Executive Summary
Coal remains India's primary fuel for thermal power generation (~50% of installed capacity). Understanding coal linkage and fuel supply agreements is critical for power generators, legal practitioners, and policy analysts:
- Coal Linkage: Allocation of domestic coal from Coal India Limited (CIL) to power plants
- Fuel Supply Agreements (FSAs): Contractual framework for coal supply
- SHAKTI Scheme: Policy for transparent coal allocation
- Imported Coal: Supplemental fuel, e-auction, market mechanisms
- Regulatory Issues: Coal shortages, force majeure, tariff implications
This guide examines coal linkage policies, FSA structures, SHAKTI scheme, and dispute resolution.
1. Statutory Framework
Coal Mines (Special Provisions) Act, 2015
| Provision |
Scope |
| De-allocation and re-allocation |
Post-2014 coal scam judgment |
| Auction regime |
Competitive bidding for coal blocks |
Electricity Act, 2003
| Section |
Provision |
| Section 62 |
Fuel cost pass-through in tariff |
| Section 79/86 |
CERC/SERC regulate fuel cost adjustment |
Key Policies
| Policy |
Year |
Purpose |
| SHAKTI (Scheme for Harnessing and Allocating Koyala Transparently in India) |
2017 (revised 2022) |
Transparent coal linkage allocation |
| DEEP (Discovery of Efficient Electricity Price) |
2020 |
E-bidding for imported coal |
| Compensatory Allowance for Change in Law |
2016 |
Coal sector reforms compensation |
2. Coal Linkage Framework
Types of Coal Linkage
| Type |
Source |
Allocation Basis |
Tenure |
| Long-term linkage |
Coal India Limited (CIL), SCCL |
FSA with power plant |
20+ years |
| Bridge linkage |
CIL |
Temporary (awaiting long-term) |
1-3 years |
| Spot e-auction |
CIL |
Market-based, no commitment |
Per auction |
| Captive coal blocks |
Own mining |
Auction winner |
Life of mine |
Coal India Limited (CIL) Subsidiaries
| Subsidiary |
Region |
Contribution to CIL Production (%) |
| South Eastern Coalfields Limited (SECL) |
Chhattisgarh, MP |
25% |
| Northern Coalfields Limited (NCL) |
UP |
18% |
| Western Coalfields Limited (WCL) |
Maharashtra |
12% |
| Mahanadi Coalfields Limited (MCL) |
Odisha |
25% |
| Others |
Jharkhand, West Bengal, etc. |
20% |
3. SHAKTI Scheme (Coal Linkage Allocation)
SHAKTI Scheme Overview
| Aspect |
Details |
| Launch |
2017 (revised 2022) |
| Objective |
Transparent, merit-based coal allocation |
| Beneficiaries |
Central, state, private power plants |
| Allocation basis |
Power procurement by discoms via Section 62/63 |
SHAKTI Allocation Criteria
| Category |
Priority |
Allocation Quantum |
| Central PSU gencos (NTPC, NLC, DVC) |
Highest |
100% of assessed requirement |
| State gencos with long-term PPAs |
High |
90% of assessed requirement |
| Section 63 bid projects |
Medium |
As per PPA, up to 75% |
| Section 62 projects |
Medium |
As per SERC-approved PPA |
| Merchant plants |
Low |
Spot e-auction only (no linkage) |
SHAKTI Application Process
| Stage |
Timeline |
Activity |
| 1 |
Month 0 |
Power plant applies via CIL portal with PPA |
| 2 |
Month 1 |
Ministry of Coal scrutinizes PPA authenticity |
| 3 |
Month 2 |
CIL assesses coal availability |
| 4 |
Month 3 |
Linkage letter issued (90% of assessed requirement) |
| 5 |
Month 4+ |
FSA execution with CIL subsidiary |
4. Fuel Supply Agreements (FSA)
Standard FSA Structure (CIL Model)
| Clause |
Provision |
| Quantity |
Annual Contract Quantity (ACQ) in million tonnes |
| Quality |
Gross Calorific Value (GCV) in kcal/kg |
| Price |
Notified price + GST + transport |
| Delivery |
Ex-mine or ex-railway siding |
| Tenure |
Linked to PPA tenure (typically 20-25 years) |
| Force majeure |
Natural calamities, strikes, mine closure |
| Termination |
PPA cancellation, sustained non-lifting |
FSA Annual Contract Quantity (ACQ)
ACQ (tonnes) = (Plant Capacity MW × Plant Load Factor % × Station Heat Rate) / (GCV of coal × 1000)
Example:
- 1,000 MW plant, 85% PLF, 2,500 kcal/kWh heat rate, 4,000 kcal/kg coal
- ACQ = (1,000 × 0.85 × 2,500 × 8,760 hrs) / (4,000 × 1,000) = 4.66 million tonnes/year
Coal Quality Specifications
| Grade |
GCV (kcal/kg) |
Use Case |
| G1 |
>7,000 |
Not produced (legacy category) |
| G2 |
6,700-7,000 |
Premium thermal coal |
| G3 |
6,400-6,700 |
Pitheads in Jharkhand, Odisha |
| G4 |
6,100-6,400 |
Common grade |
| G5-G17 |
<6,100 |
Lower grades, price adjusted |
5. Coal Pricing and Tariff Pass-Through
CIL Coal Pricing
| Component |
Calculation |
| Notified price |
Rs 1,500-3,000/tonne (GCV-linked) |
| GST |
5% |
| Royalty |
Included in notified price |
| Transport |
Railway freight (Rs 500-1,500/tonne) |
Fuel Cost Pass-Through in Tariff
| Tariff Component |
Treatment |
| Energy charge (variable) |
Full fuel cost pass-through |
| Heat rate |
Normative heat rate (2,300-2,500 kcal/kWh for modern plants) |
