Long-term power supply contracts down to trickle

Written by Noor Mohammad | Noor Mohammad | New Delhi | Updated: Jul 29 2013, 07:13am hrs
Notwithstanding the policy emphasis on the sector, new power supply contracts have dried up over the last couple of years, owing to a host of factors like domestic fuel shortage, increased reliance on expensive imports, poor financial health of state electricity boards (SEBs) and the continued delay in finalisation of bidding guidelines by the Union power ministry.

Using as alibi the ongoing revision of standard bidding documents (SBDs) for power procurement, SEBs are going slow on the signing of long-term power purchase agreements (PPAs). Their real problem, though, is financial. Only 4,700 MW electricity was requisitioned by the SEBs over last two years 2011 and 2012 under long-term contracts. In comparison, tenders were floated by them for as much as 27,000 MW in 2010 alone.

Cash-rich SEBs from Gujarat and Maharashtra have in the meantime taken recourse to the short-term power market, where prices remain quite low. For example, prices have stayed at R2 a unit at Indian Energy Exchange, which accounts for 97% of total electricity traded through exchanges in India. In comparison, discovered price was in the range of R4-10 a unit against tenders issued by SEBs in recent months. For instance, the weighted average of prices quoted by power companies for electricity supply against tenders issued by Uttar Pradesh in December was R5.89 a unit. Similarly, the average price offered by generators in April for electricity supply to Rajasthan worked out to be R5.41 a unit. The figure is estimated at R5.66 a unit for bids received by Tamil Nadu in May for power supply.

Power companies are quoting high prices because of the prevailing uncertainty over fuel supply from Coal India (CIL). Under the existing coal distribution policy, penalty clause in the fuel supply agreements (FSAs) kicks in only when coal supplied by CIL is less than 50% of the annual contracted quantity.

If a power plant gets only 50% coal of its requirement, it would be able to run at 42-43% plant load factor (PLF) only. But the developer would be able to recover full fixed-charges only if it operates the plant at a minimum 85% PLF. That leaves power companies with no option but to load unrecoverable fixed costs on power buyers.

Domestic coal production is targeted at 604 million tonnes (mt) in 2013-14 while demand is pegged at 769 mt. That leaves a gap of 165 mt to be met through imports.

The prevailing uncertainty on fuel and bidding framework are to be blamed for drying up of PPAs, said Shubhranshu Patnaik, a senior director at consulting firm Deloitte Touche. Former power secretary RV Shahi too voiced concern over the drying up of new power projects. Inaction on the part of discoms, state government and the power ministry has led to a stagnation in starting new generation projects, Shahi said.

However, another former power secretary P Uma Shankar, who was actively involved with the exercise to revise SBDs, dismissed the suggestion that the delay in SBD finalisation had anything to do with the drying up of PPAs. Uma Shankar told FE: SEBs can use existing bidding guidelines until SBD revision is finalised.

Although CIL has now committed to meet 80% of the entire coal requirement of power plants (78,000 MW capacity to be commissioned between April 2009 and March 2015) under the new FSA, it will provide only 65-75% coal from domestic sources. The balance fuel requirement will be met with imports.

Imported coal is about 40% costlier than domestic coal on gross calorific value basis. Discoms, majority of whom are in a financial mess, avoid buying expensive power generated from imported coal. With availability of 65% coal, a power plant can run only at 54% PLF. At this low level of capacity utilisation, the developer can recover his full fixed charges only by quoting a higher price for power supply.

What has further complicated the situation is the long time taken by by the Union power ministry in finalising bidding norms for projects. The Cabinet Committee on Economic Affairs (CCEA) has recently approved a proposal to allow pass-through of imported coal costs for 78,000 MW capacity to be commissioned during April 2009- March 2015. However, that is yet to reflect in the bidding guidelines. After more than two years, the ministry is yet to complete a review of the existing guidelines.

Discoms procure electricity through long- and medium-term PPAs. But over the last two years, no medium-term PPA has been signed by power companies as the coal ministry has refused to release coal against such contracts despite the power ministry's intervention. Power generators have been left disappointed by the ministry's decision. The MoC [ministry of coal] decision of not allowing coal supply against medium-term PPAs is arbitrary because these are in accordance with the existing regulations and an important instrument to meet power demand-supply mismatch, said Ashok Khurana, director general, association of power producers ( APP).

Meanwhile, capacity-addition programme for the 13th Plan programme remains in a state of limbo with coal linkage still undecided for envisaged projects. There is already talk of freezing coal linkages to power projects for at least two years given CIL's difficulty in stepping up production. If that happens, new PPAs may not be signed during the moratorium.