If state-owned distribution companies (discoms) are mandated to put in place power purchase agreements (PPAs) to meet 100% of their electricity “requirement”, they may end up shelling out extra Rs 18,000 crore annually, whether or not they consume the extra power.
If state-owned distribution companies (discoms) are mandated to put in place power purchase agreements (PPAs) to meet 100% of their electricity “requirement”, they may end up shelling out extra Rs 18,000 crore annually, whether or not they consume the extra power. Currently, it is mandatory for discoms to pay PPA-equipped generation units the capacity charge, roughly 40% of the tariff, even if they do not have any use of the power. The new policy could hit discoms while the Uday scheme has helped them cut their interest costs by Rs 15,000 crore since November 2015. The government’s rationale for the proposed 100% PPA policy seems to be to discourage discoms from rushing to the expensive spot market to meet demand during peak hours. However, in the final analysis, the additional cost of paying the capacity charge against unutilised PPA units could be higher than the expenses incurred for spot market purchases. Industry sources said given the subdued demand for power, financially stretched discoms might not have to evacuate all of the additional electricity to be tied up with new PPAs: At some peak hours, the extra capacity might get utilised, but during longer intervals, it might not.
According to industry sources, discoms need to tie up PPAs for about 30,000 mega watt (MW) of capacity in order for all of them to have “PPAs to cover 100% of requirement” as stated by power minister RK Singh in an event held by Assocham in late October.
Discoms have to pay ‘fixed charges’ as per the PPAs to recover the costs of establishing and operating a power plant. The annual fixed charge usually amounts to about 10% of the installation cost of the power plant. Going by the industry estimate of Rs 6 crore/MW as an installation cost, the fixed capacity charge for 30,000 MW comes to around Rs 18,000 crore a year. The average national power purchase cost is Rs 3.48 unit.
Discoms spent Rs 4.15 lakh crore in purchasing electricity in FY16, which was about 76% of their total expenditure. To improve the discoms’ health, the Uday scheme intends to minimise the gap between power supply cost and revenue earned; the gap has reduced to 42 paise/unit now from 58 paise in FY15.
The situation can be graver for discoms in the contemporary scenario where the country’s installed generation capacity is twice its peak demand. This calls for discoms to occasionally back down from evacuating power from contracted capacities when requirements are low. In FY16, Punjab backed down from evacuating power from 3,457 MW, or 27% of its contracted capacity, ending up paying Rs 3,000 crore to power plants operated by companies such as GVK Energy, L&T Power Development’s NPL and Vedanta.
Power demand is always dynamic depending on seasonal consumption factors. For example, peak power demand in Uttar Pradesh and Gujarat was 20,007 MW and 15,476 MW in September, respectively, while the figures were up to 17,966 MW and 16,566 MW in October.
Currently, states buy power through bilateral arrangements and from the electricity exchanges at spot market rates to cater to power requirements beyond PPA capacities. More than 4,630 million units (MUs) of power were traded through the power exchanges in October. An industry expert, who did not wish to be named, said the idea is also against the “economic wisdom” of increasing competition in the power sector, as it may deter states from trading power at the energy exchanges.
Will 100% PPA policy help stranded power plants? Research firm Icra noted that only 1,400 MW capacity was tied up through long-term PPAs over the past three years. About 20,000 MW of private coal-based power plants in the country do not have any PPAs. However, even if additional 30,000 MW of PPAs are signed through this scheme, it does not guarantee any improvement in plant load factor (PLF) of the coal power plants. Generation capacities would remain un-utilised when electricity loads are not high, perpetuating the low-PLF scenario.