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National merit order list for electricity generation to help in reducing power cost

At the national level, the scheme is well-intended, because of the variation in regional costs of power generation.

The national merit order list for electricity generation is a welcome move

In continuation of its efforts to reduce the cost of electricity generation in the country, the ministry of power has released a scheme for increasing flexibility in generation and distribution of electricity. Its main objective is to reduce the cost of power to consumers by provisioning power at lower costs from areas of excess supply. By not binding producers to supply power from a specific geographical area, the move creates surplus value by lowering costs. This process also involves the inception of a national merit order list, which would rank sources of power in ascending order of price and, thereby, provision power at the lowest cost to each discom. The surplus on each unit of production is to be shared equally between thermal power stations (TPP) and discoms. The scrapping of region-specific dispatch is expected to increase the efficiency of power generation at the national level.

This scheme is one of many steps the government has been taking for reducing the cost of power to the consumers. In 2016, in a similar move for coal, the government eased geographical restrictions in coal provisioning to reduce unnecessary transportation of coal and involved costs of the same. This move would also optimise utilisation of railway infrastructure for transportation of coal from mines to generation plants. In April 2018, the government allowed for substitution of renewable power for thermal power if it was possible, to ease the pressure on non-renewable sources like coal. Along with reducing emissions, the lower cost of renewable energy generation helped minimise overall cost of electricity generation for TPPs.

The electricity grid in India has evolved from a localised to a centralised national grid. This is captured well in the Indian electricity exchange, where electricity is quoted at a single price for the entire country. However, at the regional level, the price of electricity differs a lot, because discoms tie up with only a few power producers and requisite supply from them. Given that power acquisition takes place on a day-ahead basis, regional discoms consider only those power plants with which they have existing agreements. This asymmetry in the regional and national lists is the cause of major inefficiency affecting the states’ and discoms’ finances negatively. Even if, at the national level, power is available at a lower energy charge rate (ECR), at regional levels discoms keep purchasing electricity at a higher rate.

At the national level, the scheme is well-intended, because of the variation in regional costs of power generation. In general, the proximity to a coal mine is a major determinant of cost. The closer the mine, the cheaper the electricity, because there is lower transportation cost and also a lesser need of inventory. Once flexibility in generation is provided to TPPs, then most of the electricity generation would occur from plants located near coal mines. Besides reduction in costs, this would also ease the strain on the heavily burdened Indian Railways, by reducing the need for coal transportation itself.

The most important feature of this scheme is the creation of the merit order list at the national level. The existing procedure of TPPs declaring their availability to the various regional dispatch centres will continue. Also, a replica of these records would be maintained by the National Load Dispatch Centre (NLDC). Based on the requisitions made by various discoms, the NLDC/RLDC would then schedule electricity supply using the national merit order list. This would ensure merging of the five regional lists allowing the lowest priced supply to reach the discoms.

Keeping in mind the complications of implementation of the national merit order list, the scheme tries to implement the features only for central power producers, who supply 30% of the entire electricity generation in the country and form a substantial chunk of electricity production network. Also, based on the lessons learnt from this exercise, the ministry of power is planning to gather opinions of various beneficiaries before expanding this scheme to state power producers and independent power producers.

The successful implementation of the scheme will help reduce overall cost of electricity production, and improve the financial situation of various state discoms; it could also lead to reduced costs of energy for the end-consumers.

By- Kannan Kumar & Sumedha Shukla. Kumar is Associate Fellow and Shukla is Research Assistant, Pahle India Foundation

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