Restoring balance of power

State and central run utilities need not be ring-fenced from competition anymore

The draft amendment to the National Tariff Policy, 2016, furthers the differential treatment enjoyed by public sector power generation companies (gencos) vis-à-vis private peers — alongside state gencos, it now allows even central entities to sign power purchase agreements (PPAs) directly with distribution companies (discoms). 

This imposes a cost on efficient players and consumers alike, with private gencos finding themselves pining for PPAs and fuel linkages. A sase in point: between 2012 and 2018, private gencos added about 56 GW of thermal capacities, against which PPAs of only about 9 GW have been signed and sealed.
 

In the past four years, the average plant load factor for gencos has dropped about 490 basis points. For private gencos, it plunged about 680 bps and for central and state ones, by about 380 bps and about 230 bps respectively. 

That’s because central gencos continue to be favoured by discoms over private players, and they also get preferential treatment in terms of supply price of coal. In the process, consumers are probably paying more, as tariff discoveries at biddings show.

The levelised tariff discovered through competitive bidding in the last Case I bid in Andhra Pradesh (in 2015) was lower at Rs4.2-4.8 per unit. Contrast this with public sector NTPC’s Barh II (2015) and Solapur I (2017) units, which were allowed tariffs of Rs4.9 and Rs5.1 per unit respectively. 

The Electricity Act, 2003, aimed to bring about a paradigm shift in the sector by introducing competition and commercial autonomy.

But in power generation — which could be considered more mature and competitive compared with transmission and distribution — the preferred procurement from central and state utilities is a dampener. That is the result of two incongruous sections in the Act, also echoed in the subsequent National Tariff Policies, and the present set of proposed amendments.

Sections 62 of the Act allows sale of power by government utilities to be carried out through a cost plus formula. Section 63 lays the guidelines for power procurement through competitive bidding. Private players can sell power only through competitive bidding. This differential treatment was reviewed way back in 2011.

 

Meanwhile, NTPC was quick to ink agreements with states for around 40 GW projects — many in planning stage and even without an investment approval — up to 2011. This explains why discoms haven’t had competitive PPAs — a chunk of demand is met through such cost-plus contracts. 
 

Indeed, Uttar Pradesh went as far as cancelling a 3,800 MW bid from the private sector in 2017. This, even though it had signed cost-plus PPAs for joint-venture projects between central and state generating entities, and for projects where even the investment approval had not happened and whose completion is expected much later.

Many of these projects signed prior to 2011 are still far from completion and expected to be completed only FY21 onwards. Similarly, in Andhra Pradesh, works in cost-plus projects such as the 800 MW Vijayawada Thermal Power Station stage V and 800 MW Sri Damodaram Sanjeevaiah Thermal Power Station stage II are at an initial stage and will take time to complete. 

The proposed amendments to tariff policy continue to accommodate sales through the cost-plus route as and when central or state utilities expand. While expansion projects allow for some cost advantages (owing to land availability and shared infrastructure), such exemptions also allow leeway to sign cost-plus tariffs for state and central entities, while the independent power producers are left out. Many states simply may not like to procure from such expanded capacity and rather avail of possible better tariffs through competitive and transparent bid procurement. 

Another form of disparity exists in coal supply. Even in the ‘Scheme for Harnessing and Allocating Koyala (Coal) Transparently in India’ (SHAKTI), government gencos continue to be offered coal linkages at notified prices, whereas private entities have to purchase it at a premium. 

No surprise that the success of premium-based coal auctions has been limited, working contrary to the overall objective of bringing down power tariffs, since premiums eventually will be passed on through tariffs.

If NTPC’s 40 GW PPAs was signed only after competitive bidding with independent power producers, and adequate coal allocation, it would have changed the game.
 

As for transmission, the Power Grid Corporation of India Ltd (PGCIL) has played a significant role in building out the network and accounts for about 40 per cent of the total transmission network, leading to its dominance. What's more, it plays the dual role of planning and implementation. The policy continues to allow projects to be awarded to PGCIL on nomination basis in cases of strategic importance, technical upgradation and urgent situations. 

Exposing PGCIL to a streak of competition wouldn’t be a bad thing. It will not only encourage private sector participation, but also earn money for the government by monetising existing projects.

Power distribution hasn’t witnessed as much action as generation and transmission, as it is considered a natural monopoly. Its ailments need to be addressed separately. The Central Electricity Regulatory Commission concluded in a 2010 study that the computed prices under cost-plus methodology were higher than the levelised tariffs discovered under competitive bidding in respect of 12 out of 14 projects studied, and advised states to switch to competitive bidding.

Thus, in projects where MoU/PPA was signed without even an investment approval and should have been scrapped in the first place, one option is to nullify the agreement, especially where limited work is undertaken, and open these to competitive bidding. Further, there could be an “equitable coal for all” policy that ensures coal at notified prices to all entities, while continuing discovery of power tariffs under the competitive route. 

Preferential treatment of government utilities through nominations and cost-plus contracts turns back the direction of reforms. One can’t have it both ways. 

The author is senior director, CRISIL Infrastructure Advisory