 "Power regulators' forum to conduct study on tariff models")
Close on the heels of tariff revisions sought from the regulatory commissions by a couple of power generators, due to rise in fuel cost and the subsequent loss incurred by them, the Forum of Regulators (FOR) plans to conduct a critical study by engaging a consultant on competitive tariff vis-à-vis cost plus tariff.
FOR, which is an apex body comprising the Central Electricity Regulatory Commission and state electricity regulatory commissions, said there is a need for a detailed critical analysis of both sets of tariff determination processes as parameters and price under cost plus-based tariff determination differ from those of competitive bidding parameters. Applicants will have to submit bids by 29 December. It said while tariffs are determined primarily on cost-plus method and reviewed annually by the electricity regulatory commissions under Section 62 of the Electricity Act, 2003, tariffs adopted through bidding process under Section 63 are levelised for a fixed period of 25 years based on parameters such as capacity and energy charges and allowable escalations on escalable components, and discounting factor. RV Shahi, former union power secretary told Business Standard: “A study by an expert being engaged for an analytical approach to tariff determined through competition and tariff based on cost plus method is well timed. The spirit of the Electricity Act and the National Tariff Policy is to create competition in the larger interest of the consumers. This study will definitely reach important conclusions.”
According to FOR, it is generally believed that tariffs determined through competitive bidding are efficient and fair, as they are based on transparent and fair process of price discovery.
There are, however, concerns that as bids of generators are made under inaccurate assessment of future costs, project execution and operations, tariffs determined through the competitive bidding route may be aggressive, pose risk to financial viability of projects, or undermine execution of the project. On the other hand, the proponents of the cost plus approach argue that the design of tariff under this approach gives flexibility of revision of tariff by keeping in view the developments in the sector during the ongoing tariff period, and as such obviates aggressive or unrealistic tariffs.
RP Singh, former chairman and managing director, PowerGrid Corporation, said the government should stick to much thought-about policy that the price of power be determined through competitive basis, though direct tendering like ultra mega power project and other one is through open access and merchant mechanism and signing power purchase agreements with the consumers or state electricity boards (SEBs). “However, the cost plus approach should be avoided because it is speculative as one does not know what will be the project cost and the operational cost, which will be always under attack. The power sector is suffering due to our approach on frog-jumping basis. The transmission and distribution network should be taken up on priority and distribution network must be separated from the content (supply) for true competition in the power sector,” he added.
Jayant Deo, former member, Maharashtra Electricity Regulatory Commission, said the cost plus approach incentivises generators for gold-plating as was the case with Dabhol project and recently doubling of the imported cost even by public sector units.
“For protecting consumer interests, the regulatory commission should be vigilant for such fraudulent escalation demand. Further, the regulatory commission should do the shadow pricing comparison with other generators in competitive tariff mode,” he said.
FOR, which is an apex body comprising the Central Electricity Regulatory Commission and state electricity regulatory commissions, said there is a need for a detailed critical analysis of both sets of tariff determination processes as parameters and price under cost plus-based tariff determination differ from those of competitive bidding parameters. Applicants will have to submit bids by 29 December. It said while tariffs are determined primarily on cost-plus method and reviewed annually by the electricity regulatory commissions under Section 62 of the Electricity Act, 2003, tariffs adopted through bidding process under Section 63 are levelised for a fixed period of 25 years based on parameters such as capacity and energy charges and allowable escalations on escalable components, and discounting factor. RV Shahi, former union power secretary told Business Standard: “A study by an expert being engaged for an analytical approach to tariff determined through competition and tariff based on cost plus method is well timed. The spirit of the Electricity Act and the National Tariff Policy is to create competition in the larger interest of the consumers. This study will definitely reach important conclusions.”
According to FOR, it is generally believed that tariffs determined through competitive bidding are efficient and fair, as they are based on transparent and fair process of price discovery.
There are, however, concerns that as bids of generators are made under inaccurate assessment of future costs, project execution and operations, tariffs determined through the competitive bidding route may be aggressive, pose risk to financial viability of projects, or undermine execution of the project. On the other hand, the proponents of the cost plus approach argue that the design of tariff under this approach gives flexibility of revision of tariff by keeping in view the developments in the sector during the ongoing tariff period, and as such obviates aggressive or unrealistic tariffs.
RP Singh, former chairman and managing director, PowerGrid Corporation, said the government should stick to much thought-about policy that the price of power be determined through competitive basis, though direct tendering like ultra mega power project and other one is through open access and merchant mechanism and signing power purchase agreements with the consumers or state electricity boards (SEBs). “However, the cost plus approach should be avoided because it is speculative as one does not know what will be the project cost and the operational cost, which will be always under attack. The power sector is suffering due to our approach on frog-jumping basis. The transmission and distribution network should be taken up on priority and distribution network must be separated from the content (supply) for true competition in the power sector,” he added.
Jayant Deo, former member, Maharashtra Electricity Regulatory Commission, said the cost plus approach incentivises generators for gold-plating as was the case with Dabhol project and recently doubling of the imported cost even by public sector units.
“For protecting consumer interests, the regulatory commission should be vigilant for such fraudulent escalation demand. Further, the regulatory commission should do the shadow pricing comparison with other generators in competitive tariff mode,” he said.