Corporates saddled with power plants sans assured buyers have earmarked as much as 1,300 MW of capacity for captive consumption over the last four months, in what underscored the enormity of the problem at hand. In some cases, such shifting of power units from commercial to captive has come about as part of strategic corporate mergers. Experts feel that the trend is only to sustain in the short run given the stagnant demand for electricity, the “extremely high rates” of industrial and commercial power tariffs and a severe dearth of new power purchase agreements (PPAs) being signed by state-owned distribution companies (discoms). According to research firm Icra, about 15,600 MW of operational thermal power capacity is without PPAs at present. A lot of projects without PPAs and/or grappling with fuel supply problems have faced substantial cost overruns due to implementation delays and, as a consequence, are looking for various ways to survive, one of which is to convert their plants into captive projects. The feasibility of converting units to captive-use ones is more in the case of diversified corporate groups whose demand for power for industrial purpose is substantial: Conversion of Vedanta’s two thermal power units into captive plants in Odisha in May 2017 following the merger of Sterlite Energy with it in 2016 is an instance.
According to analysts, the current trend is contrary to the previous practice of several companies spinning off their captive units to monetise their values. Kameswara Rao, partner, PwC, said: “The intrinsic value is currently greater as a captive unit than as an IPP (independent power project).” Electricity tariffs for industrial and commercial customers is now ruling at `8-13 per unit in some states. Therefore, when a company with an IPP merges with another company with high industrial power demand, it makes sense to convert the IPP into a captive power plant.
The Electricity Act, 2003, allows captive power plants to sell their surplus power to customers who can buy power through ‘open access’ at power exchanges. As states buy more and more power through electricity exchanges, spot prices of power have risen considerably in recent times. For peak-demand slots, deals are now being clinched at stratospheric Rs 10 per unit levels at the Indian Electricity Exchange, significantly higher than the average of Rs 3.13 a unit a few months ago. The lucrative spot power market is also fuelling the shifting of units to captive use as it will practically be easier to sell surplus power in the spot market from a plant that is already operational than a stranded one. If the proposed separation of carriage and content is implemented, the potential market for captive power plants is expected to expand further, analysts added.
However, Kuljit Singh, partner, EY, said captive use of stranded power is only a part and temporary solution to the current problems. “There are other impediments like network constraints, fuel allocation issues and changing government regulations surrounding captive projects,” Singh added.