1. Ray of hope for independent power producers

Ray of hope for independent power producers

Regulators commission study to know tariff compatibility under competitive, cost-plus methods.

By: | Published: July 22, 2015 12:01 AM

The long wailing of independent power producers (IPPs) have fallen on some receptive ears, it seems. Regulators are now slowly coming round to a view that competitive tariff bidding, in which

IPPs have got foolishly trapped, may not be the best method for power procurement.

Last month, the Forum of Regulators (FoR), which acts as a link between central and state electricity regulators, has asked research agency Crisil to compare the viability of competitive tariff with the other prevailing method, cost-plus tariff.

The dual system of pricing is a legacy of two sections in the Electricity Act 2003. Under section 63, power distributors have to buy power (through a power purchase agreement) from developers through a competitive bidding process. In this, the developer that quotes the lowest tariff wins the bid.

But under section 62, power purchase agreements (PPAs) were made under a regulated regime. Under this, the regulator considers the cost of production, add a margin and set a tariff. This is known as the cost-plus method.

While tariffs under the cost-plus method are reviewed annually by the electricity regulatory commissions, tariffs adopted through the bidding process under section 63 are levellised for a fixed period of 25 years, based on parameters such as capacity and energy charges.

This led to situation where IPPs that have bid though competitive bidding got stuck with a low tariff for the contract period, no matter what the cost of production. This has made a large number of projects that got into a competitive tariff non-viable.

Now the regulators have realised that despite the belief that competitive bidding method is the fair method of price discovery, there have been “concerns that bids of generators are made under inaccurate assessment of future costs, project execution and operations, tariffs determined through the competitive bidding route may be aggressive, pose risk to financial viability of projects, or undermine execution of the project.” So they have asked Crisil to go into the issues and submit its findings by September.

The Association of Power Producers (APP), a group of private power developers, has been arguing for co-existence of both sections 62 and 63, considering the ‘inflexibility’ of the bidding norms which do not allow for accommodating any change in the cost structure of the project due to factors beyond the developer’s control. The central government, through the National Tariff Policy in 2010, had made it mandatory for power distribution companies to buy long-term coal-based power through competitive bidding.

Private players were asked to present their case before FoR, and they argued that tariffs under competitive bids did not reflect the true cost due to uncertainty on several fronts, which included coal-shortage hitting nearly 16,000 MW of capacity. Apart from fuel shortage, other factors that led to uncertainty are transportation bottlenecks and the quality of coal supplied by Coal India.

Further, the bidding criteria doesn’t provide for offsetting changes in currency volatility, as manifested by a decline in the rupee value from 44 a dollar in 2008 to over 60 a dollar now, the APP said in its presentation. Additionally, the body also cited the rigidity of section 63 in factoring

in cost escalation due to delay in land acquisition and resettlement and

rehabilitation.

“The developers are operating in a competitive environment, but hemmed are in by two state-run monopolies—Coal India and Power Grid—leading to conditions where several factors are beyond their control,” a private developer told FE on the condition of anonymity. He felt that both the sections must co-exist until other segments of the power sector move towards a more competitive market structure.

The developers have also pointed out that nearly two-thirds of the coal-based capacity supplied power on tariffs determined under the regulated regime, and have largely been free of litigation over tariff revision. In contrast, nearly 70% of the total capacity being procured under section 63 has approached regulatory commissions for revision in tariff to reflect changed cost structures.

APP has also cited that a working group set up by the finance ministry under IIFCL chairman Santosh Nayar had recommended a one-time shift of stressed assets from competitive bidding regime to regulated tariff regime.

Furthermore, as per an estimate, even if tariff of the entire capacity procured under competitive bidding is re-determined, tariff of such projects will be cheaper by nearly 35-50%, when compared with the recently discovered tariff through bidding of R5-6/unit

The developers have also cited the long-drawn nature of petitions in the Central Electricity Regulatory Commission by which tariff revisions could take several years to decide, leading to possible mothballing of projects. This, according to the APP, leaves the government with no option but to keep regulated tariff in play along with competitive bidding to save investment over R4 lakh crore from becoming NPAs.

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