All Posts in "Policy"

Revisiting the CRGO conundrum

Very recently, two key ministries – power and new & renewable energy – jointly launched a national mission to swiftly identify emerging technologies in the power sector and develop them indigenously, at scale, for deployment within and outside India.

 

By identifying emerging technologies and taking them to the implementation stage, the mission – named “Mission on Advanced and High-Impact Research (MAHIR)” — seeks to leverage them as the main fuel for future economic growth.

 

Eight initial areas have been identified, one of which is development of cold rolled grain oriented (CRGO) steel, commonly referred to as electrical steel, or simply CRGO —a critical raw material in the manufacture of transformers, in turn, a vital component of the power T&D value chain.

 

India has had a very tough time with CRGO. The country has tried to create domestic capabilities for CRGO production but a tangible outcome has eluded India for over five decades.

 

Currently, there is only one domestic manufacturer of CRGO. This is the Indian arm of a global company and has local manufacturing capacity of around 50,000 tonnes per year. India’s annual CRGO demand is an estimated 300,000 tonnes, which is around 9 per cent of the total global demand.

 

Admittedly, CRGO is a very sophisticated material and there are not more than a dozen manufacturers worldwide that are fulfilling the global demand. Technology for CRGO production is very complex and therefore, fiercely guarded. Collaborations are just not easy to come by. Little surprise therefore that India, which has massive steel-making capacity – both in the private and public sector – has come nowhere close to crediting itself with self-sufficient domestic production of CRGO.

 

CRGO has been a contentious issue on another count as well. There is never-ending debate on the use of CRGO recycled from scrapped transformers. Opinions are divided. While one section of the industry believes that CRGO is a non-ageing material that can be reused, there is a countervailing body of opinion that feels that Indian transformer manufacturers are indulging in the willful use of scrap (inferior) CRGO in commercial interest.

 

To check the entry of inferior CRGO into the Indian transformer industry, the government, some years ago, mandated foreign suppliers to have their products “BIS” marked. While most or all foreign suppliers have complied, one can never be fully sure of its impact it has had on stemming the inflow of inferior CRGO.

 

It is high time that CRGO gets serious attention at the policy and implementation levels. The criticality of CRGO for a country that is rapidly expanding its power transmission infrastructure cannot be understated. Including CRGO in the initial list under “Mission on Advanced and High-Impact Research” is a laudable first step, which should however be matched by expeditious implementation and tangible positive results.

Venugopal Pillai by — June 24, 2023 in Policy 0
Rethinking E-Reverse Auctions

It is reliably learnt that the Union ministry of new & renewable energy (MNRE) is planning to do away with the process of e-reverse auctions (e-RA) for renewable energy projects – mainly wind and solar.

 

The rationale behind this proposed move is to remove the unhealthy competition that the bidding process potentially witnesses, due to the e-RA element.

 

In a typical solar or wind project that is awarded through the competitive bidding mechanism, bidders submit their price bids and are ranked in terms of the tariffs quoted. This gives rise to the L1 bidder – the one with the most competitive bid – followed by the succeeding L2, L3, etc. In the context of tariff-based bidding, the L1 bidder is the one quoting the lowest tariff at which he is willing to sell power generated from the project under bidding.

 

Once the initial price bid submission is completed, bidders undergo the e-RA round where every bidder is given a chance to match the L1 bid. It is here that aggressive bidding by all bidders, including the L1 bidder, kicks in. The price bids after the e-RA process, due to the fierce competition, undergo a dramatic shift.

 

The final winner (after the e-RA process) could be any of the bidders, not necessarily the L1 bidder, and the winning tariff could be way below the L1 bidder’s quote.

 

Such aggressive bidding, where tariffs could border on non-viability, might suit the power procurement agency. However, the potential situation of bidders offering “rock-bottom” quotes simply with the objective of winning a project is not in universal interest. Time and cost overruns, which are ingrained in any project, can result in a situation where the developer simply cannot honour the tariffs committed. If this happens, the entire downstream value chain gets adversely impacted.

 

E-reverse auctions are part of any power procurement drive, including power transmission projects that are awarded under the tariff-based competitive bidding (TBCB) route. Unrealistic aggression witnessed in the e-RA stage may result in established bidders staying away from the bidding process, even after submission of their initial price bids. It is roughly estimated that final bids (post e-RA) are 20 per cent lower than the L1 bid.

 

All said, the e-RA process is aimed at bringing tariffs to the lowest level possible. There is nothing wrong or unacceptable in this philosophy. However, any effort made to keep the final bids within the realms of viability, is always welcome.

 

Scrapping the e-RA routine is also not a bad idea. Bidders are well aware of the competitiveness and would yet work out their price bids keeping in mind project-specific factors. Such well-derived price bids, one can assume, would be viable as they are not the result of unrealistic last-minute aggression.

