Can Shakti energise the power sector? Not as long as demand remains tepid

Centre's scheme will provide little benefit to power plants which do not have an FSA with Coal India

The Centre's drive to ensure adequate coal supply linkages to thermal power plants by way of the new coal linkage scheme, called Shakti, may not benefit these power producers, at least not in the near term.

Analysts and industry officials alike said that, currently, power demand remains muted and till the time demand revives in the country, Shakti (Scheme to Harness and Allocate Koyla Coal Transparently) will provide little benefit to power plants which do not have a fuel supply agreement (FSA) with state-run Coal India.

"Because of sluggish demand and under-utilisation of already contracted capacity, discoms (distribution companies) have been reluctant to come out with fresh long-term procurement tenders," Debasish Mishra, partner at Deloitte Touche Tohmatsu India LLP, said.

This is where industry officials, as well as analysts, feel the challenge will come in.

A crucial clause in Shakti, the Union Ministry of Power’s answer to the teething problem of coal linkage for the regulated sector, states that unless the power plants are able to turn the letters of assurance (LoA) into power purchase agreements (PPA) with the discoms, the actual supply of coal to these plants may not commence even if the producer signs an FSA with state-run Coal India.

"Considering the tepid power demand now and the clause in Shakti, it is highly unlikely that existing LoAs are going to be converted into PPAs in the near term," an industry official said, adding that this year, power generation is expected to exceed demand by 8.8 per cent while the peak-hour surplus will be to the tune of 6.8 per cent.

Under the current situation, although Coal India has a near 70 million tonnes of stock, it is not renewing those FSAs which have lapsed. Instead, the company has resorted to short-term auctions which increase its net price realisations from coal sales.

"IPPs (independent power producers) without a contract will continue the practice of buying coal in e-auctions and sell power in the Exchange. It is unlikely that they would buy coal at a premium to the notified price in absence of a long-term PPA, given their already precarious financial condition," Mishra added.

Kameswara Rao, a partner at PwC, opined that the immediate relief from Shakti will be to those power plants which have been completed and have signed PPAs with discoms but lack fuel security.

As an example, Adani Power's 3,300-Mw Tiroda plant may benefit from the situation but plants belonging to the India Power Corporation, which is yet to sign any long-term PPA, may continue to rely on imported coal instead of getting relief from Shakti.

"Power companies can bid a sizeable premium to get the security of supply. This is because Coal India rates are pegged largely to domestic inflation. Besides, it avoids the uncertainty of global coal prices, shipping costs, and exchange rates," Rao said, adding that the open auction route to substitute imported coal by the auctioned Coal India produce will benefit private power producers.

On the other hand, industry officials, who have coastal power plants, said that although Coal India’s produce is cheaper than the imported variety, the cost of logistics pulls up Coal India’s price and thus they prefer to stick to imported coal.

Further, sector experts point out the ambiguity over how bidding of these linkages will happen under Shakti and how the Centre plans to come up with specific rules over the process of linkage. Experts say clarification is also needed regarding how domestic coal, mined in the east coast and transported to the west coast at an economical rate, can compete with imported coal.

"Until now, there is no clarity on how the bidding for the fuel supply agreement will happen and the finer points which will make an FSA with Coal India economical for the power plants is yet to come out," the expert said.

Nevertheless, although it needs to be seen if Shakti will be able to provide some relief to stressed power plants without an FSA, analysts expect a demand rebound in late 2018.

According to the Perspective Transmission Plan of the Draft National Electricity Plan prepared by the Central Electricity Authority, the country’s peak demand for power is expected to rise from the current level of 153 Gw to about 690 Gw by 2035-36.

Primary features of Shakti 

• TPPs having LoA shall be eligible to sign FSA after ensuring that the plants are commissioned, respective milestones met, all specified conditions of the LoA fulfilled within specified timeframe and where nothing adverse is detected against the LoA holders and the TPPs are commissioned before 31.03.22

• TPPs, part of 78,000 Mw, that could not be commissioned by 31.03.15 shall now be eligible for coal drawal if the plants are commissioned before 31.03.22

• Actual coal supplies to all TPPs shall be to the extent of long-term PPAs or medium-term PPAs to be concluded in the future. Coal linkages shall be granted on auction basis for IPP with PPA based on domestic coal. The IPPs participating in auction will bid for discount on the existing tariff. The discount on tariff would be adjusted from the gross amount of bill at the time of billing

• The future coal 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 Coal Company. The LoA shall be issued to the successful bidders and FSA signed after meeting the terms of LoA

• Coal linkages for IPPs having PPA based on imported coal shall be made available through a transparent bidding process

Source: Ministry of Coal