State governments are in a fix over the Centre’s fiat to them and the power regulators proposing caps on the fixed costs of power plants, the developers of which have won captive coal mines in the recent auctions. Experts sided with the states and expressed doubts about the legality of such an advisory.
As per the the Centre’s calculations, the completed auction of some 12 coal blocks for the power sector would bring down electricity tariffs by a cumulative R97,000 crore thanks to the reverse bidding methodology that resulted in developers forgoing any pass-through on fuel cost. The directive is meant to ensure that power companies don’t load additional charges onto the fixed cost, thus negating expected gains in tariff reduction.
In its directive, the Centre has said that a power procurer in consultation with the appropriate authority must set an upper ceiling in terms of R/unit towards the fixed cost component of power tariff for any future procurement of power from a developer under the so-called Case-1 bidding.
This, it said, should be indicated in advance to all prospective bidders so that the power purchase agreement includes this provision.
The change is not only meant for future coal auctions but will also apply for those developers who have bagged mines in the past auctions.
“This is to ensure that no undue and ineligible cost is loaded on the fixed charge. If this is not done then the entire process to get the lowest run of mine (ROM) price of coal through reverse e-auction will be vitiated because the purported reduction in coal price will be loaded on to the fixed charge component of electricity tariff.
This will thus defeat the objective of reverse bidding in the auction of coal mines for the power sector,” the advisory said.
The power industry is, however, unclear if such a directive could be sent to state regulators that are independent, quasi-judicial bodies. Moreover, the implementation of such a directive is likely to lead to litigation, analysts say.
“Section 63 of the Electricity Act allows for competitive bidding for power purchase agreements (PPAs) while Section 62 empowers the regulator to fix tariffs. A regulator cannot cap fixed cost for developers participating in competitive bidding to tie up buyers. The execution could lead to litigation as the legality of the directive is questionable,” Pramod Deo, former Central Electricity Regulatory Authority chairman told FE.
Apart from the doubtful legal authority of the directive, state-owned power companies are clueless about executing the order as it is open-ended and provides no frame of reference for capping capacity charge. “The directive is quite vague and its not clear how a power procurer would cap the fixed cost for developers participating in the competitive bid. Since we recently conducted bidding for signing PPAs, we are not inviting any bids soon. We will study the directive further and figure out a way to accommodate what advisory asks,” a top government power official in Kerala said.
The most recent Case-1 bids invited by Kerala had seen developers loading the fixed cost component of the tariff that accounted for up to 70% of the tariff. The range of quoted fixed cost varied widely from Rs 2.74 per unit to Rs 5.15 per unit. Despite the unusually high fixed cost component, Kerala managed to discover a lower tariff (by 25%) compared with other states.
Ashok Khurana, director general of the Association of Power Producers, said that capping of fixed cost could be tricky as no two plants have the same capital cost. A plant using machinery from Toshiba, for instance, would have a much higher capital cost compared to an otherwise similar plant using Chinese machinery, Khurana said. Though ideally there should not be a ceiling on fixed cost and tariff should be market-determined, he said, the state governments, given the Centre’s directive, could fix higher ceilings of fixed cost to enable wider competition and to ensure that consumers also benefit from depreciation that would lower the component progressively every year by nearly 2%.
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