End to fuel famine: Narendra Modi government clears rights through auction for power firms

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New Delhi | May 18, 2017 7:44 AM

About 30,000 MW of private power plants — two-thirds with PPAs — to benefit.

The government’s move will immediately benefit 20,000 MW private-sector thermal capacities with PPAs. (Reuters)

In what could end years of fuel famine for several private-sector power plants and put their stranded/upcoming capacities into productive use, the Cabinet Committee of Economic Affairs (CCEA) on Wednesday approved a new auction-based coal linkage policy. Thermal capacities in the private sector to the tune of 30,000 megawatt — two-thirds of which are equipped with long-term power purchase agreements (PPAs) — will get the right to fuel produced by Coal India under the new policy, branded Shakti. The government’s move will immediately benefit 20,000 MW private-sector thermal capacities with PPAs. These include 12,000 MW which were issued letters of allocation (LOAs) by CIL in 2009 but still lack fuel supply agreements (FSAs) and another 8,000 MW capacity without LOAs that had plunged into a crisis after their short-term MOUs with CIL lapsed on March 31 last year.

Among the immediate beneficiaries are GMR, Adani Power, Reliance Power, Vedanta, KSK Energy, CESC. These firms have plants operating at below financially viable levels due to lack/shortage of fuel linkages. The new policy prescribes direct linkage allocation to public-sector plants and reverse auction for supply of coal linkages to private players; it also integrates fuel linkage to the tariff-based competitive bidding for long-term power purchase by distribution companies with a view to ensuring that firms with fuel supplies are not deprived of PPAs and vice versa.

Under the auction, firms with PPAs based on domestic coal will offer discount on the existing tariff, which will be adjusted from the gross amount of bill at the time of billing. Those without PPAs will bid for fuel linkages with CIL’s notified price serving as the reserve. “Linkages shall be earmarked to the states where any linkage quantity unutilised for two years shall lapse. States may indicate the earmarked linkages to the discoms, who may undertake tariff-based competitive bidding on long-term and medium-term PPAs and allot the linkages to the successful bidder,” the government said.

Ashok Khurana, director-general, Association of Power Producers, said: “The long-awaited policy will help ease coal availability for projects with PPAs but with no long-term coal source. However, offering discount on quoted price discovered in competitive bidding process for obtaining linkage exposes them to risk of under-recovery.” The auction route for rights to CIL coal comes three years after captive coal mines cancelled by the Supreme Court were reallocated through such a mechanism.

What has enabled the policy change is an improvement in domestic coal supplies and CIL’s production. It may be recalled that under the 2013 presidential directive, CIL signed FSAs for only 78,000 MW of capacity although LOAs were issued to 1.08 lakh MW in 2009 due to inadequate production. This left 30,000 MW, half in the government sector, with LOAs but without FSAs. Of the 15,000 MW such private capacities without firm fuel linkage, 12,000 MW have PPAs but are stranded/operating at low PLF, for lack of fuel at competitive prices or stagnant demand, rendering the projects stressed assets.

According to analysts, the policy offers a comprehensive solution to both old and new thermal projects requiring coal supplies, and in particular, helping stranded projects demonstrate viability to the lenders.

Kameswara Rao, partner-PWC said: “The linkage policy spares project developers the upfront 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. The policy time-frame of 2022 could buck the trend and result in revival of thermal projects with LOAs getting built. This is more so, given the strong demand outlook for electricity in the medium-term, with initiatives from rural electrification to electric vehicles gaining pace.”

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Some observers felt that giving coal linkages on allocation basis to thermal stations owned by the Centre or state governments and to private developers on competitive bidding basis distorts the competitive power market. They said this is contrary to the government’s policy of according level playing field for all stakeholders .

“It is time that NTPC is exposed to getting projects by competitive bidding as ordained by tariff policy,” a source said on condition of anonymity. Calling the of linkage for the power plants under construction a “huge respite,” Mohit Kumar, analyst at IDFC, said that “increasing demand and new PPAs are critical for resolution of the stranded power plants.”

“Power plants with PPAs are going to benefit from the linkage. The discount to PPA tariffs will be passed on to consumer. Power plants with high PPA tariffs and located in the coal fields will be likely beneficiaries,” he added.According to Kumar, there would not be any material decline in overall power price because of this policy.

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