The problem with pooling

Instead of the proposed pooling solution, it would be better if all high-variable-cost gencos sell their electricity in the power exchange.

power sector, power industry
Now that the power ministry has gone ahead and finalised the scheme, one must again raise one’s voice because this scheme is detrimental from the discoms’ point of view, which will ultimately hurt the consumers. (IE)

Just the other day, the power ministry finalised the scheme of pooling of tariff of plants (coal and gas only) whose power purchase agreements (PPAs) have expired after their life of 25 years. In simple terms, it means that all generating units of a single generating company which attain 25 years will go into a pool and the fixed cost of the pooled plants will be a weighted average of the individual generating units. The energy charge too will be a pooled weighted charge. All distribution companies will be entitled to draw power from this pool though the original beneficiaries will get preference in case demand from the pool exceeds supply.

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The discoms will have to sign a fresh PPA for a period of at least five years and they will pay the fixed charge in proportion of the capacity allotted to them. Similarly, they will also pay the pooled energy charge based on the schedules declared by them for each individual generating unit.

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When the draft of this proposal was floated by the power ministry, this author had written against this scheme in this very column (December 14, 2022). Several points were raised, for example, how the concept of pooling was inimical to the principle of the security constrained economic dispatch (SCED) which the power ministry wants to implement. Under SCED, only the relatively cheaper plants are allowed to dispatch, starting with the cheapest unit and thereafter stacking all the generating units in ascending order of their variable cost till such time the demand is met. By pooling, this principle is violated since there will be weighted pooled price, common to several generators.

Another issue that was raised is the fact that unless we retire our old plants, we may not be able to add to our renewable capacity and consequently, miss our target of having 500 GW of non-fossil generating capacity by 2030. After all, demand is limited, and more of coal and gas-based plants would imply less of solar and wind.

Now that the power ministry has gone ahead and finalised the scheme, one must again raise one’s voice because this scheme is detrimental from the discoms’ point of view, which will ultimately hurt the consumers. The scheme mentions that all generating units, after the completion of 25 years, will automatically get transferred to the pool.

Under the present regulations of the Central Electricity Regulatory Commission (CERC), (Section 17 of the Tariff Regulations 2019), the discoms have the option of continuing with the PPA beyond 25 years on mutually agreed terms and conditions if they so desire. The discoms, therefore, have been extending the PPAs of those units whose variable cost is relatively low, which ensures that the unit figures in the merit-order dispatch. The PPAs of units which have a high variable cost are not extended because such units don’t figure in the merit-order dispatch but the discoms are forced to pay the fixed charge.

The power ministry, of course, has taken pains to explain as to why this scheme is really required. It has mentioned that with rising demand for power, one cannot fritter away the generating assets that we already have.

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Since battery storage is not yet competitive and keeping in mind that there are issues in hydro pump-storage schemes, we need the existing thermal sources for grid balancing. In this regard, the existence of the gas-based unit would be particularly helpful, since they can ramp up and down quite quickly as compared to coal-based units.

There is no doubt that there is some merit in what the power ministry is saying. As rightly pointed out, we are likely to face unprecedented demand for power within this summer itself and that the existence of gas-based units will help us in grid balancing. However, instead of forming this pool, a better course of action would be if all such units that have a high variable cost (the PPAs of which are no longer wanted by discoms after 25 years) sell their power in the power exchange.

Why should the discoms be forced to give up their cheaper power after a period of 25 years just to ensure that expensive generating units are kept afloat through pooling? The scheme of pooling specifically benefits the generating companies (NTPC in particular) who want the comfort of earning the fixed charge beyond 25 years and do not want to submit to the vagaries of selling power in the exchange. The returns in the exchange are definitely lower unless it is a situation where demand exceed supply many times over. We have seen situations where the price in the exchange has reached `20 per unit and today, we have a separate day-ahead market for high priced power where the cap is `50 per unit.

Mercifully, this proposal of pooling is unlikely to move forward till such time the CERC amends Regulation 17 (of the Tariff Regulations of 2019) and does not allow any PPA to continue beyond 25 years, making it mandatory for all generating units to be assigned to the pool after the completion of 25 years. Since the pool will consist of only the expensive plants, at least as of now, there is little incentive for the discoms to draw power from the pool.

For the weighted average price to fall, the cheaper units will have to be added to the pool which, of course, will be to the disadvantage of the original beneficiary discom(s).

Over the last few years, one has seen the power ministry encroach upon the territory of the regulatory commissions and also of the state governments, especially when it comes to distribution issues. Let us hope and pray that the central regulators will not allow this proposal to go through and refrain from amending Regulation 17 as has been proposed by the government.

The writer is senior visiting fellow, ICRIER

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First published on: 08-05-2023 at 04:30 IST