By Devanshee Dave
On Wednesday, the Cabinet Committee on Economic Affairs (CCEA) approved the signing of the Fuel Supply Agreement (FSA) with a Letter of Assurance (LoA) to the holders of Thermal Power Plants (TPP’s).
The SHAKTI (Scheme for Harnessing and Allocating Koyla (Coal) Transparently in India) agreement will bring transparency in the allocation of coal to the power sector and will obliterate the effects of the prevailing coal allocation regime. The new regime will establish the supply of coal as per entitlements decided by the government. Thermal Power Plants having LoA’s can sign the FSA after meeting all the specified conditions of the LoA withing a given time-frame. The TPP’s also have to start producing before the 31st of March, 2022, to avail the benefits of this scheme.
Glitches in past policies
The New Coal Distribution Policy (NCDP) of 2007 was made to look after the coal allocation among TPPs. However, due to the scarcity of this resource, in 2009, the pre-decided allocation of 1, 08,000 MW could not be met up. Only 78,000 MW could be supplied. Due to that, many power companies had to take aid in the form of bank loans and with time, they got converted into Non-Performing Assets (NPAs). The same led to a sharp rise in the bad loans of banks which have increased from 1 lakh crore in the past years to a total of Rs 6,06,911 crore in December 2016. Most of these bad loans are due to the power, steel and textile sector.
Breaking down the new regime
As per the new policy, allocation of linkages from the coal miners to the power sector will be based on the auction of linkages or through the Power Purchase Agreement (PPA), in accordance with the competitive bidding of tariffs. There are a few exceptions granted to the State and Central Power Generating companies as per the Tariff Policy, 2016. The PPA has to be submitted to the state within two years, or the state has the absolute right to divulge such linkages to the Distribution Companies. Independent Power Producers (IPP’s) having PPAs based on domestic coal can bid for discounts on the current tariffs. These discounts will be adjusted from the gross amount of the bill at the time of billing only. The allocation of the imported coal will be permitted to the IPPs having PPAs, only on the basis of transparent bidding of such imported coal.
Furthermore, the grant to set up the Ultra Mega Power Project (UMPP) will be entitled to full normative quantity linkages as per the bidding only. The agreement will be issued by the Ministry of Coal and Ministry of Power and will be implemented by Coal India Ltd (CIL) or Singareni Collieries Company Ltd (SSCL).
The future that SHAKTI will usher in
The SHAKTI agreement will provide a regular supply of the essential quantity of fuel to the power companies. This will prove to be a blessing for the banking and infrastructure sectors. While the production of coal rises, 90 percent of the coal demand will be fulfilled by the end of this year. This means that an additional 20,000 MW will be provided to the power companies.
Between April 2016 to January 2017, power companies have imported 16.6 million tonnes of coal, which in comparison to the previous year’s import of 31.6 million tonnes is considerably lower. The new regime will help to further replace imported coal with affordable domestic variants. Global coal prices are currently facing a surge due to the lack of supply so the use of domestic fuels will reduce the burden on the exchequer.
Scrutinising the overall scenario, the power sector will be able to work with increased efficiency as the demand for fuel will be fulfilled on time. This in turn will benefit the infrastructure sector as the pending projects will now be completed on time. Imports will also reduce and that will reflect positively on the economy.
Featured Image Source: Flickr