Why power tariffs are still going up despite fall in demand

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Updated: June 27, 2015 4:05:59 PM

Since January this year, over half a dozen states have kicked-off the process of hiking their power tariff.

power tariff hikeEven as plants are idling and there is hardly any uptick in demand, the number of states that have sought a hike in power rates is steadily increasing. (PTI)

Since January this year, over half a dozen states have kicked-off the process of hiking their power tariff. What is ironical, though, is that the steady stream of tariff hike proposals comes in a year when electricity demand is sluggish and capacity utilisation of the thermal power plants — the country’s electricity sector backbone — have fallen precipitously.

While, in theory, a higher supply and low demand should precipitate a downward push on prices, the series of tariff hike proposals also militate against the assumption that delicensed generation and open access to the grid, as mandated under the Electricity Act, 2003, should have fostered competition and thereby reduced the cost of supply of electricity. So what has gone wrong?

In the last 13 years, generating capacity to the tune of 1,30,000 MW has been successfully commissioned, effectively doubling the country’s installed capacity to 2,68,000 MW. However, recent years have seen tardy growth in electricity demand, especially industrial load, has led to a sustained drop in the plant load factor (PLF) — an indicator of capacity utilisation — of the country’s power plants. In the last one year the average PLF of thermal capacity has plummeted by about 8 percentage points, with the PLF of generating stations in the state and private sector estimated at just a tad above 50 per cent.

The reason why tariffs have not reflected the fall in demand is simple. If one considers that the capacity of the entire state GENCOS (generation companies owned by states) and a substantial chunk of private capacity is tied with discoms on long term PPAs (power purchase agreements), meaning that whether the plants operate at half the capacity or one third capacity, the entire fixed or capacity charges are payable by the distribution companies that buy power from them.

For instance, in case Delhi, the PLF of Badarpur, Pragati, Rithala in April this year were less than half of what they were during the same month last year, in case of Haryana, the Panipat Thermal Station and the Rajiv Gandhi Thermal Station had crashed to near zero while in Punjab, the PLF of the Bhatinda Thermal Power Station was down to less than 10 per cent in April this year and that for the Ropar thermal power station was down to 29 per cent from over 54 per cent (see chart). Because of the loading of the capacity charge that happens irrespective of the efficiency at which the plants are operating, the consumers have to still cough up the full capacity charges of these heavily underutilised plants as part of their monthly electricity bills, which increases the average cost of electricity.

So, even as the installed capacity has increased, the lack of infusion of competition into the process under which tariffs are determined has put paid to the overall objective of lowering the cost of supply.

While this is broadly the situation of a majority of coal-fired plants, in the gas sector, at least 15 stations reported zero PLF in April, an unprecedented number that has been sparked off by the lack of fuel. Stations such as Reliance Power’s Samalkot 2,420MW, GMR Vemagiri 800MW, three gas-based power plants aggregating 1,200MW in Uttarakhand’s Kashipur are reported to be among those that did not get enough gas to declare commissioning of these projects. So none of these plants figure in the Central Electricity Authority’s monitoring format, even as lenders are in a fix over the possibility of these stations turning into non performing assets.


So, even as plants are idling and there is hardly any uptick in demand, the number of states that have sought a hike in power rates is steadily increasing:

* On June 18, the Uttar Pradesh State Electricity Regulatory Commission (UPSERC) increased power tariff for all categories of consumers in the state by 5.47 per cent.

* On June 13, the Delhi regulator hiked the power tariff up to 6 per cent by increasing the surcharge component. DERC hiked the power purchase cost adjustment charges — a surcharge component — up to 6 per cent in order to compensate private discoms for variations in market-driven fuel cost.

* On May 25, despite large-scale protest against power tariff hike, state-run Chhattisgarh State Electricity Regulatory Commission (CSERC) decided to effect on average 14 per cent increase for all categories of customers.

* On March 27, the Telangana State Electricity Regulatory Commission in its power tariff order for 2015-16 hiked the overall tariff by 4.42 per cent, with the average increase in tariff working out to 1.3 per cent for the entire domestic category.

In all, till March 2015, power distribution utilities in Bihar, Haryana, Madhya Pradesh and Uttarakhand had sought tariff hikes ranging from 15 per cent to 26 per cent from April 1, while those in Andhra Pradesh, Gujarat, Maharashtra and Telangana have asked for an increase of up to 8 per cent, according to a report by rating agency ICRA. The report, released in March 2015, noted that a few states have not sought any increase in tariff while power utilities in 14 states are yet to file their tariff petition with the electricity regulatory authorities.


While, at the consumer end, surging tariffs are a bother, for developers and lenders alike, the big worry is demand. Subdued demand, an indicator of sluggish growth in the industrial sector, portends mounting problems for the developers of projects that have been commissioned in the last five years and the lenders who extended loans to them. For an economy that is ostensibly on the mend, an almost flat demand curve for electricity — a key indicator of whether an industrial revival is underway — and a mounting list of 57 thermal power units across the country that are shut down due to lack of demand despite the onset of peak summer, continues to belie an industrial revival story. Of the country’s total installed generation capacity of 2,68,603 MW, the peak demand met in mid-May (May 23) was less than half at just 1,34,892 MW, according to official data available with grid managers.

For the current oversupply situation to translate into some degree of respite for consumers by way of lower tariffs, something that was weaved into the broad tenets of the Electricity Act, 2003, it’s unlikely to happen anywhere in the near future.

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