Opinion

India’s power sector seems to be headed towards creating a distorted market, if the latest policy trends are anything to go by

On May 5, the Union Power Ministry came out with a set of directions to generating companies that all imported coal-based power plants shall operate and generate electricity to their full capacity. Earlier on April 1, the Central Electricity Regulatory Commission, a key regulator of the power sector, capped the prices in the Day Ahead Market and Real Time Market on the power exchanges to ₹12 a unit, from the previous level of ₹20 a unit.

On the face of it, the government seems to be trying to bring the prevailing crisis situation under control. An unprecedented increase in the demand for power — owing to the scorching summer — is being witnessed in various parts of the country. With low coal stocks at several power plants and depleted water levels in rivers, the supply of power has not been able to keep pace with the rise in demand, leading to peak power shortage touching double-digit figures.

The measures taken by the government thus far are seen as knee-jerk, and do not point towards long-term solutions. “The government wants the plants to import, coal is not cheap and though there is a pass through, the cap on tariff actually defeats the idea of free market principle where the market dynamics drives the prices,” said a generator.

As per the May 5 order, imported coal-based power plants will supply power in the first instance to the power purchase agreement (PPA) holders. Any surplus power left thereafter or any power for which there is no PPA will be sold to power exchanges. In cases where the plant has PPAs with multiple distribution utilities (DISCOMs), then if one DISCOM does not schedule any quantity of power, that power will be offered to other PPA holders, and any remaining quantity will be sold to the power exchanges thereafter.

And if the existing PPA did not provide for the pass through of the present high cost of imported coal, the rates at which the power shall be supplied to the agreement holders will be worked out by a committee constituted by the Ministry. This committee has to ensure that the benchmark rates of power so worked out meet all prudent costs of using imported coal for generating power, including the present price, shipping costs, and a fair margin.

Producers in a fix

Even as all this is happening, there is also the April decision. This has put the producers in a fix and consumer wondering how the hike will be managed.

While the regulator has the power to intervene, the common refrain is it should be fair and not loaded against the generators. “To establish when the prices were breaching the lower circuits, the regulator did not find it prudent to intervene, even when generators were forced to desperately sell below their full cost. However, when the power tariff — due to factors beyond the control of the generators — breached the normal ceiling the regulator stepped in to intervene,” argued one of the players. 

Besides, the lowering of the price ceiling, irrespective of the fuel source used, has resulted in around 20 GW of gas based plants and 17 GW of imported coal-based plants being unable to supply power to meet the growing unmet demand at the power exchanges. These plants are forced to keep their units under Reserve Shutdown, despite market forces indicating the requirement of marginal generation.

For example, the average spot price for imported gas now is around $25/million British thermal units. According to industry sources, for a gas based power plant sourcing RLNG (Re-gasified Liquefied Natural Gas) from gas marketing companies, this translates to a delivered variable cost of ₹20/kWh to be sold on the power exchange.

Similarly, the variable cost of power using imported coal is currently hovering at ₹12-13/kWh. This is unviable and, therefore, there’s need to sufficiently improve supply of power from domestic coal-based plants and hydro power plants to meet the unmet demand at this time of crisis.

Trading on the exchange

Another point to be noted is that with the above decision, one is only seeing 3-4 per cent of the total power being traded on the exchange. While there is significant attention on this amount of power being traded, the rest of the power is still being sold at the pre-decided tariffs which are much lower than ₹12/unit at some places as the generators are honouring the existing terms and contract irrespective of the price fluctuation in input cost.

Also, the fallout of April decision is that those customers or DISCOMs who were agreeable to purchase power at more than ₹12/unit to ensure uninterrupted supply are now being constrained. As a result, large industrial and commercial consumers are moving out of the exchange and entering into bilateral deals.

“Capping of the price needs to be looked at two levels — question of principles and what signal is being sent. With this, what is being said is that the authorities will intervene whenever they want,” says an expert.

So, is this move to cap the price actually curbing the availability of power? Yes, say most players. Besides, it is also sending a wrong signal to investors who will be wary of the precedence being set and will be concerned about what the next level of capping will be.

Published on May 13, 2022