CERC's brave steps mean well for the power sector

CERC needs to be complemented for taking away the carrot when none was needed by the sector

Central Electricity Regulatory Commission’s (CERC) recent regulation on electricity tariff underscores the strides taken by the power sector over the years. Apart from fixing the manner in which tariff will be calculated over the next five years, CERC’s regulation demonstrates the maturity of the regulator in taking hard decisions.

 

The mission statement of Central Electricity Regulatory Commission (CERC) states that it is expected to promote competition, efficiency and economy in bulk power markets, improve the quality of supply, promote investments and advise government to remove barriers to bridge the demand supply gap and thus foster the interests of consumers. 

 

Thus when India was a power deficit nation and desperately needed investment in the sector, CERC offered a minimum return of 15.5 per cent return on equity (almost double the risk free return in the country) and offered liberal return over and above this figure. 

 

The regulator allowed power generating companies to charge higher taxes to consumer but pay lower (actual) taxes to the government. NTPC earned nearly Rs 850 crore through this arbitrage. CERC’s idea was to promote investment and supply of electricity in the initial years and did not mind generating companies earning some extra money. 

 

Further, recognising that even though generation capacity will be set up, there would be times when there will be no buyers for electricity, given the poor health of state electricity boards (SEBs), CERC allowed generation companies to be compensated for being idle, but ready. It thus allowed companies to be compensated on the basis of plant availability factor (PAF).NTPC earned nearly Rs 650 crore a year by keeping its plant ‘available’ but not selling any power. 

 

However, the sharp increase in generation capacity expected over the next five years will bring down the peak power deficit from the current levels of nearly 8 per cent to less than 1 per cent. Under this scenario, it makes little sense for CERC to continue incentivising the sector. It is under this context that the changes suggested by CERC needs to be viewed. 

 

Even though the regulator has continued with the 15.5 per cent return on equity clause, it has sharply slashed the incentive structure. Tax arbitrage has been removed and will now be deducted on actual basis. 

 

Further, plants will now need to sell power units rather than just keep their capacity available. In essence CERC has moved back to its earlier norm of plant load factor (PLF) rather than PAF. This would ensure higher efficiencies and improve better utilisation and thus lower tariffs.

 

CERC has also taken into account technological changes in operating power plants and how they have become more efficient. CERC has reduced heat rate from 2,425 kcal/kwh to 2,375 kcal/kwh. Heat rate is the amount of energy required to generate every unit of power. A lower heat rate means a more efficient plant. Over the years plants have become more efficient on account of technological upgradation in power generating machines. Reducing benchmark heat rate means lower incentives for power plant.

 

Taking into account the difficulty of accessing coal, CERC has allowed for marginal relaxation on account of coal unavailability. Apart from allowing water charges to be passed through to the consumer, CERC has not tinkered with any other costs, despite an increase over the last five years. 

 

CERC needs to be complemented in taking the brave step of taking away the carrot when none was needed by the sector. It still has the stick though in the form of increased competition and a possibility of lower tariffs.