Coal Linkage

Imagine a ration card that guarantees a household a fixed monthly quantity of grain from one specific government warehouse, at a set price, regardless of what the open market is doing. Coal linkage does almost exactly this for a power plant, connecting it to a specific coal source on pre-agreed terms rather than leaving it to buy fuel on the open market every time it needs to.

A coal linkage is a formal, long-term arrangement, typically with a Coal India subsidiary, that allocates a defined supply of coal from a specific mine to a specific power plant. Because coal accounts for the majority of a coal plant's running cost, whether a plant has adequate, reliably priced linked coal or has to depend on costlier e-auction coal or imports determines much of its underlying profitability.

For decades, linkage allocation was a purely administrative decision made by the central government, a process that became infamous during the so-called Coalgate controversy over how some allocations were made. The SHAKTI policy, introduced in 2017, moved the system toward more transparent, largely auction-based allocation of linked coal, intended to reduce the discretion and opacity that had defined the earlier regime.

The consequences of inadequate linkage are not abstract. Several Ultra Mega Power Projects and merchant power plants built with the expectation of cheap, assured linked coal found themselves instead buying costlier coal from other sources, squeezing margins that had been calculated on a very different fuel cost assumption.

Whenever a coal power plant reports weak margins despite steady electricity demand, an inadequate or unfavourable coal linkage, forcing it toward costlier open-market or imported coal, is one of the first places analysts look.