Recently, Yogi – government in Uttar Pradesh [UP] cancelled a number of power purchase agreements [PPAs] that were signed in the past by state electricity boards [SEBs]/power distribution companies [PDCs] with independent power producers [IPPs] under MOUs [memorandum of understanding] route.
The reason given was that cost of purchasing power under these agreements was substantially higher [in some cases even double] than the average cost of purchase @ Rs 4 per unit. In view of surplus availability of power in the state, the government hopes to lower overall cost even while meeting all its requirements. In turn, this will help reduce losses of SEBs/PDCs in the state.
The galloping loss of SEBs/PDCs [as on September, 2015, their accumulated loss stood at close to Rs`400,000 crores] is a major headache for majority of states. The losses arise because average revenue realized [ARR] from sale of electricity is significantly lower than average cost of supply [ACS].
A much talked about factor contributing to the losses is subsidized tariff charged in respect of electricity supplies to households and farmers [in some states, it is even free] and large-scale technical and commercial [T&C] loss – a euphemism for power theft. However, another factor not so much in limelight is the high cost of power purchase, a good portion of it is ‘artificially’ inflated.
Yogi – government decision not to take power from high cost producers has catapulted this vital aspect to the centre-stage. This needs to be comprehensively looked in to and must be considered along with adjustment in tariff for finding a permanent solution to this endemic problem plaguing SEBs/PDCs.
The extant system of determining cost allowed to power generators/IPPs has in-built incentive to indulge in cost padding. Thus, under PPAs across all states [majority of these are on MOU route], the producer is allowed a guaranteed return on capital irrespective of the quantum of power produced by it. He gets this money in full even when the generation is low nil or even nil.
Further, the cost of fuel is ‘pass-through’. This means that all increases in cost of generation caused by hike in fuel cost are charged from SEBs/PDCs without any limit. Thus, increase in the price of coal – domestic or imported – or gas, mostly imported LNG [liquefied natural gas] ends up increasing their liability. No wonder, under some PPAs, distribution companies pay as high as Rs 12 per unit.
The provision is also susceptible to manipulation of cost by generators. In this regard, investigations by Finance Ministry and Directorate of Revenue Intelligence (DRI) revealed over-invoicing of coal imports by 40 companies — both in the public and private sector — to the tune of ₹35,000 crore during 2012-13 to 2014-15.
During this period, the average price of Indonesian coal with a gross calorific value of 3,800-4,200 kCal/kg ranged between $38 and $49 a ton on free-on-board (FOB) basis, according to various international indices. On CIF [cost insurance and freight] basis, this should be $55-60/ton. However, actual payments were almost double this price. Since, coal costs are pass thru under PPA, it was hapless SEBs/PDCs who ended up paying for this loot.
In a bid to insulate SEBs/PDCs from the impact of increase in fuel cost, in case of ultra mega power projects [UMPP], the then UPA – dispensation mooted the idea of tariff-based competitive bidding [TBCB]. Under this, the generator bids for a fixed tariff applicable all through project’s operational life. For instance, Tata Power [4000 MW] and Adani Power [4620 MW] had bagged these projects to supply power at a fixed tariff of Rs 2.26 per unit and Rs 2.35/ Rs 2.94 per unit for Gujarat/Haryana respectively.
However, this experiment was short-lived. When, confronted with increase in price of Indonesean coal [courtesy, change in government regulation], both the mentioned companies petitioned Central Electricity Regulatory Commission [CERC] for increase in tariff which the latter allowed. SEBs/PDCs contested this before Appellate Tribunal for Electricity [APTEL] who also allowed it albeit under “force majeure” clause. The matter went up to Supreme Court [SC] who disallowed increase due hike in price of imported coal yet, allowed in respect of increase in domestic coal price.
Meanwhile, the government has decided to dispense with TBCB policy altogether. For awarding projects [UMPP or otherwise] henceforth, it is now inviting bids only for ‘fixed’ component even as fuel cost will be pass-thru; back to square one! This is a dangerous trend. It will not only lead to steep increase in tariff from all UMPPs based on domestic coal – in operation and under commissioning – but also ‘pre-empt’ all chances of reining in tariff in the future.
In several states, the SEBs – apart from distribution – also have generating stations within their fold. Unlike cases where these two functions are with separate/independent entities and therefore, more likely to come under regulator’s gaze, herein, the integrated operations make it much easier for hike in fuel cost [and those of other consumables] to be passed on to the distribution unit.
The SEBs/PDCs too have their share in inflating the cost. For instance, their financial irregularities are often camouflaged under what are commonly known as ‘regulatory assets’ [RAs]. The RAs is a euphemism for increase in cost of power purchase, transmission and distribution not allowed by way of increase in tariff – in short revenue gap deferred to future.
This is best illustrated by the case of PDCs in Delhi viz., BSES Rajdhani Power Limited [BRPL], BSES Yamuna Power Limited [BYPL] and Tata Power Delhi Distribution Limited [TPDDL]. As at the end of financial year 2012-13, these three distribution companies had an accumulated RAs of Rs 19,500 crores. Arvind Kejriwal, Chief Minister had attributed this to irregularities and ordered an audit by Comptroller and Auditor General [CAG].
Even as power minister, Piyush Goyal is trumpeting about Union Government’s efforts to reduce the cost of power purchase by SEBs/PDCs including by supplying more of domestic coal at low price [or measures to reduce gas price], there is need for ‘holistic’ reforms in the entire supply chain to make a dent on tariff.