 

(The author of this article, Venugopal Pillai, is Editor, T&D India, and may be contacted on venugopal.pillai@tndindia.com. Views are personal.)

Venugopal Pillai by — July 15, 2022 in Policy 0
The highs and lows of tariff-based competitive bidding

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.

Selling stake

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.

What next?

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.

venu by — June 29, 2017 in Policy 0
Electricity gains prominence in index of industrial production

The electricity sector has been given higher weight in the recently revised Index of Industrial Production series.

The Central Statistical Organisation (CSO), a body under the Ministry of Statistics & Programme Implementation (MOSPI), announced major changes to the Index of Industrial Production (IIP), on May 12, 2017. This article tries to discuss the subject in the context of the electricity sector.

The most important change has been the shifting of the base year from 2004-05 to a more recent year, 2011-12. Such shifting makes the calculation of the IIP more in tune with current economic dynamics. The other big change is the increase in the weight of the electricity sector (which means electricity generation) from the earlier 7.994 per cent to 10.316 per cent. The weight of a sector in the IIP broadly suggests its relative importance, measured in terms of value addition, in the overall industrial production. It is worth observing that electricity generation—largely an enabler of industrial production—is itself becoming an important contributor to industrial production.

Sectoral Weights in IIP
(per cent)
Sectoral

New Index
(Base: 2011-12)

Old Index
(Base: 2004-05)
Mining

14.373

14.157
Manufacturing

77.633

75.527
Electricity

7.994

10.316
Total

100.000

100.000

Another point worth noting is that “electricity generation” that was used in the calculation of the IIP till now, was based on only conventional sources—thermal, hydropower and nuclear. Henceforth, generation from renewable energy sources (e.g. wind, solar, biomass, small hydropower, waste-to-energy, etc) would also be taken into account.

Generation from renewable sources recorded an impressive year-on-year growth of 25.5 per cent in the first eleven months (April to February) of FY17, according to latest official statistics. Generation in the said period was 75,949 million kwh as against 60,513 million kwh in the April-February period of FY16. By the same comparison, growth in conventional electricity generation was 4.2 per cent. What is also worth mentioning is that the share of renewable energy generation in total electricity generation improved 6.7 per cent in the April-February period of FY17 from 5.6 per cent in FY16. More than the year-on-year growth rates, which may seem amplified by a low-base effect, it is the share in total electricity generation that reflects the growing importance of renewable energy (RE) generation.

Not the full series

A fine point that may be discussed here is that due to data limitations, the new IIP series has included RE generation with effect from April 2014 only. This means that the IIP series for electricity, for the years FY13 and FY14, are the same as the old series. Due to this “abrupt” inclusion of RE generation, the growth in the IIP for electricity for FY15 shows a spike of 14.8 per cent, as against 8.4 per cent measured by the old series. It may be mentioned here that since 2011-12 (or FY12) is the base year, the IIP for each of the months of that year is set as 100.

Growth in IIP for Electricity
(year-on-year % change)
Year

 

Old Index
(Base: 2004-05)

New Index
(Base: 2011-12)
2012-13

4.0

4.0
2013-14

6.1

6.1
2014-15

8.4

14.8
2015-16

5.7

5.7
2016-17

4.7

5.8

Significant change in perception

Due to the changes in the IIP composition, the perception of overall industrial growth has altered significantly. For instance, in FY17, industrial growth as suggested by the old IIP was a depressed 0.7 per cent. Now, growth measured as per new IIP series, is a much more respectable 5 per cent. Also, in FY14, industrial production was believed to have shrunk by 0.1 per cent based on the understanding derived from the old IIP series. Thanks to the revised series, industrial growth in that year stands at a commendable 3.4 per cent.

Contribution of electricity

Based on the revised series, the overall IIP grew by 5.0 per cent in FY17 as compared with 3.4 per cent in FY16.  By the same comparison, the IIP for electricity was up only marginally from 5.7 per cent in FY16 to 5.8 per cent in FY17. Though the growth in electricity generation was rather flat, the electricity sector made a higher contribution to growth in overall industrial production during FY17. This contribution stood at around 20 per cent in FY17 as against 14 per cent in FY16.

venu by — May 22, 2017 in Policy 0
Separating CTU from Power Grid Corporation

 

For quite some time now, Power Grid Corporation of India, the Central PSU engaged in interregional power transmission, has been in the news with respect to separating itself from the “CTU”, which is “Central Transmission Utility.” It is worthwhile to understand the issue in some detail.

