Modi cabinet greenlights major coal reform: New SHAKTI Policy set to transform power sector

The Indian government has approved a sweeping revision of the SHAKTI (Scheme for Harnessing and Allocating Koyala Transparently in India) policy aimed at revamping coal allocation to thermal power plants across the country. This major policy change, ratified by the Cabinet Committee on Economic Affairs under Prime Minister Narendra Modi on May 7, 2025, is designed to simplify coal linkage mechanisms, reduce reliance on imports, and foster greater competition and flexibility in electricity markets. The new framework consolidates the previous complex eight-paragraph allocation system into just two operational windows, reflecting a broader policy thrust towards ease of doing business and market responsiveness in the energy sector.

What Is the Revised SHAKTI Policy and Why Was It Approved?

The original SHAKTI policy introduced in 2017 marked a significant departure from opaque, nomination-based coal distribution towards a more transparent structure rooted in competitive auctions and tariff-based bidding. While central and state-owned thermal power generators continued receiving coal linkages through nominations, private developers had to secure supplies via competitive bidding. Despite amendments in 2019 and 2023 to address operational challenges, stakeholders had voiced concerns about complexity, overlap, and delays in allocation. The newly revised SHAKTI policy, approved in May 2025, seeks to overhaul this fragmented system by integrating it into a simplified dual-window approach that enhances market access, ensures coal security, and supports new investments in thermal generation capacity.

What Are the Two New Windows for Coal Allocation?

The revised policy introduces Window-I and Window-II, each catering to distinct operational needs in the power sector. Under Window-I, coal will be allocated to central and state public sector thermal power producers, including their joint ventures and subsidiaries, at the notified price. These allocations will continue to be made on a nomination basis, following recommendations from the Ministry of Power. State governments will be permitted to utilise their nominated linkages for their own generating companies or to assign them to Independent Power Producers identified through Tariff Based Competitive Bidding or those with Power Purchase Agreements under Section 62 of the Electricity Act, 2003.

Window-II introduces a flexible market-aligned mechanism where domestic and imported coal-based power producers can secure coal through auctions by paying a premium above the notified price. This window applies to power projects regardless of whether they have existing Power Purchase Agreements, and allows supply durations ranging from 12 months to 25 years. Crucially, this model gives producers the freedom to sell electricity through any platform of their choice, whether bilateral trade, power exchanges, or open market mechanisms, thereby unlocking additional market depth and encouraging price discovery.

How Will the Revised SHAKTI Policy Improve Coal Allocation and Power Market Efficiency?

By simplifying the previous structure into a two-window format, the revised SHAKTI policy is expected to significantly improve transparency, reduce administrative burdens, and enhance coal procurement flexibility. The removal of the mandatory PPA requirement under Window-II represents a transformative change, allowing developers to plan new generation capacity with greater confidence in fuel availability. The option to secure coal for both short-term and long-term needs gives thermal generators the operational elasticity to respond to seasonal demand variations and power market fluctuations.

The policy also supports domestic coal substitution for imported coal-based plants, a move that could reduce foreign exchange outflows and improve energy security. Encouraging the establishment of pithead power plants, located close to coal mines, is another strategic focus aimed at reducing coal transportation costs, easing railway infrastructure loads, and ultimately lowering the delivered cost of electricity. Moreover, rationalisation of coal sources based on geography and plant efficiency is expected to result in cost savings that will be passed on to end consumers through reduced electricity tariffs.

What Is the Implementation Strategy for the Revised Policy?

To facilitate the execution of the new framework, the government will direct Coal India Limited and Singareni Collieries Company Limited to act on the revised guidelines. Regulatory bodies, state governments, and other relevant authorities will be formally notified to ensure consistent policy implementation nationwide. Additionally, an Empowered Committee comprising the Secretaries of the Ministries of Power and Coal and the Chairperson of the Central Electricity Authority will be formed to resolve operational challenges and enable timely policy adjustments.

The policy also provides for delegated decision-making powers to the Ministry of Coal and the Ministry of Power, allowing minor changes to be made without requiring fresh Cabinet approval. This aspect is particularly significant in ensuring that the policy remains dynamic and responsive to real-time operational requirements and stakeholder feedback.

How Will the Revised SHAKTI Policy Impact Stakeholders?

Thermal power developers stand to gain the most from this reform, as it creates a stable and flexible coal supply mechanism tailored to their evolving capacity needs. Existing Fuel Supply Agreement holders are allowed to procure coal beyond their Annual Contracted Quantity under Window-II, providing additional supply security. Additionally, power producers whose coal linkages under previous policies have expired may reapply under the revised SHAKTI framework, removing legacy uncertainties and fostering continuity in operations.

For Indian Railways, the policy promises to reduce congestion through source rationalisation, as coal will now be matched more effectively to geographically proximate power plants. Coal producers such as Coal India Limited and Singareni Collieries Company Limited benefit from more streamlined and market-aligned sales opportunities. Electricity consumers, both industrial and residential, may see tariff relief as a result of lowered transportation and handling costs of coal, and improved logistics efficiency. State governments, in turn, will benefit from greater autonomy in coal usage and planning for thermal capacity additions.

What Is the Broader Policy Context Behind the SHAKTI Reforms?

India’s dependence on coal for power generation remains substantial, with over 70 percent of installed electricity capacity tied to thermal sources. While the push toward renewables continues, base-load stability and round-the-clock supply continue to rely heavily on coal-fired generation. The original SHAKTI policy of 2017 marked a significant departure from earlier discretionary allocations, yet its fragmented structure limited its impact. The revised SHAKTI policy reflects a deeper shift in India’s regulatory philosophy—towards standardisation, market-based allocation, and long-term planning flexibility.

This reform is also aligned with the national objectives of reducing coal imports, strengthening energy self-reliance, and improving coal sector competitiveness. The policy’s emphasis on promoting Greenfield power generation at pithead locations supports infrastructure efficiency while contributing to the national decarbonisation effort through optimisation, if not outright reduction, of coal use per unit of electricity generated.

What Are Investors and Institutions Expecting?

Institutional sentiment towards the revised SHAKTI policy is cautiously optimistic. Coal India Limited may benefit from new premium-based auctions under Window-II, creating incremental revenue streams without requiring new capital expenditure. Listed thermal power generators such as NTPC Limited, Tata Power, Adani Power, and JSW Energy could capitalise on long-term supply clarity and increased trading flexibility. The removal of PPA requirements for coal linkage is especially noteworthy for private developers, as it lowers entry barriers for merchant power sales and fosters a more robust short-term power market.

Analysts view the policy as a positive development that addresses key structural inefficiencies in India’s coal linkage system. For infrastructure and energy-focused investment funds, the framework offers greater predictability in project planning and may accelerate financial closures for under-construction or proposed thermal projects. The policy’s ability to deepen market participation and promote coal rationalisation also aligns with investor preferences for operational transparency and policy certainty.

What Are the Long-Term Implications for India’s Energy Strategy?

In the long term, the revised SHAKTI policy positions India to better manage its thermal generation assets in an increasingly complex energy landscape. While renewables are expected to grow in share, coal will remain integral to India’s base-load power strategy for at least the next two decades. The dual-window mechanism introduced by the revised SHAKTI policy enables both strategic fuel security and operational competitiveness, marking a vital step in reconciling environmental goals with industrial and economic growth demands.

The policy lays the groundwork for more adaptive, market-responsive energy planning and can serve as a template for reform in other resource-dependent sectors. With implementation mechanisms now in place, the success of this framework will ultimately hinge on execution efficiency, state-level coordination, and regulatory clarity across auction processes, pricing, and contract enforcement.