, without any power-purchase agreements (PPAs). In these projects, 14,000 Mw are privately owned. 

According to government calculations, the total demand from the unregulated sector is 919 million tonnes.

The future linkages for supply of coal to IPPs without PPA shall be on the basis of auction where bidding for linkage shall be done over the notified price of the coal company. 

“The policy envisages power plants to give discount on their tariffs to get linkages. This could lead to under-recovery by the units. But that is still better than no fuel supply. But the dual policy to allocate linkage to state units and auction to private is against the terms of the tariff policy,” said a senior sector expert.

The policy though has brought immediate cheer for the private power units which were awaiting fuel supply. Most of the thermal power projects were on the verge of turning into non-performing assets (NPAs), as they could not sell power despite having PPAs because they lacked fuel supply. 

The policy would also benefit future projects which don’t yet have any PPAs.

“We are expecting to get 100 per cent annual contracted quantity of linkage coal supply, compared to the current levels of partial supply. This will improve the merit order dispatch position of the plants and profitability,” said a senior executive at Reliance Power. 

Sector experts also welcomed the policy. “The linkage policy spares project developers the up-front capital costs and risks of a captive mine. The direct gains to treasury will be modest, as a result, but it’s a huge positive for state-owned coal companies who will enjoy robust volume growth,” said Kameswara Rao, leader — energy, utilities and mining, PwC India.

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