Power ministry proposes swapping of coal linkages

Recommendation aimed at optimising the coal mix available to a company

To reduce generation costs for power companies, the power ministry has recommended allowing swapping of coal linkages between projects operated by a single company. Amid the shortage of domestic coal, lower generation costs would help contain the rise in power rates.

The recommendation is aimed at optimising the coal mix available to a company operating projects at multiple locations. This would have no commercial implications on linkages of state-owned Coal India Limited (CIL) or the obligation on power companies to “take or pay” under supply agreements.

Currently, CIL provides linkages to meet the entire coal requirement of plants in the hinterland, and 70 per cent of plants in coastal areas. However, owing to the shortage of coal, hinterland plants often have to import coal through ports, while coastal plants secure coal from hinterland mines. This anomaly raises generation costs, owing to the increased cost of transportation. It also leads to concern on supply, as hinterland plants are not designed to use imported coal.

“The ministry recommends coal mix optimisation may be allowed on a case-to-case basis for a limited period after taking into account the recommendations of Central Electricity Authority, wherein swapping of a linage at a company level is applicable only between projects owned by a company or the parent special purpose vehicle or subsidiaries with a common parent company,” the power ministry recently said in a letter to its coal counterpart, seeking its view on the recommendation.

Swapping of linkages may be allowed when both projects fulfil all criteria for coal supply, including achieving milestones under letters of assurance. Also, the swapping shouldn’t breach power purchase agreement obligations of companies, the ministry said. Both parties involved in swapping would have to give an undertaking to this effect.

“All the risks associated with this would have to be borne by the developer, including lower availability of coal for a particular power project after the coal mix optimisation,” the power ministry said. Last month, the coal ministry sought CIL’s views on the proposal. Coal linkage swapping was first proposed by the Association of Power Producers earlier this year.

In 2011-12, India’s total coal production of 532 million tonnes (mt) fell short of demand by about 90 mt, owing to delayed green clearances for new CIL mines. The shortfall was met through imports, which are expected to rise to 200 mt by the end of the 12th Plan in 2017.