The power ministry recently allowed power distribution companies to exit from power purchase agreements (PPAs) related to power generation plants that have completed 25 years of operation. This is, prima facie, a positive step.
Today, the private sector is the biggest owner of coal-fired power capacity with a share of 37 per cent. By December 2023, this share will drop to 32 per cent. State government entities with a projected share of 35 per cent will constitute the single-largest ownership.
It was recently informed in Parliament that the Centre was looking into the issue of “stressed” power generation assets. It is estimated that advances of scheduled commercial banks (SCB) to the “electricity generation” sector as a whole was an estimated Rs.4,700 crore representing a big chunk of total advances by the SCB ecosystem.
The government has reportedly drawn up a list of 43 power projects for whom commissioning has been elusive for various reasons like absence of firm fuel supply agreements (mainly coal), delay in signing power purchase agreements, inability of the promoters to infuse equity or service debt, etc.
At the micro level, the government is considering a proposal where it would involve Central power generation utilities to take over such stressed assets. Though finer details are not yet available, NLC India (formerly Neyveli Lignite Corporation Ltd) has been mandated to take over the 2×600-mw Raghunathpur power project in West Bengal, currently owned by Damodar Valley Corporation. The Raghunathpur project has been delayed for over four years on a variety of issues including absence of coal linkages.
Now, it should be appreciated that it is not just unfinished coal-fired power projects that are causing stress to the power sector, stress is seeping into operational plants as well. For instance, mega power projects fired by imported coal are struggling. Tata Power’s 4,000-mw Mundra ultra mega power project is unable to honour the tariff committed in the long-term power purchase agreement. It may be recalled that Tata Power had contracted long-term coal supplies from Indonesia at negotiated rates, on the basis of which it quoted the winning tariff of Rs.2.26 per kwh. Indonesia, in a ruling of 2010, disallowed export of coal at less than market prices, leading to huge commercial losses to the Mundra UMPP. Adani’s 4,620-mw Mundra project and Essar’s 1,200-mw Salaya project are also confronted by the same problem.
Domestic coal better off
Over the past two years or so, domestic coal supplies have improved dramatically. This has resulted in a revival of coal-fired power plants that had shut down due to absence of coal linkages. Generation from coal-fired power plants has now risen but the overall plant load factor (PLF) has fallen. In June 2017 for instance, the overall PLF was down to 57.4 per cent from 60.7 per cent in June 2016, despite a 4.1 per cent growth in thermal power generation. This paradox can be explained by the fact that PLF is calculated only with respect to operational plants. As more power plants came into operation, the overall denominator (total capacity) increased but there was a smaller increase in the numerator (electricity generation). [In simple terms, plant load factor of a power plant can be interpreted as a measure of its capacity utilization.]
It is very evident that once these so-called stressed power plants are brought into operation, the overall PLF of thermal power plants will further decrease. This connotes that there is little scope for all power generation plants to operate at full capacity. If more power generation capacity has to be pressed into operation, there needs to be matching transmission and distribution infrastructure.
T&D upgrade
It is encouraging to note that recent trends in augmentation of power transmission infrastructure have been healthy. For instance, in the first quarter (April to June) of FY18, 6,855 circuit km (ckm) of transmission lines were added as against 5,743 ckm in the same period of FY17, implying a growth of 19 per cent. By the same comparison, growth in transformation capacity was 40 per cent. The momentum in upgrade of power T&D infrastructure needs to be maintained so that growth in power generation capacity fulfills the intended socio-economic purpose. All said, with more T&D infrastructure coming in place, redundancy in power generation capacity will be inevitable. Also, brisk capacity additions to the national grid are making interregional transfers seamless. This has given power plants a “national” dimension; no longer are they confined to a region. This interregional transfer capability will also infuse redundancy in operational power generation capacity.
The solar dimension
On a related note, recent trends of sharply falling solar tariffs are bound to cause disruptions in the overall power generation segment. Solar tariffs at a recent auction fell to an incredulous Rs.2.44 per kwh, making it technically much cheaper than generation from conventional coal-fired power plants. As the fall in solar tariffs has been abrupt, there is also a looming question mark on older solar power plants where long-term power purchase agreements have been signed for a higher tariff. What happens if discoms (the power purchasers) dither on buying this relatively expensive solar power? Whether solar power plants will also come under stress is a question not entirely out of place.
(This article’s author Venugopal Pillai is Editor, T&D India. Views expressed here are personal. The author may be contacted on venugopal.pillai@tndindia.com)
It is a matter of irony that while the country the celebrating the success of the tariff-based competitive bidding (TBCB) mechanism in the solar and wind energy sectors in terms of historically low tariffs quoted by developers, the same philosophy is creating turmoil in the conventional power generation and transmission industry.
