For India now progressively moving towards an energy use configuration that is environment friendly [increase in share of non-fossil fuel such as nuclear, solar, wind, hydro etc], a steep decline in the cost of power generation based on solar and wind to level even below Rs 3 per unit – enabled primarily by reduction in the cost of equipment and services – has come as a boon.
The state electricity boards [SEBs]/power distribution companies [PDCs] are keen to be a part of this transition and would like to procure power at a lower rate so that this benefit can be passed on to consumers. Besides, this will also help them in reducing losses and make their operations financially sustainable so that they can provide a strong link between power generators on one hand and consumers on the other.
This is also in sync with the requirements of the financial restructuring package [FRP] granted to SEBs/PDCs under UDAY [Ujwal DISCOM Assurance Yojna] launched in September, 2015. While, granting them huge relief from over Rs 400,000 crores debt piled up [due to mounting losses], the scheme required them to reduce the gap between the revenue realized from sale of electricity and cost of its purchase. The lower cost of sourcing power from generators based on solar and wind energy helps precisely in achieving this objective.
Accordingly, the state governments [they are the owners of SEBs/PDCs] asked those producers to reduce the price at which they deliver electricity under the extant power purchase agreement [PPA]. Some states had threatened cancellation of PPA in cases where the generator refused to oblige. But, union power minister, Piyush Goyal has taken a stern view of the decisions taken by state/SEBs/PDCs.
Goyal has argued that states must respect sanctity of PPAs. They should refrain from seeking reduction in the tariff unless the agreement specifically has an enabling clause, he opines. This stance militates against the overarching objective of sustaining viability of SEBs/PDCs – propounded by none other than minister himself while spearheading UDAY. It also looks anomalous when seen in the backdrop of a decision approved by regulators and judiciary in case of ultra mega power projects [UMPPs].
For UMPPs, the then UPA – dispensation had mooted the idea of tariff-based competitive bidding [TBCB]. Under this, the independent power producer [IPP] bids for a fixed tariff applicable all through the operational life of the project. For instance, Tata Power Limited [4000 MW] and Adani Power Limited [4620 MW] had bagged these projects to supply electricity at a fixed tariff of Rs 2.26 per unit and Rs 2.35/ Rs 2.94 per unit for Gujarat/Haryana respectively.
Faced with increase in price of coal – both domestic and imported [from Indonesia, courtesy change in government regulation], the companies petitioned Central Electricity Regulatory Commission [CERC] for increase in tariff to compensate for it. The CERC allowed it. The compensatory tariff was confirmed by Appellate Tribunal for Electricity [APTEL] using a different route i.e. under “force majeure” clause. The matter went up to Supreme Court [SC] which allowed it in respect of increase in domestic coal price [while disallowing increase caused by hike in price of imported coal].
Clearly, in the mentioned cases, the generators were granted increase in tariff [albeit at the cost of SEBs/PDCs] in complete violation of the PPA which provided for fixed rate all through the project life. This was done primarily to protect the generators. Now, in a reverse scenario where the cost of generation from solar and wind based plants has actually declined, why should SEBs/PDCs be denied the benefit?
Most of the PPAs were signed under the MOU [memorandum of understanding] route. Apart from guaranteed return on capital, these provided for adjustment in cost of fuel on actual basis. This was done to give IPPs full protection against any escalation in cost [in some cases, tariff is as high as Rs 12 per unit especially for gas based stations]. On the same logic, the user of electricity [read SEBs/PDCs] is also entitled to pay less if generation cost is lowered.
An argument that bank loans given to such generators will turn in to non-performing assets [NPAs] if tariffs are reduced – as per the wishes of SEBs/PDCs or states were to back out of the agreements – is flawed. This is because any reduction in tariff will not be at the cost of former as what the latter are seeking is merely passing on the benefit of reduction in the cost of equipment and services.
In view of above, it will be good if the union government refrains from making any intervention and leave the matter to be decided bilaterally between IPPs and SEBs/PDCs in a spirit of mutual accommodation and taking in to account the past practice. At the same time, state governments should take steps to address other generic factors that contribute to the losses of distribution companies.
They will have to make a frontal assault on high AT&C [aggregate technical and commercial losses] – a sophisticated nomenclature for theft – as well as heavily subsidized tariff on supplies to farmers [free in some states] and poor households. The root cause of these twin problems is sheer populism and politics of vote bank that is practiced by the ruling establishments in majority of states.
The huge subsidy on electricity or giving it even free is perceived to be a pro-farmer measure which politicians feel will automatically buy votes. Likewise, if power is stolen by connecting a wire to the pole for supplies to slum dwellers/jhuggis, this is meant to garner their votes. All parties need to take a pledge to put a stop to this.
Sans a major onslaught on these twin maladies, the SEBs/PDCs will never be able to come out of their present dire financial straits irrespective of the quantum of reduction in price they get from the generators. Action is needed on all fronts.
Considering that over 70% of the population in India is now ruled by BJP [given its winning spree – state after state], prime minister Modi should take the lead by implementing stern measures in this regard.
Hopefully, he will crack the whip.