Power sector: Missing the wood for the trees

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Power sector: Missing the wood for the trees

Tuesday, 09 November 2021 | Uttam Gupta

Power sector: Missing the wood for the trees

One gets a sense that discoms are not honouring their commitments with regard to lifting quantities mentioned in the Power Purchase Agreements

On October 30, 2021, the Ministry of Power notified two sets of rules under Electricity Act, 2003 viz. Electricity (Timely recovery of costs due to Change in Law) Rules, 2021, and Electricity (Promotion of generation from renewable sources of energy by addressing Must Run and other matters) Rules, 2021.The stated objective of the rules is to inter alia sustain economic viability of the electricity sector and ease financial stress of various stakeholders.

An idea of the stress can be gauged from the losses incurred by power distribution companies (discoms) — the most crucial link in the supply chain. Mostly owned and controlled by the State governments, discoms purchase electricity from independent power producers (IPPs) and public sector undertakings (PSUs) such as National Thermal Power Corporation (NTPC) (besides supplies from their own generating stations), etc. under long-term power purchase agreements (PPAs) which cover 95 per cent of the total electricity supply.

During 2015-16, the losses of discoms were Rs 52,000 crore. After decreasing to Rs 17,000 crore during 2017-18 (this was primarily due to a massive bail-out package given in November 2015 under Ujwal Discom Assurance Yojana or UDAY), these increased to Rs 30,000 crore during 2019-20 and further up to Rs 58,000 crore in 2020-21. This also impacts the cash flow of generators as discoms owed them around Rs 82,500 crore (end March 2021).

How do the aforementioned rules seek to address the stress? 

In the first set of rules, at the outset, we need to understand the connection between the cost and the 'Change in Law'. The cost of fuel — primarily coal which contributes to over 2/3rd of power supply — accounts for a major share of electricity generation cost. In most of the PPAs, this is 'pass through' — a jargon for increasing tariff to neutralize increase in fuel cost. This in turn, can happen in the normal course say due to increase in the international price of coal. It can also arise due to what is termed as 'Change in Law'. 

To put things in perspective, let us look at some facts relating to two ultra-mega power projects (UMPP) each of 4000 MW capacity set up over a decade back by Tata Power Ltd (TPL) and Adani Power Ltd (APL) respectively in Gujarat.

Unlike most other PPAs wherein fuel cost is pass through, TPL/APL agreed to charge from discoms low tariff at Rs 2.26 per unit and Rs 2.35 per unit — using tariff-based competitive bidding [TBCB] methodology. While, TPL is based entirely on imported coal, APL uses 70 per cent domestic and 30 per cent imported coal. This unique arrangement was meant to shield consumers from any hike in fuel cost. The intent was to set up many more such projects to make power available to the users at 'affordable' and 'stable' price but things did not pan out as intended.  

In 2012, TPL/APL petitioned the Central Electricity Regulatory Commission (CERC) seeking 'compensatory tariff' — a sophisticated nomenclature for hike in tariff. They argued that following an order of Indonesian government in September 2011, fixing a minimum export price (MEP) of coal, they were forced to pay more which should be compensated. This was instantly allowed by CERC (February 2014) and confirmed by the Appellate Tribunal for Electricity (APTEL) (December 2016). The Supreme Court (SC) after initially rejecting the claim (order of April 2017), finally directed CERC 'to amend the PPAs to enable pass-through of fuel price escalation subject to a cap' (order dated October 29, 2018).

Currently, the position is all hikes in fuel costs including due to the 'Change in the Law' have to be paid for by the discom — even when this is disallowed under PPA (albeit original). Now, the Government wants to ensure that the generators are paid promptly. However, making a provision in the rules per se does not guarantee that timely payments will be made. Given their unrelenting precarious financial position, when, discoms are unable to make even normal payments leading to huge pending dues, how will they be able to pay for increase in fuel cost arising from the change in law or any other reason.

As for the second set of rules, these are driven by an international commitment under the Paris Agreement on Climate (2015) — reiterated at the Glasgow summit — that India will have 175 GW (giga watt) of generation capacity based on renewable energy (RE) sources by 2022and 450 GW by 2030.

The rules assign to RE based units the status of a 'must-run' power plant; such plants shall not be subjected to curtailment or regulation of generation or supply for any reason other than technical constraint in the electricity grid or for reasons of security of the grid. Furthermore, in the event of a curtailment of supply, compensation shall be payable by the procurer to them at the rates specified in the agreement for purchase or supply of electricity.

One gets a sense that discoms are not honoring their commitments even with regard to 'lifting quantities mentioned in the PPAs' — forget making timely payments. This is true. But, the way to deal with such situations is also provided for under the agreement between the generator company and the discom. This is a standard practice in any contract between the seller and the buyer.

Even so, to make rules that give 'must run' status to a particular segment is unfair and discriminatory. While, the Government may be well within its rights to give incentives for promoting RE based plants, this can't be stretched to a point of favoring them over others say, those based on natural gas or coal even in their running. In such matters, all plants should be meted out the same treatment.

Whether, it is recovery of costs or concern over off — take, the problem lies elsewhere. It has to do with the fragile finances of discoms. This in turn, connects with their huge under-recovery on sale to poor households and farmers, at a fraction of the cost of purchase, wheeling and distribution or even free (in recent years, this trend has got aggravated as Chief Ministers merrily go around promising free power to their vote banks); high aggregate technical and commercial (AT&C) losses - most of it is plain theft and inflated tariff allowed to power generators under cost plus formula.

In a bid to force discoms make timely payments, in the past, the Government had come up with measures such as insisting on LC (Letter of Credit) arrangement (under it, the bank guarantees payment if the buyer/discom doesn't); deducting money from the funds transferred by Centre to States as per the Finance Commission recommendations, denial of loan if a discom continues to make loss etc. None of these yielded any result. The rules notified on October 30 are two more additions to that series.

These are all cosmetic solutions to problem that requires deep surgery.

Unfortunately, our political class does not even want to recognize the fundamental factors that put discoms under stress, forget addressing them. Till that happens, the Government will only roll out more of such high-sounding rules/measures; attempts that are nothing but sheer obfuscation.

(The writer is a policy analyst. The views expressed are personal.)

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