Optimising Coal Transportation

Ministry releases methodology for linkage rationalisation for IPPs

The Ministry of Coal (MoC) has released the methodology for the rationalisation of coal linkages for independent power producers (IPPs), kicking off the process for private developers. Until now this was only available for central and state-owned power producers. As of March 2018, the rationalisation of around 30.46 mt of coal has resulted in savings of Rs 33.54 billion.

The rationalisation of linkages is aimed at reducing the distance over which coal is transported, thereby freeing up railway infrastructure for other gainful uses, as well as lowering the cost of power generation. The methodology for the rationalisation of coal linkage is based on the recommendations of the Inter-Ministerial Task Force (IMTF), constituted by the MoC to undertake a comprehensive review of the existing coal sources of IPPs with linkages, and to consider the feasibility of rationalising these sources with a view to optimising transportation costs.

By and large, while the rationalisation exercise is welcomed as a positive development, there are concerns over the real benefit to private developers, since the methodology mandates that any savings in the cost of generation need to be passed on to the procurer. Besides, the developers might face issues pertaining to the quality and volume of coal from the new mine.

Details of the methodology

Process: Under coal linkage rationalisation for IPPs, the linkages for thermal power plants (TPPs) may be transferred from one coal company to another, subject to the availability of coal from the company. The swapping of linkages cannot be contended as mandatory, and will be based on the coal availability during the fiscal year and the future expected availability as per the company’s production plan.

Priority to PSUs: The coal companies would implement the linkage requests of state/central generating companies before implementing rationalisation requests of IPPs. Participation under the scheme is voluntary for IPPs.

Role of various entities: The one-time process of calling for requests from IPPs for linkage rationalisation will be undertaken jointly by Coal India Limited (CIL), Singareni Collieries Company Limited and the Central Electricity Authority (CEA) in a transparent manner.  In order to avail of linkage rationalisation, IPPs would need to state the minimum order quantity for which rationalisation is being sought, along with the preferred mode of transportation.

Cost savings: The methodology mandates that the savings in the cost of power generation need to be transferred to the buyers of power through a transparent and objective mechanism. The IPPs approaching the coal companies for linkage rationalisation will be required to submit an undertaking stating that their savings would be passed on to the buyers, and a supplementary agreement for the same would be approved by the appropriate Electricity Regulatory Commission (ERC). The fuel supply agreement for the rationalised linkage would be implemented following the approval from the concerned ERC. The cost saving arising from linkage rationalisation would be calculated based on the savings due to changes in transportation distance and gross calorific value (GCV) of linkage coal calculated as per the prescribed formula (see table).

Grade of coal: The grade of coal supplied under the existing linkage will be taken as the mid-point GCV of the existing linkage, which is verified by the Coal Controllers Organisation.

Distance and transportation: The distance over which the coal is despatched under the existing linkage will be taken as the weighted average distance for all coal supplies made to IPPs in the preceding financial year. The coal which was earlier coming through rail may now be transported by road, after linkage rationalisation. In such a scenario, the coal transportation charges by rail will be considered for the purpose of calculating cost savings.

Scope of coverage: Rationalisation will be considered only for IPPs having linkages through the allotment route. Linkages awarded through auction will not be eligible for rationalisation. In addition, the swapping of linkages with coal sourced through auction and imports will not be permitted. Also, since the cost plus mines are for dedicated consumers and the pricing policy for coal from these mines is different from that of other coal mines, any IPP drawing coal from Western Coalfields Limited under a cost plus arrangement will be excluded from the purview of rationalisation.

Dealing with multiple requests from same source: To deal with a scenario in which more than one IPP requests rationalisation from the same source, and the coal availability of that source cannot meet the entire linkage rationalisation request, the methodology recommends that preference be given to the IPP with the highest cost savings. However, in case the cost savings of two or more IPPs is the same, the coal quantity will be distributed amongst them in proportion to the linkage capacity.  Any disputes arising in linkage rationalisation will be resolved as per the provisions in the Arbitration and Conciliation Act.

Expected benefits

The rationalisation of linkages is expected to reduce the landed cost of coal due to a reduction in the transportation costs. The reduced landed price would bring about savings in the cost of power generation.

As per ICRA Limited, for every 100 km reduction in the distance for transporting coal, the variable cost of coal-based power generation for linkage-based plants is estimated to decline by about 10-12 paise per unit.

However, the actual savings would vary depending upon the reduction in the coal transportation distance. Apart from the reduced cost of power generation, rationalisation of linkages would help to ease up railway traffic, which would benefit not just the power sector but other sectors availing of railway transportation as well. Besides this, it will help in the creation of a level playing field for power producers.

Issues and challenges

Despite the cost savings arising from rationalisation of linkages, there is scepticism in the industry regarding its success. Industry experts opine that while the objectives of the policy are laudable, the process is overly rigid and, therefore, its benefits may not be fully realised. The entire gains from rationalisation are mandated to be passed on to the procuring utility; hence only those IPPs whose lower logistic costs improve their position in the merit order are likely to consider this.

Another issue that could restrict the participation of IPPs in linkage rationalisation is that of the volume and quality of coal when switching to a new mine. There is a risk of not getting coal of a required grade and in sufficient quantity from the new mine. Besides, the power plants are designed based on the designated coal mine decided at the time of setting up of the plant. Since every coal mine has a different quality of coal, this could be a concern for developers especially in view of the new environmental regulations.

On the railway infrastructure front, the fundamental problems of infrastructure deficiencies in the transportation of coal to power plants, the shortage of wagons offered by Indian Railways and the congestion of railway tracks continue. Therefore, switching of linkages is likely to be palliative for select TPPs and fails to offer an industry-wide solution. Apart from this, the process of transferring linkages involves the mutual agreement of multiple entities – power plants, subsidiaries of CIL and regulators, which complicates the process and restricts participation.

To conclude, the implementation of coal linkage rationalisation for private players would enable efficient coal utilisation as well as ensure optimal utilisation of the railway network. However, to encourage participation under the scheme, the developers’ concerns need to be addressed, especially those pertaining to quality and volume of the coal available, as well as easing the process of approvals required.

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