‘Automatic Pass-through Model’: State discoms to pay higher power tariffs if fuel costs spike

By: |
November 12, 2021 4:15 AM

The move is seen to cut the delays traditionally seen in the process of vetting power costs and improve the liquidity position of power generators.

The step was taken by the power ministry after assessing the recent coal crisis scenario in the country, when many power plants had run short of the fuel. Private power plants have to pay for the fuel in advance to coal companies, and low liquidity prevents them from keeping adequate stocks at the generating stations.The step was taken by the power ministry after assessing the recent coal crisis scenario in the country, when many power plants had run short of the fuel. Private power plants have to pay for the fuel in advance to coal companies, and low liquidity prevents them from keeping adequate stocks at the generating stations.

In a move aimed at ensuring timely compensation to power generating companies for any post-contract spike in fuel costs, the Union power ministry has asked state electricity regulators to adopt an ‘automatic pass-through model’, which will require the state-run power distribution companies (discoms) to pay higher tariffs to power plants as soon as the cost of fuel escalates.

The move is seen to cut the delays traditionally seen in the process of vetting power costs and improve the liquidity position of power generators. However, a fallout of the move could be a further rise in discoms’ losses, if the end consumers are spared from the burden, under political pressure.

The step was taken by the power ministry after assessing the recent coal crisis scenario in the country, when many power plants had run short of the fuel. Private power plants have to pay for the fuel in advance to coal companies, and low liquidity prevents them from keeping adequate stocks at the generating stations.

Under power purchase agreements (PPAs), fuel costs are contractually acknowledged as pass-through elements, and some states already have a formula for fuel surcharge adjustment. However, these costs are not passed through automatically and requires the approval of the state power regulator.

In a communication to the state regulators, the ministry said that “the present mechanism leads to delays” and “may be changed to provide for automatic pass through in tariff change in costs on account of change in law/power purchase costs in accordance with a formula laid down by the state regulatory commissions”.

Most PPAs include the ‘Change in Law’ (CIL) provision, under which appropriate alterations are required to be made in the tariff structure if the cost of electricity supply is impacted by enactment, amendment or repeal of any law after the initial agreement has been signed by buyers and sellers. Changes in taxes and license fees are also included in the ambit of CIL provision. As per the Electricity (Timely recovery of costs due to change in law) Rules notified by the government on October 22, power plants need to give a three weeks prior notice to the buyers about the proposed impact in the tariff to be recovered under CIL.

“After giving effect to the pass through the discoms will send the relevant papers/calculation sheets to the commissions which shall verify the pass through within 60 days,” the power ministry said. “The new rule would obviate the need to go to the regulatory commissions which resulted in huge delays and avoidable litigation,” Ashok Kumar Khurana, director general, Association of Power Producers, told FE. “Many Distribution utilities indulged in prolonged litigation to only delay payment and finally ended up in paying huge amounts through actual compensations and their carrying charges – which ultimately was being paid by consumers,” Khurana added. Many generators received their CIL compensations after years of litigations at various regulatory commissions. Many power plants had to take the long legal route even to recover the Rs 400/tonne GST compensation cess levied on coal by the Centre.

As FE recently reported, receivables of private power plants from discoms as late payment surcharges (LPS) and unpaid payments in lieu of various pass-through costs approved by regulators under the CIL clause had piled up to nearly Rs 50,000 crore by May end. Irregular payments against LPS led to the accumulation of these dues to rise to Rs 24,722 crore in May 2021 from Rs 5,753 crore in August 2019. Similarly, CIL dues increased 41% to more than Rs 24,000 crore in the same period. The current levels of LPS-CIL dues are not known. These dues are over and above the Rs 52,293 crore of outstanding receivables of private gencos from discoms at October end.

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