Award of Fresh Coal Linkages by Government Is Positive for The Power Sector: ICRA

The Central Government has recently notified the third round of auction for award of coal linkages under SHAKTI policy to independent power projects having long-term PPAs. As per ICRA, this will have a positive impact for coal-based power plants. The government has proposed the minimum tariff discount to be quoted by the bidders for securing coal linkage at 7 paise per unit. The latest discount is higher than 1 paise per unit base discount set under the first round of auction held in September 2017 and 4 paise per unit base discount set under the second round of auction for coal linkages held in May 2019. The base discount for the third round of auction is equal to the bid discount discovered in this second auction. 

Commenting on the auction terms, Sabyasachi Majumdar, Group Head & Senior Vice President, ICRA, says, “On the positive side, the availability of coal linkage would enable the plants to declare normative availability allowing recovery of fixed charges and improve their merit order position. Moreover, the winning bidders can offset the discount offered in tariff to some extent through efficiency gains in station heat rate and auxiliary consumption. Further, the higher discount in tariff would be positive for the distribution utilities. On the flip side, the increase in base discount is a negative for coal-based power projects, given that most of the coal-based assets without fuel linkages are financially stressed. They are also likely to be facing under-recoveries in fixed charges under their PPAs because of significant increase in project capital cost and fine tariffs quoted under the competitive bidding for securing long-term PPAs.” 

For instance, the reduction in tariff by 7 paise per unit at a 60% PLF level for a coal-based power project with capital cost of Rs. 7.5 crore per MW and having long-term PPA for the entire capacity, would reduce the debt service coverage by 0.05 times over the debt repayment tenure and IRR by 50 bps.

Previously, under the second round of auction, there was restriction on participation from developers, who had won linkage in the first auction. However, there is no such restriction under the third round of auction. As per ICRA estimates, about 3.5 GW of coal-based capacity having long-term PPAs and without corresponding fuel linkage, would be eligible to participate in this auction. However, the maximum quantity of coal that can be allocated has been capped at 90% of the requirement at 85% PLF. Considering a supply rate of 75% of the contracted quantity from the coal companies, the linkage coal would be sufficient to meet about 68% of the winning bidder’s normative fuel requirement.

The domestic coal production by the Coal India Limited (CIL) witnessed a decline of 3.9% in the first ten months of FY2020 on a Y-o-Y basis. This is being attributed to the extended monsoon season and the labour issues for CIL. As a result, the supply from CIL to power sector declined on a Y-o-Y basis. However, the impact of this decline on thermal power generation remains limited so far, given the slowdown in electricity demand growth as well as higher supply from other generation sources like hydro, nuclear and renewables. The thermal power generation declined by 2.8% in 10M FY2020 on a Y-o-Y basis, with the demand growth slowing down to 1.3% in 10M FY2020 compared to the reported growth of 5.7% in the corresponding period of previous year. The domestic coal production would have to be ramped up to meet the incremental demand driven by the expected improvement in electricity demand growth, award of fresh coal linkages, and given the government’s objective to reduce dependence on costlier importer coal. Along with the higher production, this would require augmentation of the rail transmission infrastructure to ease the logistic issues for coal supply.