Power woes: Tight tariff structure leaves little room for efficiency gains

NTPC has given in-principle clearance to replace around 11,000 MW old thermal power plants

The thermal power segment feels the current rate structure for coal-based units does not encourage the adopting of better efficiency.
 
They contend the categorisation into fixed and energy cost needs to be reviewed when the Central Electricity Regulatory Commission (CERC) comes out with the next set of rate guidelines.
 
And, CERC says it is looking at making energy efficiency a part of the rate regulations, given the increasing impetus on this. A senior CERC official told this newspaper that efficiency gains would find due mention in the next revision of the rate regulations, due 2019.
 
Power sector executives say generators wanting energy efficiency are cutting on their auxiliary power to earn back the benefit that is forgone due to additional expenditure on these improvement measures. Auxiliary power is that used by the generation station for own need, not transmitted.
 
“Plants which are on cost-plus (rates), such as those of NTPC, take the benefit on a normative basis, as the expenditure on energy efficiency gets passed on to the consumers. Whereas, competitively- bid projects have no regulation to absorb or pass on the additional cost of energy efficiency. There is no incentive also in the tariff (rate) guidelines to promote energy-efficient plants,” said a senior  sector executive.
 
Centrally-owned NTPC, the country’s largest power producer, has given an in-principle clearance to replace around 11,000 Mw at its older and less efficient thermal power plants. These would be replaced in about five years, for an investment of around Rs 50,000 crore. NTPC executives said the power rate escalation of 25-50p for each unit would be reflected in the final consumer rates.
 
“Tariff guidelines get set every five years. In the annual petitions, power producers have to make representations on their efficiencies and it is pass-through. If a generating company embarks on efficiency improvement and invests the money, the payback is in the efficiency improvement but if the tariff gets reset and the company does not get to keep any of those benefits, what ends up happening is that the way the company looks at it, it has to be passed through to the customers next year,” Ashok Ganesan, managing director, GE Power India, told Business Standard.
 
As the payback is typically over a three-year range, it becomes difficult for companies to evaluate, given the rate structure. “It (energy efficiency) is not a black and white scenario. Regulation is not the only block. It does allow a portion of efficiency savings to be kept for a portion of time. But, when we embark on all of this together, efficiency plus emissions, emission is the piece which is completely open. We have an opportunity to reshape regulation to ensure incentives in place, so that the landed cost of electricity becomes cheaper,” says Ganesan.
 
Energy efficiency is governed by the ‘Station Heat Rate (SHR)’ of a power plant. In the rate guidelines which govern the competitive bidding for power generation projects, the SHR is pre-specified. Sector experts said this leaves no room for power developers to quote the capex for energy efficiency.
 
“To incentivise energy-efficient plants, the SHR (station heat rate) should be a biddable parameter. However, the bidding documents asks for bids based on a predetermined SHR. With no incentive to spend more capital for getting the latest technology for high energy-efficient plants,” said A K Khurana, director-general, Association of Power Producers, which represents independent entities.