Kerala deal sign of rates to come

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New Delhi | Updated: November 18, 2014 5:12:02 AM

Fixed cost 72% of tariff discovered at auction...

Jindal Power and Jindal India Thermal have emerged as the biggest winners in the auction process conducted by the KSEB to award 25-year rights for supply of power to the state from December 2016. (Reuters)Jindal Power and Jindal India Thermal have emerged as the biggest winners in the auction process conducted by the KSEB to award 25-year rights for supply of power to the state from December 2016. (Reuters)

Heralding what the future holds for India’s power distribution companies and consumers in terms of additional volatility, if not increase, in electricity prices, fixed cost accounted for a record 72% of the tariff discovered at a recent auction by the Kerala State Electricity Board (KSEB).

This is the first instance of Case 1 category bidding after the norms were revised in June. Before the new norms that provide for annual revision of tariffs were introduced, the Case 1 bidding was based on the concept of weighted levellised tariff for the life (usually 20-25 years) of a power purchase agreement (PPA) and the fixed cost hovered around 30-40% of the tariff discovered.

The winning bidders for supply of 450 MW to Kerala  struck deals at a weighted average tariff of R4.10/unit. The tariff discovered is for the first year of supply and will be revised annually as per an index linked to inflation, depreciation and debt mitigation developed by the Central Electricity Regulatory  Commission.

Though the tariff secured by KSEB now is less than the immediate past instance of Case 1 auction by a quarter, it needs to be reckoned that the latter was a case of average levellised tariff for a 25-year PPA whereas KSEB’s tariff will escalate on an annualised basis and it would end up paying much more to the power companies over the contract period.

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In 2013, Rajasthan discoms secured power supply from a clutch of power producers at an average levellised tariff of R5.41/unit, under the earlier bidding norms for Case I category. Apart from the fixed cost, the tariff includes variables, fuel costs in the main, which are a pass-through.

“The developers have loaded all the risk on to the distribution companies. This has happened because they have become risk-averse after an initial period of exuberance. The reluctance to assume risk is primarily due to the uncertainty over fuel supply agreements. Uncertainty over future demand for power is another factor that made power companies risk-averse. The new bidding guidelines mandating developers to sell 20% of their capacity in the open market is also a constraint when it comes to planning the business given the uncertainty over fuel availability,” Ashok Khurana, director general of the Association of Power Producers, told FE.

Kameshwar Rao, leader, utility and mining, PwC India, said: “The fixed charges quoted are unusually high primarily due to bidding provisions allowing for deduction in fixed cost recovery for lower fuel stocks, shortfall in heat rates and lower transmission availability. Many generators see these norms as challenging.”

As per the new CERC formula for Case I bidding, 25-30% of the escalation component of the tariff (annual fixed cost) is linked to the wholesale and consumer price indices. The remaining 75-80% will have a degression curve to factor in depreciation, interest on loan, etc.

Jindal Power and Jindal India Thermal have emerged as the biggest winners in the auction process conducted by the KSEB to award 25-year rights for supply of power to the state from December 2016. Balco and Jhabua Power are the other two winners. The four companies have qualified to enter into the 25-year power purchase agreement with the state government. While the Jindal Group companies won the bids for a combined capacity of 400 MW, Balco and Jhabua Power will supply power to KSEB from a combined capacity of 330 MW.

While the Kerala bids are the first under the revised Case 1 category, states have lined up plans for inviting bids for supply of another 7,300 MW of power under this category by 2017.

In the case of Case 2 power plants, the government identifies the location, fuel type and technology for the producers before the bids are invited, and so the risk is much less on developers, leading to cheaper tariffs. The ultra mega power plants fall in this category.

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