New Coal Linkage Policy ‘Shakti’ Will Benefit Domestic Power Generators

The new coal linkage policy 'Shakti' approved by the government last week, to bring in a transparent bidding-based mechanism for allocating fresh coal linkages, is seen as a positive development for domestic thermal power producers.

According to ICRA, this would help the private coal based IIPs (Independent Power Producers) with a combined capacity of 28 GW to source domestic coal from CIL(Coal India Limited), who were earlier affected by the lack of Fuel Supply Agreements, giving them a long-term certainty on fuel supply.

The IIPs, especially with around 8.3 GW of capacity were earlier hit by coal shortages who had long term PPAs (Power Purchase Agreements) with state distributions but no long term arrangements for coal, according to ICRA.

Addressing the dry fuel woes of the private power producing companies, the government last week approved the much awaited 'Coal Linkage Policy', naming 'Shakti or Scheme to harness and allocate 'koyla'.

The announcement comes as a much-awaited respite to these companies, most of who 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. Despite having surplus coal in the country, the lack of the proper mechanism for sourcing coal pushed these companies to either depend on imports or e-auctioning, impacting the viability of their projects. This move would help the ones with PPAs and also without the PPAs with the state DISCOMs.

For IPPs with existing PPAs and without LoAs (Letter of Assurances), the award of coal linkage shall be through an auction process, based on a discount to quoted tariff in PPA.

According to Sabyasachi Majumdar, Senior Vice President and Group Head, ICRA Ratings, "The ability of the IPPs with existing PPAs and without LoAs to secure coal linkage in the bidding process will be dependent upon the quantum of quoted tariff in existing PPA and the distance of coal-linked mine from the project. In this context, any aggressive bidding to secure coal linkage may lead to a risk of under-recovery in variable cost. Even IPP capacity without FSAs and without PPAs estimated at 16.9 GW, would benefit from this policy."

For IPPs without PPAs, linkages shall be made available under the auction route with bid parameter being the premium over the CIL notified price. However, the supply of coal under this linkage shall be subject to availability of valid long-term PPAs or medium-term PPAs with distribution utilities. This dependency of coal draw with the PPAs tie up could be an area of concern, given the overall slow progress in the signing of the PPA by the state distribution utilities, adds Majumdar.

The policy has also included a provision to allocate domestic coal to projects based on imported coal through the auction route. This is expected to benefit such projects as the availability of domestic coal may enable such projects to lower their fuel cost under-recovery, given that some of these projects have competitively bid PPAs with fuel cost risk.

From the perspective of distribution utilities, the new coal allocation policy is a positive development as it is likely to improve coal supply from domestic sources to the coal-based power generation companies. This, in turn, would lower the cost of procurement and provide a relief in the cost of supply to the distribution utilities.

Naina Sood

BW Reporters Naina Sood is a Economics graduate and has done her post graduation in International economics and Trade. She has deep interests in Indian economy and reforms