The government has set up a committee to reform power purchase agreements [PPAs] [it is a contract between generators and power distribution companies (PDCs) setting the terms of electricity purchase by the latter from the former even as the tariff is approved by the state electricity regulatory commission (SERC)] in a manner as to make power available at ‘competitive price’ and give relief to consumers. The move looks laughable when seen in juxtaposition with the extant tariff policy environment as also the position on ground zero with regard to the architecture of PPAs already signed.
On tariff policy, under directions from the state governments [they own and control PDCs], PDCs sell electricity to certain category of households and farmers at heavily subsidized rate, even free in some states [for instance, in Delhi, driven by his zeal to win elections, Chief Minister, Arvind Kejriwal not only gives free power to 90% of households, he has also dared BJP to do the same in Maharashtra and Haryana]. This forces them to charge exorbitant rate from industries and businesses; it’s a different matter that despite this, PDCs incur losses forcing the centre to come out with packages to bail them out [three packages have already been given since 2000].
As regards PPAs, in consonance with Modi’s ambitious plan of giving a big push to renewable energy [the government has set a target of achieving 175,000 MW of generation capacity based on this source by 2030], in Andhra Pradesh [AP] alone, promoters of 139 power plants based on solar and wind energy had signed agreements with PDCs during the last five years under the erstwhile dispensation led by Dr N. Chandrababu Naidu. Under the PPAs, the distribution companies had agreed to pay to the generators @ Rs 4-6 per unit which is almost double the normal tariff of about Rs 2.4 per unit.
At such high tariff, the PDCs are incurring huge losses. During the last five years, of the total loss of close to Rs 7000 crore, an overwhelming Rs 5500 crore was on account of excess payments to the generators of renewable energy. The situation has come to such a pass that they have accumulated unpaid dues of Rs 20,000 crore.
This has prompted the new government led by Y. S. Jaganmohan Reddy to set up a high level committee to review those agreements with a view to bring down the tariff. However, the decision has been stayed by the Andhra Pradesh High Court [APHC]. The issue is heading for a protracted legal battle and it will be some time before the proceedings get concluded and final pronouncement from the highest court comes.
Meanwhile, the issue has much wider ramifications even as investors in these projects [mostly foreign investors] have raised a fundamental question arguing that any review will dent the sanctity of contracts thereby eroding their confidence in India as an attractive investment destination. The countries from where these companies come have also taken up the matter with the centre who in turn, has asked the AP government to exercise restraint.
The way event are unfolding, it is most unlikely that the issue will get settled in favor of the distribution companies who will continue to pay high tariff – as per the subsisting PPAs. This in turn, would mean higher tariff burden on the user industries and businesses if the state is unwilling to foot the bill.
At another extreme, there were other PPAs wherein in the overriding interest of consumers to make power available at ‘affordable’ and ‘stable’ rate, generators agreed to charge from PDCs low tariff – using tariff-based competitive bidding [TBCB] methodology. Under the long-term PPAs signed by Tata Power Ltd [TPL] and Adani Power Ltd [APL] in respect of their ultra mega power projects [UMPP] in Gujarat, these companies committed to sell @ Rs 2.26 per unit and Rs 2.35 per unit respectively for supplies to PDCs in the state. Both projects are based on coal. While, TPL is based entirely on imported coal, APL uses 70% domestic and 30% imported coal.
Unlike all other PPAs wherein increase in the cost of fuel is pass-through, for supplies from these plants, the consumers were fully shielded against any potential increase in cost. This in turn, was predicated on projects having arrangements in place to ensure that they got coal supplies at a fixed price all through [even if TPL/APL were to pay more, they would absorb it leaving tariff unchanged]. To make it happen, TPL had acquired 25-30% equity in 3 Indonesian mines. Likewise, Adani acquired a coal mine in Queensland [Australia] in 2010. But, this turned out to be an illusion.
In 2012, TPL/APL petitioned the Central Electricity Regulatory Commission [CERC] seeking ‘compensatory tariff’ – a sophisticated nomenclature for hike in tariff. They argued that following an order of Indonesian government in September 2011 fixing a minimum export price [MEP] of coal, they were forced to pay more which should be compensated. This was instantly allowed by CERC [February 2014] and confirmed by the Appellate Tribunal for Electricity [APTEL] [December 2016]. The Supreme Court [SC] after initially rejecting the claim [order of April 2017], finally directed CERC ‘to amend the PPAs to enable pass-through of fuel price escalation subject to a cap’ [order dated October 29, 2018].
To sum up, we have an abhorrent scenario whereby from the day one PPAs [such as those for renewable electricity in Andhra Pradesh] are meant to exploit the hapless consumers. Even where, initially PPAs were crafted to be lenient towards them [as in case UMPP of TPL and APL], the government, regulator and even judicial authorities put up a united front to ensure that these are altered to their detriment. It is a typical syndrome of ‘head I win and tail you lose’.
In this backdrop of extant arrangements blatantly discriminating against user industries and inflicting sever damage by way of exorbitant tariff or higher subsidy support [which is ultimately paid for by tax payer], any talk of reforming PPAs ‘with a view to make electricity affordable to them’ is tantamount to adding salt to the injury. Instead of offering platitude, the government should think through measures to rein in those who pursue their self-aggrandizement at the cost of consumers and public at large.
For instance, in case of PPAs for renewable electricity in AP, none other than the Chief Minister has pointed to serious irregularities. Or else, how does on explain tariff being 100% more than the normal rate? Likewise, in 2012-13, there were reports of the directorate of revenue intelligence [DRI] investigating cases of over-invoicing of bills for coal import [those included import for UMPPs]. It also needs to introspect as to why free or subsidized power be continued. Finally, despite tall claims, large-scale power theft continues.
The government should deal with these issues with alacrity. To the extent, it can be taken care while crafting PPAs [e.g. a clause may provide for cancellation of the agreement if any irregularity involving corruption is noticed], it should be done. Other things like power theft or free supply can be tackled through improving governance and shedding populism. Sans, these harsh steps, consumers and tax payers will continue to suffer.