According to reliable reports, the Supreme Court has disallowed any increase in tariffs from Tata Power’s 4,000-mw Mundra ultra mega power project (UMPP) to be passed on to beneficiary utilities. Tata Power in late 2006 had clinched the Mundra UMPP quoting a levelised tariff of Rs.2.26 per kwh during the 25-year concession period. The tariff quoted by Tata Power was based on long-term negotiated deals signed with Indonesian coal suppliers. However, Indonesia in 2010 ruled that coal cannot be exported at less than market price. The fuel cost for Tata Power shot up, rendering the tariff (of Rs.2.26 per kwh) simply unviable.
Two mega transmission schemes of Reliance Power (Anil Ambani Group) have been under litigation for quite some time now, on the same grounds. Reliance Power had won the North Karanpura and Talcher-II transmission schemes under the TBCB mechanism, back in 2009. Reliance Power has sought revision in tariffs as the company has alleged that work on the projects could not start on time due to non-timely pre-project clearances from the Union government. Reliance Power has sought 160 per cent increase in tariff for the North Karanpura project and 90 per cent in the case of Talcher-II. Beneficiary state utilities have contested this plea and the matter is still sub-judice. The next hearing of the Appellate Tribunal of Electricity (ATE), with whom the matter is now resting, is scheduled on July 12, 2017, for both these projects. Incidentally, Power Grid Corporation of India has stepped in and offered to take over the projects but on conventional “cost-plus” basis, and not under the tariff-based competitive route.
Coming back to the Mundra UMPP case, Tata Power has offered GUVNL 51 per cent stake in Coastal Gujarat Power Ltd (the 100 per cent Tata Power subsidiary that owns the Mundra UMPP) for just Re.1. This will result in CPGL relegating itself to an O&M contractor. GUVNL (Gujarat Urja Vikas Nigam Ltd) is the parent body of all power utilities in Gujarat. It is never going to be easy for power utilities to take over the project and sell power at Rs.2.26 per kwh. The project is designed to run on imported coal; domestic coal will be an inferior alternative from both technical and commercial standpoints.
Adani Power and Essar Power are also saddled with their projects – Mundra (4,620 mw) and Salaya (1,200 mw), respectively – that are based on imported (Indonesian) coal. Both the developers are finding it difficult to sell power at rates contracted in the power purchase agreements. [These projects do not technically fall under the TBCB mechanism but are based on long-term PPAs signed with beneficiary utilities. However, the impact of rising fuel costs on the commercial viability of the power generation asset is the same.]
Also read: Tariff-based bidding in wind energy to gain momentum
The TBCB mechanism has done wonders for the solar industry with tariffs falling to a historical and incredulous low of Rs.2.44 per kwh, as seen in the Bhadla-Phase III project in Rajasthan. Even in the recent 1-GW wind energy auction conducted by SECI, the winning tariffs have been around Rs.3.50 per kwh, much lower than the Rs.4-6 per kwh band seen in the feed-in tariff regime. The biggest advantage that solar and wind projects have is a complete insulation from the vagaries of fuel cost. Despite this, experts believe that such aggressive quotations have been submitted with an underlying desperation to bag projects. Solar developers have set up large teams but the flow of projects has not been much slower than anticipated.
Based on the cases under discussion, it appears that the TBCB regime is going through a rough patch. While the developer does his homework in quoting the winning tariff, there is always room for unexpected developments that can make financial calculations go awry. Agreed that developers fully subscribe to the project risk but what happens when a developer is confronted by a totally unanticipated situation that makes the tariffs unviable? This is more so considering that the concession periods are long—25 to 30 years. Although concession agreements provide for force majeure, not all eventualities can qualify.
The power projects of Tata, Adani and Essar under discussion are stuck in a policy logjam, and there is no easy way out. It is a tragedy that technically efficient power generation projects are becoming victims of commercial inefficiency.
The tariff-based competitive bidding mechanism, a sound philosophy of power procurement implemented in the country since January 2011, needs some rethinking. Right now, the Central government appears to be distancing itself as issue is strictly between the power generator, the procuring state government utilities, and the lending institutions. While this is understandable, the Centre could do well in reworking the nuances of the otherwise sound tariff-based competitive bidding mechanism, protecting the long-term interests of all stakeholders.
India’s supercritical power generation capacity crossed 38 GW as of December 31, 2016, according to statistics released by Central Electricity Authority. It is interesting to note that independent power producers (IPP) had the maximum share of this capacity. Nearly 75 per cent of this capacity, corresponding to 28,550 mw, was built by IPPs with government utilities having a very small share. Central PSUs—mainly NTPC—accounted for 12.4 per cent of this capacity while state government entities had a comparable share of around 13 per cent.
