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regulator wants cap on short-term tariffs for coal-fired plants

The power regulator is likely to propose a Rs 5 a unit (kilowatt-hour) cap on the sale of
power from coal-fired plants in the short-term market.

The move, coming in the wake of pressure from the Planning Commission for a clampdown
on tariffs, is based on the rationale that there is “sufficient margin” in the proposed tariff cap
for firms to make profits in the short-term market, which includes bilateral contracts and
deals through traders spanning less than three months, as well as transactions taking place on
the power exchanges.

Under conditions of shortage of supply of electricity, the regulator — the Central Electricity
Regulatory Commission or CERC — has been empowered under Clause (a) (1) of Section 62
of the Electricity Act 2003 to fix lower and upper ceilings of tariff for sale and purchase of
electricity. The CERC had last September invoked its powers under the legal provision and
notified a price ceiling of Rs 8 a unit applicable to power exchanges as well as bilateral
markets to rein in what it calls runaway prices. The cap on prices was applicable for 45 days.

The average tariffs in the short-term market currently are, however, well within the Rs 5-6 a
unit range, way below the Rs 19 a unit levels recorded during the second half of last calendar
year. Industry players, including executives with power trading firms and one of the
exchanges termed the proposal, if it comes through, an instance of “over-regulation as no
instance of market abuse or market domination has come to light to warrant intervention by
the Commission.”

Also, imposing a price cap would send a contradictory signal to the investors, which might
affect fresh investments in the sector, they said.

Two power exchanges operate in the country — the Indian Energy Exchange (IEX) and the
Power Exchange India Ltd (PXIL). Of the total electricity generated, roughly 8 per cent is
transacted in the short-term market.

Of this, around half is through bilateral deals (via traders and directly between distribution
companies), while the remaining is through the power exchanges (IEX and PXIL) and the UI
mechanism (the grid-frequency linked price-balancing mechanism).

In March, for which latest data is available, the weighted average price of electricity
transacted through traders was Rs 4.94 a kWh while the weighted average price of electricity
transacted on the Power Exchanges was Rs 5.58 on the IEX and Rs 6.47 on PXIL.
Merchant Power plants
By B.S. Meel

Merchant power plants differ from traditional rate-based power plants as to: 1) how they are
financed and 2) where they sell the electricity they generate.
A merchant power plant is funded by investors and sells electricity in the competitive
wholesale power market. Since a merchant plant is not required to serve any specific retail
consumers, consumers are not obligated to pay for the construction, operations or
maintenance of the plant.

