(Photo: Bloomberg)
(Photo: Bloomberg)

Power generation firms without supply contracts can secure three-month coal supply

  • According to the new methodology, state-run coal mining firms such as CIL will earmark mines from where these coal linkages for three months will be auctioned
  • This issue assumes importance given that discoms owe 81,095 crore for the power bought from the gencos at the end of August

New Delhi: As part of the National Democratic Alliance (NDA) government’s strategy of reducing the stress in the India n power sector, the government has changed the way in which coal allocations are made for generating electricity, according to power minister Raj Kumar Singh.

Given the situation of stressed power projects that don’t have power purchase agreements (PPAs) and hence can’t secure the critical fuel for generating electricity in the absence of one, the power ministry has issued the methodology for allocation of coal for sale of power through short term and Day Ahead Market (DAM) in power exchange.

According to the new methodology, state-run coal mining firms such as Coal India Ltd will earmark mines from where these coal linkages for three months will be auctioned. These auctions will carried out every four months. All coal fuelled power projects (except captive power capacity) having untied capacity of more than 50% will be eligible to bid for such coal linkages.

This issue assumes importance given that electricity distribution companies (discoms) owe 81,095 crore for the power bought from the generation companies (gencos) at the end of August. Around 25,000 MW of capacity doesn’t have long-term PPAs.

This will in turn help revive the stressed power generation projects and follows the government’s decision in March this year allowing power generators to retain coal allocations linked to a supply contract even if the agreement is terminated because of payment defaults by power distribution companies (discoms). The Cabinet Committee on Economic Affairs (CCEA) had then also approved coal allocations for short-term supply contracts as recommended by a ministerial panel. A high-level panel, headed by then cabinet secretary P.K. Sinha, set up to address the issues of stressed thermal power projects submitted its report in November, after which a group of ministers was formed to examine them.

“Ministry of Power issued the methodology for allocation of coal for sale of power through short term and Day Ahead Market(DAM) in power exchange. So far coal was allocated for long term and medium term PPA holders. With this, stressed power stations may be revived. Further, this will also enable deepening of power market being traded through Power Exchange," said power minister Raj Kumar Singh.

A power exchange functions on the lines of commodity exchanges and provides a platform for buyers, sellers and traders of electricity to enter into spot contracts that are for the same day, next day, and on a weekly basis. Of around 1,200 billion units (bu) of electricity generated in India, the short-term market accounts for around 130-150 bu. This trade volume has grown by around 10% annually and is valued at around 22,124 crore.

However concerns remain in the backdrop of electricity generation, tracked by many to gauge the momentum in the economy, seeing its biggest fall in more than five years in October. To be sure, the government sees the 12.9% drop in October power generation as an aberration, attributing it to a combination of high base, an extended monsoon and a economic slowdown.

This comes in the backdrop of India’s electricity sector poised for a structural shift with distribution utilities becoming increasingly averse to entering into long-term PPAs for thermal projects. Given that state electricity distribution companies (discoms) are not floating long-term PPAs , generation utilities also don’t want to hinge their growth on one set of customers. Instead, they are looking at different customer sets such as industrial clusters, discoms, individual customers and power exchanges Mint reported on 21 June 2017.

Such a mechanism will also help facilitate cross-border energy trade, which is a key part of Prime Minister Narendra Modi’s South Asia-focused neighbourhood-first policy. This comes in the backdrop of India’s strategy to negate the growing influence of strategic rival China in the Indian Ocean region and South Asia. In recent years, China has tried to co-opt Sri Lanka into its ambitious One Belt One Road initiative, a programme to invest billions of dollars in infrastructure projects, including railways, ports and power grids, across Asia, Africa and Europe.

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