| Fuel price |
Actual price paid to CIL or importer |
| Adjustment |
Monthly/quarterly Fuel Price Adjustment (FPA) formula |
6. Imported Coal and E-Auctions
Imported Coal Sources
| Country |
Quality (GCV kcal/kg) |
Price (FOB, $/tonne) |
| Indonesia |
4,200-6,500 |
$60-$120 |
| South Africa |
5,500-6,500 |
$80-$140 |
| Australia |
6,000-7,000 |
$100-$180 |
DEEP (Discovery of Efficient Electricity Price) Portal
| Aspect |
Details |
| Purpose |
Aggregate demand, competitive bidding for imported coal |
| Participants |
Discoms, gencos |
| Bidding |
Reverse auction, lowest FOB price wins |
| Volume |
10-30 million tonnes annually |
| Benefit |
Price discovery, bulk procurement discounts |
CIL Spot E-Auction
| Type |
Frequency |
Price |
| Special Forward E-Auction (SFE) |
Monthly |
10-30% premium over notified price |
| Exclusive E-Auction |
Quarterly |
20-50% premium |
| Non-power e-auction |
Bi-weekly |
Market-determined |
7. Coal Shortages and Force Majeure
Common Causes of Coal Shortage
| Cause |
Frequency |
Impact |
| CIL production shortfall |
Seasonal (monsoon) |
10-20% supply reduction |
| Railway rake unavailability |
Periodic |
Logistical delays |
| Mine closures (safety, environment) |
Rare |
Sustained supply disruption |
| Demand surge |
Summer, winter peaks |
Spot price spikes |
Force Majeure Provisions in FSA
| Event |
FSA Treatment |
PPA Treatment |
| Mine accident |
Force majeure, supply exempted |
Genco not liable for non-generation |
| Monsoon flooding |
Seasonal, anticipated (not FM) |
Must procure alternate fuel |
| Government policy change |
Change in law |
Pass-through to buyer |
Recent Coal Shortages (2021-2022)
| Period |
Issue |
Resolution |
| Oct 2021 |
Low CIL stocks, high demand |
Emergency coal imports, e-auction |
| Apr 2022 |
Heatwave, peak demand |
Increased CIL production, imports |
8. Captive Coal Block Allocation
Coal Block Auction Process
| Stage |
Timeline |
Activity |
| 1 |
Month 0 |
Ministry of Coal notifies coal blocks for auction |
| 2 |
Month 1-2 |
Technical, financial pre-qualification |
| 3 |
Month 3 |
E-auction (forward or reverse bidding) |
| 4 |
Month 4 |
Letter of Allocation (LoA) issued |
| 5 |
Year 1-2 |
Mine development, statutory clearances |
| 6 |
Year 2-3 |
Mining commencement |
Auction Parameters
| Block Type |
Bidding Parameter |
| Power sector blocks |
Rs/tonne premium over floor price |
| Non-power blocks |
% revenue share |
Captive Mining Benefits
| Benefit |
Explanation |
| Fuel security |
Own coal source, no linkage dependency |
| Cost savings |
Mining cost (Rs 500-1,000/tonne) << CIL price |
| Quality control |
Direct control over coal quality |
| Long-term assurance |
Life of mine (20-30 years) |
9. Dispute Resolution in Coal Supply
Common FSA Disputes
| Issue |
Forum |
Typical Outcome |
| Non-supply by CIL |
Arbitration (FSA clause) |
Compensation for shortfall |
| Quality deviation (GCV) |
Arbitration |
Price adjustment formula |
| Tariff pass-through denial |
CERC/SERC |
Regulatory determination |
| Force majeure claim |
Arbitration |
Evidence-based adjudication |
CERC/SERC Role in Fuel Disputes
| Issue |
Regulatory Action |
| Fuel cost non-pass-through |
CERC/SERC orders discom to pay |
| Imprudent fuel procurement |
Disallow excess cost in tariff |
| Alternative fuel cost |
Prudence check, then pass-through |
10. Compliance Checklist for Coal Linkage
For Power Plants Seeking Linkage
For FSA Compliance
11. Key Takeaways for Practitioners
SHAKTI Prioritizes PPA Plants: Long-term PPAs get coal linkage—merchant plants rely on spot e-auctions.
FSA is Non-Transferable: Linked to specific PPA—cannot trade or assign linkage.
Fuel Cost is Pass-Through: Entire fuel cost (domestic or imported) recoverable in tariff—maintain documentation.
Coal Quality Deviation: GCV shortfall compensated via price adjustment—monitor quality testing.
Force Majeure is Narrow: Monsoon delays not FM—gencos must procure alternate fuel or face penalties.
Captive Blocks Save Cost: Mining cost ~50% of CIL price—viable for large thermal plants.
Import as Backup: Domestic coal insufficient—plan for 10-20% imported coal blending.
Conclusion
Coal linkage and fuel supply remain critical for India's thermal power sector, with SHAKTI scheme bringing transparency and merit-based allocation. Fuel Supply Agreements (FSAs) with Coal India Limited provide long-term fuel security, while tariff regulations ensure full cost pass-through to buyers. As India transitions to renewables, coal will continue playing a baseload role for the next 1-2 decades. Practitioners must navigate SHAKTI application procedures, FSA compliance, and regulatory frameworks for fuel cost recovery while preparing for imported coal dependency and eventual phasedown aligned with climate commitments.
