Regulators feel high return on equity jacks up power tariffs

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August 26, 2021 3:15 AM

However, for the RoEs to reduce at the national level the decision will have to be made at the CERC level which can then be followed by State Electricity Regulatory Commissions.

The ROEs have since come down, but continue to jack up tariffs. Now that the prime lending rate and the 10 year G-Secs rates have fallen substantially, there is a pressing need to lower the RoE build into tariff determination, the analysts feel.The ROEs have since come down, but continue to jack up tariffs. Now that the prime lending rate and the 10 year G-Secs rates have fallen substantially, there is a pressing need to lower the RoE build into tariff determination, the analysts feel.

Higher return on equity (RoE) granted for power-sector units is proving to be a fixed-cost factor driving retail electricity tariffs up, according to analysts. The Central Electricity Regulatory Commission (CERC), guided by a policy objective to incentivise investments in the sector uses to provide RoE as high as 18% for gencos about two decades ago. This was in view of the fact that the cost of capital to set up the power infrastructure – generation, transmission and distribution – was very high, and companies needed high margins as risk premium on investments to protect themselves against any volatility in demand or supply.

The ROEs have since come down, but continue to jack up tariffs. Now that the prime lending rate and the 10 year G-Secs rates have fallen substantially, there is a pressing need to lower the RoE build into tariff determination, the analysts feel.

A recent study by the Forum of Indian Regulators of 12 discoms across India with RoE of 14-15.5%, said if RoE is reduced to 12% ,there would be reduction of 7 paisa per unit of retail tariffs.

The regulators from Uttar Pradesh, Rajasthan, Tamil Nadu, West Bengal, Assam, Haryana and Madhya Pradesh who were part of the study, noted hat the RoE for generation and transmission must be linked to the 10-year G-Sec rate (average for previous 5 years), along with capping of the risk premium as decided by appropriate commission.

“Also, it is important to link the RoE for discoms on their performance, based on indicators such as supply availability, network availability, AT&C (aggregate technical and commercial) loss reduction since their performance substantially impact the retail tariff to the consumers,” a senior official from official from Maharshtra Electricity Regulatory Commission (MERC) told FE.

Maharashtra, in its multi-year tariff for 2019-24, reduced the RoE by 1.5% for discoms over the previous tariff period to 14.15%. “We have ensured that the base RoE will be linked to certain parameters of performance such as reduction in AT&C losses, network, and supply availability etc,” the official said.

However, for the RoEs to reduce at the national level the decision will have to be made at the CERC level which can then be followed by State Electricity Regulatory Commissions.

A senior UP regulatory officer on conditions of anonymity said, the RoEs effectively goes up to 20-21% if the tax reimbursement is added. The entire coal sector and railways are unregulated which have an impact on the overall tariff. They need to be bought under a regulator to address the issue of coal grading and billing as per the gross calorific value as received and not on as fired basis, which affect the tariff for retail consumers. The freight cost has also gone up substantially, which needs to be capped.” “Since the multi year regulations were already passed The reduction in RoE is not expected till the next round of tariff determination happens after 2024,” said the UPERC officer.

Santosh Kamath, partner at KPMG India: “The green energy cess that is collected and used for development of other sectors should be routed back to the power sector”. The clean energy cess has increased over time, from Rs 50 per tonne in June, 2010 to Rs 400 per tonne of coal since March 2016. The total impact of coal cess on the power sector is around Rs 25,000 crore per year during last 3 years.

“A reduction in clean energy cess of Rs 100 per metric tonne (MT) would lead to a saving of about 6 paisa per unit which would translate into a saving of 3% of the Average Cost of Supply (ACoS),” the Forum of Regulators’ report stated.

Dinesh Pardasani, Partner, DSK Legal, however has a counter view on linking RoE to discoms’ performance given their weak financial condition. “With performance- linked ROE for discoms, there will be lower chances of discoms performing better, rather they could end defaulting more in payments to gencos with reduced RoE.”

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