Something very significant had taken place on January 5, 2011. The power ministry ruled that all power purchases made after this date would be based on tariff-based competitive bidding (TBCB) mechanism. This has had serious bearing on all aspects of the power value chain—generation, transmission and distribution.

In the context of interregional and interstate power transmission, PGCIL was always the agency “nominated” by the power ministry. PGCIL could build power transmission lines on the “cost-plus” method, which meant that it could quote a project cost, factoring a mark-up on the envisaged construction cost. In other words, PGCIL was always assured of return on investment as the tariffs charged by PGCIL for transmission of power were based on the expenditure incurred on constructing the line.

Power Grid no longer nominated agency

Post January 5, 2011, PGCIL lost its status of being the “nominated agency” for building interregional and interstate lines. Under the TBCB regime, PGCIL would have to compete with private players and win projects based on the tariff quoted. It surely would have been a culture shock for PGCIL. The Central PSU now had to compete with the same private entities that used to be contractors for its projects. These private entities, in turn, were contractors that choose to groom into developers. In other words, a private contractor for PGCIL would now aspire to become an owner and manager of a transmission line—much more than simply building it for PGCIL. The TBCB regime, as one can see, marked the evolution of private enterprise in interregional power transmission. We have today private developers like Sterlite Power, Reliance (ADAG) Group, Kalpataru Power Transmission, etc—all of whom are sharing the power development space with PGCIL.

It is important to note that PGCIL along with being a power transmission company, in the sense of owning and managing interregional transmission lines, is also responsible for grid management and for planning the nationwide transmission infrastructure. For PGCIL to fit fairly into the TBCB regime, other aspects, namely the grid management, and the planning of transmission network, also had to be worked upon.

Grid management hived off, now it is CTU’s turn

Steps to reorganize PGCIL were taken much before the January 5, 2011. In February 2009, the grid management operations of PGCIL were hived into a separate company called Power Systems Operation Corporation Ltd (POSOCO). When incorporated, it was a wholly-owned subsidiary of PGCIL. The grid management operations of PGCIL, now under POSOCO, include one national load dispatch centre (NLDC), five regional load dispatch centres (RLDC) and 33 state load dispatch centres (SLDC). The incorporation of POSOCO was aimed at ring-fencing the grid management operations from PGCIL, though POSOCO’s ownership was still with PGCIL.

Very recently, an important development took place. On January 2, 2017, the ownership of POSOCO was transferred from PGCIL to the Union power ministry. The complete equity capital of POSOCO, comprising 30.64 million shares of face value Rs.10 each, was transferred to the power ministry for a consideration of Rs.81 crore. This now makes POSOCO a Central PSU, directly under power ministry. At the organizational level, POSOCO is now at par with PGCIL, as well as other Central PSUs under the power ministry. More importantly, POSOCO will have much more financial autonomy allowing it to even raise resources on its own.

With the grid management issue now taken completely care of, it is time to look at the CTU dimension. Among the various functions of the CTU is that of planning the national transmission network, which essentially means new interregional and interstate transmission systems. The paramount corporate objective of PGCIL is to develop a national grid for the seamless transfer of electricity between the five regional grids—north, northeast, west, east and south. Currently, the interregional transfer capacity of the National Grid is around 62,650 mw, which is very close to the target of 65,000 mw set for end-March 2017, the end of the XII Plan period. It should be remembered that PGCIL does not own this 62,650 mw entirely. Around 10 per cent belongs to private developers, representing projects won by private entities under the TBCB regime.

Also read: The changing complexion of Power Grid Corporation of India

Why the CTU needs to be separated

The CTU is a small but highly specialized cell within PGCIL. It is reliably learnt that the CTU is a group of five or six members. The main job of the CTU is to plan new transmission schemes, to augment capacity of the National Grid. The CTU not only plans new lines, but it also estimates the project cost and other sensitive parameters like the base tariff, etc. All this information is critical whilst bidding out the project under the tariff-based competitive bidding mechanism. Technically, PGCIL has access to this information and this could vitiate the tenets of tariff-based competitive bidding. It threatens to destroy the level-playing field between PGCIL and private developers. This is why the CTU aspect of PGCIL needs to be detached from PGCIL. The power ministry is already working to this effect.

The case of PGCIL is reminiscent of several such instances where Central government undertakings had to be restructured in the wake of the Liberalisation Policy of 1991. One such case is that of the erstwhile Oil & Natural Gas Commission. Till the early part of the 1990s, ONGC was both an operator and a regulator of sorts. When private sector entered the oil exploration business, ONGC could not perform a dual role. Thus, in 1993, was born Oil & Natural Gas Corporation Ltd (a corporate entity under the petroleum ministry) and Directorate of Hydrocarbons (DGH)—the regulator.

venu by — January 18, 2017 in Policy 0