National Tariff Policy: Impact to be most on the renewables

Published: February 3, 2016 12:09:23 AM

There exists a potential of ~1700 MW from urban waste and ~1300 MW from industrial waste. However installed capacity till November 2015 was less than 150 MW

The Union Cabinet recently approved amendments in the Power Tariff Policy. While overall the changes, especially those relating to renewables, are a positive for the sector, the amendments as they stand relating to conventional energy may have negligible impact in the short to medium term.

Perhaps the most significant amendment for the wind sector is that “No inter-state transmission charges and losses would be levied for renewable power (solar/wind) till such period notified by GoI”. The amendment now makes it financially viable for project developers in a wind resource rich state to target PPAs in another state. The key challenge in addition to transmission would be the willingness of the state to encourage projects in other states thereby foregoing revenues that would accrue should the project have been set up in the home state.

Another significant change is the “Compulsory procurement of 100% power produced from all the Waste-to-Energy plants by Distribution Companies”. This serves twin objectives of the Swachh Bharat Mission as well as providing a boost to another source of renewable energy. According to the MNRE, there exists a potential of ~1700 MW from urban waste and ~1300 MW from industrial waste. However installed capacity from waste sources till November 2015 was less than 150 MW.

Other key amendments relating to renewables include Renewable Generation Obligation (RGO) on new coal/lignite based thermal plants set up after a specified date and bundling of renewable power with power from thermal plants whose PPAs have expired or which have completed their useful life subject to development through competitive bidding. The associated scale benefits and cost efficiencies may provide an edge to conventional power developers over pure-play Renewable Energy IPPs.

However RGO would have limited impact in the short term as private sector companies are presently focussed on completing their existing projects rather than setting up new capacity.

Another change is that all Inter-State transmission projects (with flexibility to meet exigencies) and Intra-State projects above a threshold limit would be developed through competitive bidding. Power Transmission is an asset class which is much coveted by developers and investors due to the low perceived risk on revenues, moderate competition and comparatively larger concession periods as compared to other infrastructure assets.

Another objective of the amendments is to clarify principles relating to determination of tariff. These include clarity on tariff setting for multiple state projects (CERC to determine tariff where more than 10% power is sold outside a state) and monthly/quarterly review of tariff. The decision to allow cost pass through for alternate coal (to the extent of shortfall in linkage coal) has already been implemented by some states. Another amendment that may improve profitability by improving load factors is the permission to sell un-requisitioned power with the benefit from such sale being shared equally between the developer and the erstwhile offtaker, even if such sale is not provided for in existing PPAs. Developers would prefer it if the above provisions are implemented through an amendment to the PPA making it applicable for the entire term rather than on a periodic review by the regulator which is currently the norm in some states and takes a long time to opine on. This would significantly reduce the risk perception of such projects leading to investments by foreign developers/private equity funds thus freeing up equity for Greenfield development.

An amendment aimed at speeding up the development of conventional power plants and optimum utilisation of resources is the provision to allow expansion of existing private power plants on regulated tariff from the prevalent 50% to 100% of existing capacity.

While the intent is admirable, private developers are unlikely to be lured into developing further conventional power assets unless the associated development challenges are adequately addressed. Perhaps a specific single window mechanism to address development issues needs to be set up for the above amendment to have any impact.

Most of these amendments need to be enforced by states. For the amendments to have the desired impact, the challenge before the Centre would be to convince the states to implement the amendments as envisaged and in a timely manner.

Jitesh Khatrani: 
The author is Director- Infrastructure practice, EY India. The views are personal


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