Revised SHAKTI Policy 2025: India Simplifies Coal Allocation to Boost Thermal Power Capacity

SHAKTI Policy Revision: Key Overview

In a landmark decision aimed at transforming India’s energy landscape, the Cabinet Committee on Economic Affairs (CCEA) has approved a comprehensive revision to the SHAKTI (Scheme for Harnessing and Allocating Koyala Transparently in India) policy. This significant update, announced on May 7, 2025, represents a strategic shift in how coal resources are allocated to the power sector, with far-reaching implications for energy security and thermal capacity addition.

The revised SHAKTI policy introduces substantial streamlining of the allocation process, reducing the previous eight-paragraph framework to a simplified two-window system. This restructuring aligns with the government’s broader commitment to enhancing ease of doing business in the coal sector while creating favorable conditions for expanding thermal power generation capacity.

This policy overhaul comes at a critical juncture as the Power Ministry implements plans to add a “minimum” of 80 gigawatts (GW) of coal-fired capacity by 2032, recognizing the essential role of thermal power in meeting India’s base load requirements despite the rapid expansion of renewable energy sources.

The Two-Window Coal Allocation System

The cornerstone of the revised SHAKTI policy is the consolidation of coal allocation mechanisms into a streamlined two-window system. This represents a significant departure from the previous approach, which involved eight different paragraphs detailing various allocation pathways. The new structure offers clarity, simplicity, and efficiency in the coal allocation process.

This binary approach significantly reduces procedural complexities while ensuring that coal resources are allocated more efficiently to entities that value them most. The system balances the need for predictable coal supply to essential public sector projects with market-based allocation mechanisms that optimize resource utilization across the broader power sector.

Window-I: Coal Linkage at Notified Price

Under the first window of the revised policy, coal linkages will be provided at notified prices to central and state sector projects. This window preserves essential elements of the previous allocation system for strategic public sector undertakings while introducing operational improvements.

Window-I maintains the existing mechanism for granting coal linkages to Central Sector Thermal Power Projects (TPPs), including Joint Ventures (JVs) and their subsidiaries. This continuity ensures that national priority projects maintain reliable access to coal resources at predictable prices.

Additionally, coal linkages will be earmarked to states based on the existing mechanism, following recommendations from the Power Ministry. This provision gives states considerable flexibility in utilizing their allocated coal resources through multiple pathways:

This structured approach under Window-I ensures that essential power generation capacity serving public utilities maintains priority access to coal resources, supporting energy security for critical infrastructure and services. The mechanism balances administrative allocation with competitive elements, particularly in how states may allocate their earmarked resources to independent producers.

Window-II: Premium-Based Coal Linkage

The second window introduces a market-oriented approach to coal allocation, representing perhaps the most significant innovation in the revised SHAKTI policy. Under Window-II, coal linkages will be available at a premium above the notified price, introducing a market mechanism that allocates resources to those who value them most highly.

This window dramatically expands eligibility and flexibility for coal linkages. Any domestic coal-based power producer, regardless of whether they have existing Power Purchase Agreements (PPAs) or are currently untied, can secure coal through auction. Notably, even imported coal-based power plants can access domestic coal through this window if they require it.

Perhaps the most revolutionary aspect of Window-II is the complete elimination of PPA requirements. This means power producers can secure coal linkages without having pre-arranged electricity sales contracts, giving them the freedom to sell power through various channels including exchanges, bilateral arrangements, or future PPAs as market conditions evolve.

This flexibility is expected to significantly enhance market dynamics in both coal allocation and power sales, leading to more efficient resource utilization and potentially more competitive electricity prices in certain market segments.

The revised SHAKTI policy’s two-window system creates clear pathways for coal allocation to different types of power producers. (Image: Representative)

Coal Source Rationalization Benefits

Beyond restructuring allocation mechanisms, the revised SHAKTI policy addresses the critical issue of coal source rationalization. This element targets the reduction of ‘landed cost’ of coal at thermal power plants, with cascading benefits for operational efficiency and consumer electricity tariffs.

Coal source rationalization involves optimizing the matching of coal mines to power plants based on factors such as distance, coal quality, logistics infrastructure, and plant requirements. The policy recognizes that historical allocations may not represent the most economically efficient arrangements in the current context.

By enabling more logical source-plant pairings, the policy aims to reduce transportation distances and costs, which often constitute a significant portion of the total landed cost of coal. This rationalization offers multiple systemic benefits:

The rationalization component addresses a long-standing inefficiency in India’s coal-power value chain, where coal often traverses unnecessarily long distances due to historical allocation patterns. By allowing more flexible and logical source-plant relationships, the policy aims to extract system-wide efficiencies that benefit both producers and consumers.

Thermal Capacity Expansion Strategy

A central objective of the revised SHAKTI policy is to create conducive conditions for expanding India’s thermal power generation capacity. The policy specifically targets the development of new coal-based power plants, with a strategic emphasis on pit head locations situated near coal sources.

The policy supports both brownfield expansions (additions to existing plants) and greenfield projects (entirely new facilities), with a particular focus on developing capacity at locations that minimize coal transportation requirements. This approach aligns with economic efficiency principles while supporting the Power Ministry’s target of adding 80 GW of coal capacity by 2032.

Several key provisions directly incentivize capacity expansion:

By removing rigid requirements for pre-arranged power sales agreements while ensuring coal availability, the policy addresses a major “chicken-and-egg” problem that has historically constrained capacity development. Developers now have greater flexibility to secure fuel supply before finalizing power offtake arrangements, or to develop merchant capacity serving dynamic market needs.

This approach represents a significant evolution in India’s power sector planning, moving from a rigid PPA-driven model toward a more flexible framework that can better accommodate market dynamics while still ensuring capacity development aligned with national energy security needs.

Future Implications for India’s Power Sector

The revised SHAKTI policy represents a pivotal shift in India’s approach to coal allocation and thermal power development, with wide-ranging implications for the country’s energy future. Its effects will likely extend beyond operational improvements to reshape investment patterns, market structures, and generation mix over the coming decade.

The policy acknowledges an essential reality: despite India’s ambitious renewable energy targets, coal-fired generation will remain a cornerstone of the country’s electricity system, particularly for meeting base load requirements. By creating pathways for adding 80 GW of new thermal capacity by 2032, the policy ensures power system stability during the transition to cleaner energy sources.

Looking ahead, several key implications emerge from this policy shift:

The removal of PPA requirements under Window-II may prove particularly transformative, potentially shifting power generation investment toward more market-responsive models rather than the traditional long-term contracted approach. This could accelerate the evolution of India’s electricity markets while creating new opportunities and challenges for both producers and consumers.

As implementation proceeds, the success of the revised policy will ultimately be measured by its ability to balance multiple objectives: ensuring coal availability for power plants, promoting cost-effective capacity addition, reducing consumer tariffs through efficiency improvements, and maintaining system reliability while the country continues its broader energy transition.

With its streamlined processes, enhanced flexibility, and strategic focus on pit head developments, the revised SHAKTI policy establishes a framework that could substantially reshape India’s energy landscape over the coming decade, supporting both immediate energy security needs and longer-term transition goals.