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Industry Update Back
Utilities : Flexible coal linkage enhances value of low-cost plants
15-May-2017

  • Flexible utilization of coal linkage (tolling) is a win-win. Saving of transport cost reduces DISCOMs power purchase cost and supports generation by low-cost private power plants.
  • There is potential for ~18GW of high-cost state GENCOs to use tolling and generate savings of ~INR25b, representing 10% of finance cost saving under UDAY.
  • Private generating companies with ~27GW of untied capacities – many near coal mines – would benefit. Merchant power prices would get a boost.
  • Rising renewable energy (RE) generation enhances the value of low-cost base-load generating plants. Tolling and stricter environment norms could drive faster-than-expected rebalancing of the power market.
  • We like JSPL and JSW Energy. The implied value of their merchant capacities is at a significant discount to replacement cost.Policy on flexible use of coal linkage promotes efficiency Under the scheme, a state GENCO can toll its coal linkage to another power plant if the landed cost of electricity from the participating plant is lower than its own variable cost. India’s power sector has historically grown on the concept of local generation. Ignoring logistics disadvantage, states often set up plants far away from coal mines in their own regions (local generation). The resultant inefficiency is getting evident as India's power market evolves – merit order principle, expanding transmission grid, development of merchant power market, and over-supply. The flexible utilization of coal linkage policy aims to reduce this inefficiency by enablingthe most efficient use of coal – a small but excellent policy move, in our view.

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Motilal Oswal Financial Services Limited. (MOFSL) Member of NSE, BSE, MCX, NCDEX - CIN no.: L67190MH2005PLC153397

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