Centre's plan on sale of RE power to states offers only a flickering hope

The power ministry's plan to become an intermediary in the sale of green power generation to states is only a limited solution to the larger problem facing state discoms

Last week, when 27 cash-strapped state-owned distribution companies, or discoms were barred from the power exchanges, it starkly highlighted the rising scale of risks in the Indian power sector. The demand for power has shot up but states are unwilling to make consumers pay the actual costs of power. The risks have now spread to the renewable energy (RE) generation too, as an order issued by the Union power ministry makes clear. Both the steps also risk pressuring Centre-state relations since they cut down the wiggle room for the discoms drastically. 
 
The weakest link in the power sector are the discoms. Their dues to power companies and state governments are a combined Rs 1,01 trillion as of March 31, 2022. Since power generators would often cut supplies to them citing breach of payment schedules, many of the discoms had begun to use the via media of accessing power exchanges to buy electricity in the spot market. Their overdues in the spot market has reached Rs 5,085 crore, triggering Thursday’s action, though a day later, the dues dropped 80 per cent as several discoms paid up.

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Mounting unpaid bills have also begun to affect renewable energy (RE), which now accounts for a daily median share of just 13 per cent of electricity generation, though it is almost 48 per cent of installed capacity. Power Minister R K Singh has made a proposal to offer a uniform tariff for RE procurement by states, seeking to address their key pain point. Under this plan, RE power generators will sell their power to Singh’s ministry-run company, Solar Energy Corporation of India or SECI. In turn, SECI will sell the power to the discoms at an adjusted monthly rate. Therefore, instead of being prey to the uncertainties of selling to cash-strapped state discoms, which often reneged on deals in expectation of RE tariffs falling further, RE project developers will enjoy some degree of revenue stability. This, the power ministry hopes will encourage more generation companies to set up more capacity to fulfil India’s target of achieving 500 Gw of RE by 2030. 
 
Despite the gloom, power companies are hopeful. “There is a lot of forward thinking in the India market which is what makes it so exciting. More and more players are starting to become aware of how the system needs to balance and what the implicit costs are in doing that,” said Louis Strydom, Director, Project and Market Development- Middle East and South Asia for Wartsila, a power equipment manufacturer and O&M service provider for plants. 
 
In fact, this arrangement is not novel. Even before this iteration came in, the SECI was acting as a market maker on a voluntary basis. RE developers could sell their power to the company and the state-led discoms could sign Power Sales Agreement with it. It was a profitable portfolio for SECI and will be even more so now that the market is expected to expand.
 
For the discoms, the results are not that clear since their problems stem from the free or subsidised power they provide to favoured political groups such as farmers.  Of the Rs 1.01 trillion owed by the discoms all around, the highest share is of Telangana. Matters are made worse since many state governments are also not clearing their own dues to the discoms. Again, Telangana government leads with dues of Rs 12,000 crore. Others with comparable liabilities were Maharashtra at Rs 9,100 crore and Karnataka at Rs 6,600 crore (as on March 2022). For the struggling discoms, life will become more difficult since they also have to buy RE power under their renewable purchase obligations, now at a higher averaged price.
 
“This is a prime cause of continuing difficulties in the power sector. Though rarely invoked, yet under the existing tripartite agreement, these dues can be deducted from the tax devolution to the state concerned,” said a former finance secretary at the centre.  Of course, this is the remit of the finance ministry and not that of the department of power. 
 
Into these complex problems, the Union power ministry has unspooled its plan in the form of a draft amendment to the Electricity Rules of 2022. It will now be a brave RE generator who will not adopt the SECI-mediated route and try to set a deal with the state governments directly. Effectively, then fresh investments in the sector are now under the guidance of the Centre.
 
This plan somewhat mimics the one developed more than two decades ago for the thermal power sector, in 1999. Then power minister P R Kumaramangalam established the Power Trading Corporation (PTC) as an intermediary between the generating companies such as NTPC and the recalcitrant state power distribution companies. The fortunes of the generators and the discoms did not change, but PTC has become a fairly successful company in the stock markets with a market cap of Rs 2.49 trillion (NSE data). 
 
“What we need instead of renewable power obligations on the discoms is renewable generation obligations,” said a top source in one of the state-owned power companies. The switch will make it an obligation for generators to price their power at rates that are competitive by blending both thermal and RE generation, he said. It will be easier for the discoms to source their power based on the company than having to hunt for the source of power. It is understood that the Union ministry is considering the proposal. 
 
The advantage of this alternative is that it will not strain Centre-state relations further. The power ministry will not have to monitor the discoms or push the states towards fulfilling their RE obligations. The states will receive blended power at competitive rates and the responsibility of raising more RE will sit with the generating companies instead of the discoms. There are challenges here, notably whether SECI as the market maker for the RE sector can expand its remit to price thermal power too. But that will require far bigger reforms.
 

Power equations

• Discoms (12 states and 1 UT) barred from short-term power market over unpaid dues for previous transactions 
• Stress has also built in long-term market
• Affects both RE and thermal power markets
• Unpaid dues for power generators means less cash to meet coal producer bills
• To cut both stress, power ministry decides Solar Energy Corporation of India will mediate between discoms & power sellers in RE market
• Plan mimics the PTC route of early 2000s
• SECI intervention crucial for India to achieve RE targets