New coal linkage policy

The Union Cabinet on Wednesday approved a new coal linkage policy for fuel supply to the power sector. It seeks to lower power tariffs by allocating coal blocks through a reverse auction. The new Scheme SHAKTI (Scheme for Harness and Allocate Koyala (Coal) Transparently in India) advance the government’s promise for good governance and move from fossil fuels.

Policy Highlights

The government has approved the long-waited coal-linkage policy. An addition of 7,000MW of nuclear capacity was approved by PM Narendra Modi to generate up to Rupees 70,000 crores of orders for domestic industries. Under the policy, coal linkages would be provided to various state and central power generation companies through a state-owned Coal India Ltd (CIL). India will construct 10 indigenous units of pressurized heavy water reactors (PHWRs), each with a capacity of 700MW, in a “fully home grown initiative”. Coal linkage to IPPs (independent power producers) dependent on imports would be provided through a transparent bidding process.

Thermal power sector

Electricity is crucial to fuel the economic growth of the nation. To keep the momentum of the high growth, availability of unhindered power supply is a must. Thermal power generation accounts for 65 percent of the total electricity generation in India, where coal-based plants accounts for the bulk of thermal power capacities. One of the many blockages in unleashing the full potential of thermal power sector in India is lack of fuel availability. Coal supply by CIL is restricted to 65% of the actual demand by coal-based thermal plants, leading to increased dependency on imported coal. The new policy is expected to reduce the limitations and intensify efficient utilization of the sector.

Analysis

The new coal distribution policy (NCDP) was formulated in 2007. The policy specifically dealt with the issue of supply of coal to small and medium sector. As per the policy, small and medium consumer, with annual consumption less than 4200 metric tons per annum who do not have access to coal purchase, were eligible to get it through agencies nominated by State Governments.

 Coal distribution through E-auction was introduced by CIL to provide access to consumers who are not able to source through available institutional mechanisms due to seasonal and limited coal requirement.

The new policy of the government aims at reducing the dependency on coal imports and undertake indigenous production to reduce the energy scarcity in the country. This, along with achieving self-sufficiency, can increase the export of coal to less developed countries in the future. Domestic production would also reduce the tariffs on coal, which would boost the thermal sector, increasing electricity supply to the nation.

Assessment

The move is expected to not just save natural resources but also help in boosting capacity of plants. Improving operational efficiency, use of energy efficient and less-polluting technology in the coal-based thermal sector would bring in long-term benefits and take care of the environmental and social impact. Coal production by the world’s largest coal mine CIL, helped to reduce import bill by more than Rs.28000 crores. Indigenous production would be more reliable and less prone to price variations.

Environmentally, with the improvement of single percentage point in efficiency, plants can achieve Co2 reduction upto three percent. Hence, there is a need to focus on better technology to improve energy-efficiency. The government’s initiative to use inland waterways and coastal shipping to transfer coal among various states would help reduce power prices, self-sufficiency and affordable power supply to all Indians.

Over-invoicing of imported bills by private companies leads to increased power tariffs. E-auctions can also help avoid coal scams and thereby maximizing consumer benefits, ensuring industry health, enhancing government revenues over the long run and encouraging efficient use of the resources.