A traditional rate-based power plant, on the other hand, is built and operated by a regulated
electric utility specifically to serve that utility’s retail customers. In return, the customers are
obligated to pay for the plant’s construction, operations and maintenance.
The merchant power plants are not tied up with long-term power purchase agreements (PPA).
Independent power producers (IPPs) who opt for this route will have to do so at their own
risk. Setting up a merchant plant would necessarily mean balance sheet financing by he
developer, as financial institutions/lenders may as a rule, may not be comfortable with
projects that don’t have long-term PPAs.
Though this would appear to be a gamble, experts say the risk could be fully taken care of
IPPs develop projects that deliver power at competitive rates. Given considerable demand-
supply mismatch, sale of competitively – priced power should pose a problem. Consider that
in between April and May’06, against a demand of 95,583 MW, only 83,094 mw power was
available – a peak shortage of 13.1%. This situation is likely to persist. Projections by the
Central Electricity Authority show even if Xth Plan capacity addition together target of
32,084 mw is met, the all India peak shortages would be at an average of 16.3% or 18,913
mw. The ministry of power intends to add 10,000 MW capacity addition through MPPs in
11th Plan.
In its guidelines for the allocation of coal blocks and coal linkages for the power sector, the
ministry of power said, “merchant power plants fill different niches in the market; some
provide steady supplies to a power grid, while others fire up only when demand is highest
and meet peak loads.” Merchant power plants operating competitively help assure that power
is produces with efficiency and supplied to locations where it is needed most”.
The government has set the plant size between 500 MW and 1,000mw. This is not merely
because the national tariff policy mandates all new private sector projects to come through
the competitive bidding process. There are transmission constraints as well. The transmission
system will not be able to support evacuation of power from large sized merchant plants.
To ensure that large volumes of power can be evacuated, dedicated transmission systems
would be required. This would mean that customers for power produced by these plants have
been tied up. Such projects would require transmission systems that are planned and executed
in tandem with the generating plant. So that when the plant begins producing power, the
transmission lines are in place to evacuate power from the plant to the consumer.
Merchant plants, by definition, do not have pre-identified customers. This would mean that
these plants would have to depend on redundancies in the existing transmission system to
evacuate power. The ministry is working on a via media where the merchant plant of capacity
500 mw to 1000 mw can be accommodated in the national grid, which would have
redundancies.
The ministry of power, believes that a limited number of merchant plants will enable the
development of an electricity market. “A few merchant plants of 500 mw to 1000 mw could
be easily handled through the transmission system and it is an option for creating a market as
it would promote power trading on short-term, medium –term and spot market basis.
KEY ISSUES EN ROUTE
But are we ready for the MPPs? Some of the key issues to be addressed in this regard are:
There are acute shortages in the country and we ration out use of electricity. The demand-
supply gap is large.
The prices are fully regulated and there is no correlation between the cost of generation and
the end-price paid by the consumer. There is a significant level of subsidy to all the consumer
groups — in the form of lower-than-cost tariff or lower-than-cost recovery of infrastructure
that go with the generation, transmission and distribution of electricity.
Thefts, pilferage, losses and inefficiencies arising out of transmission and distribution are
high. This has resulted in higher-than-normal wheeling charges for transmitting electricity.
There is no common charge across the country for wheeling. States discourage wheeling and
banking for captive and third-party use.
Transmission — intra- and inter-State — is grossly inadequate. While Section 42 of the
Electricity Act 2003 promises open access, it will be far from reality unless significant
capacities are created in transmission.
Even 15 years after the power reforms policy, no private sector entry in transmission is seen
or envisaged accept exception in the near future. PGCIL has the sole monopoly though
efficient.
Cross-Subsidy Surcharge for open access by unrelated buyer-seller combine as stipulated by
the EA 2003 has not been clearly defined yet. In some cases such as Gujarat and Tamil Nadu,
it is as high as Rs 3.50 per unit sold. In the case of Maharashtra, the MERC has declared this
as nil.
Some States, such as MP, have pegged this at lower than Re 1/-. There has been no stable
policy from any of the States, though the Act stipulates that the surcharge is to be withdrawn
in toto in five years.
Given these conditions, how would an MPP sell its output? There is no private market.
Conditions are not conducive for development of a private market in the near future. Even if
it exists, the cost economics will be dictated by high wheeling charges and the cross-subsidy
surcharge as the States would not give up the creamy layer and would continue to levy high
surcharge.
Selling to SEBs and discoms (distribution companies) during peak hours and lean season
(summer) is a strong possibility. This is already being handled by NTPC and other agencies.
There may be a few summers like last year when Maharashtra bought power at Rs 10 per
unit. But these are far and few in between and MPPs cannot be set up based on summer
demand alone. Trading licenses were encouraged but effectively there is no trading market,
except between State utilities. No private trade has been signed so far, not even for a single
unit of electricity.
HITCH IN COAL
The Ministry wants to encourage coal-based MPPs and allocate coal blocks to them. These
plants cannot be switched on and off at will. They will require an eight- to ten-hour cycle
time to stop and start, and even then the fuel loss is very high. MPPs typically have to supply
whenever there is demand.
Peaking stations are to operate only in the peak hours. This being so, coal is not a
recommended fuel at all for MPPs. Natural gas is the only option. Given the pricing and
availability, natural gas-based stations are not feasible unless supplies are assured.
With so much uncertainty, who would finance the MPPs? While NTPC, BHEL, etc., alone
can put up their balance sheet for these projects; no other private operator is capable of
exposing their books for such ventures. Even in the case of NTPC or BHEL, they may set up
a few peaking stations near the gas pipelines and but would not go for capacities such as
1000MW.
Thus, given the complexity of the Indian market, the scheme for MPPs may remain a dream
unless the market reforms totally and free access is made available to the consumer for
creation of a competitive market.