Domestic coal prices match international trends without raising power bills

Linkage policy gives power plants assured supply of the fuel while giving them more scope to sell electricity in exchange market

Eight years after India started a new coal auction system, prices in the domestic market are in lock step with international. The system has increased pressure on thermal power plants to keep costs low, as the government is determined that consumer electricity price doesn’t rise. The winner in the arrangement is state-run Coal India (CIL) which continues to surprise investors despite selling most of its product at notified prices.

The percentage change in prices of coal mined domestically has often crossed 50 per cent within a span of just a quarter. The changes have become steep after the pandemic.

Going by the data extracted from the coal ministry’s national index, such price fluctuations give a good reason to downstream companies to push the government for assured supplies of the fuel. While the government is willing to heed the companies, it is keen that linkages do not lead to cascading rise in cost of power. 

The ministry has relaxed the terms for supply-cost linkage to ensure the government’s objective. Plants getting coal under the linkage can sell power through more windows in the exchange market. The government hopes that the flexibility will keep electricity price low enough for consumers not to complain. It also hopes that companies will not switch back to bilateral power purchase agreements (PPA) with states. The PPAs had become a means for power companies to operate in a sellers’ market, assuring them pre-set prices that were often far removed from their actual cost of production.

Coal linkage is a mechanism under which CIL and Singareni Collieries, another state-run company, offer a committed supply to power plants (the two companies account for over 85 percent of total production of domestic coal). The offer reduces the pressure on power plants to buy coal from the spot market. The detailed terms were issued as SHAKTI policy in January 2020.

The rider is that the electricity generated has to be sold through power exchanges in the Day Ahead Market, or in short term through a transparent bidding process through Discovery of Efficient Energy Price (DEEP) portal.

A recent amendment in the policy has expanded the scope of this flexibility. “Power plants including private generators which do not have PPAs shall be allowed coal linkage under SHAKTI Policy…provided further that the power generated through that linkage is sold through any product in power exchanges…,” said an order issued by the coal ministry early this month.

CIL’s results for the second quarter of Financial Year 2023-24 (Q2 FY24) surpassed share market expectations. The company had earnings before interest, taxes, depreciation and amortisation of Rs 9,021 crore, an 11 percent rise year-on-year. Coal production increased by 11.3 percent for the same period and off take, the amount buyers pick up from the miner, increased 8.6 percent.

“The notified price for sale of coal under FSA (fuel supply agreements), accounting for 85 per cent of sales, does not fluctuate. The fluctuation is limited to around 15 percent sold through e-auction where consumers decide the price based on demand and  supply. This fluctuates in response to variations in imported coal price,” said former CIL chairman Partha Bhattacharya.

Now, even FSA-based arrangements are based on global prices, fluctuations in the coal index show. So while the e-auction prices do play a leading role in setting the trend, there is no doubt despite the preponderance of fixed price arrangements for coal, domestic coal prices are now gyrating to international prices.