For almost two decades now, the successive governments have made exhortation about reforming the fledgling power sector with the three-fold objective of (i) supplying electricity at affordable rates; (ii) reducing the burden of subsidy and (iii) make power distribution companies (discoms) viable.
Whether, it is the provision for reform the power purchase agreements (PPAs), ‘open access’ under the amended Electricity Act (2003), reducing cross-subsidy so as lower tariff to industries and businesses, increasing the share of renewals in total supply, opening of power exchanges for trading of electricity, direct benefit transfer (DBT) of subsidy to the target beneficiaries and so on, the aforementioned objectives resonate in each of these reforms.
Yet, it is ironical that when it comes to developing the architecture of these reform measures and their actual implementation on ground zero, the impact is just the opposite. Let us look analyze each.
Power purchase agreement (PPA) is a contract between a generation company and discom which lays down terms of electricity purchase by latter from former including tariff which is subject to approval by state electricity regulatory commissions (SERCs). Nearly 86% of power is sold through long-term PPAs; of the balance, 10% is covered under short-term agreements and 4% sold on trading platform.
The discoms mostly owned and controlled by state governments, procure power from independent power producers (IPPs) and public sector undertakings (PSUs) viz. National Thermal Power Corporation (NTPC) etc and sell to consumers such as households, farmers, industries, businesses etc. While, sale to poor households and farmers are normally made at subsidized rate (or even free in some states) i.e. below the cost of purchase, wheeling and distribution, from industries and businesses, they charge much higher than the cost of supply. Put simply, the tariff policy uses excess payments by the latter to cross-subsidize the former.
The mandate of discoms is to source and sign PPAs with those IPPs or PSUs who can deliver power at lowest possible tariff (in fact, the central government runs several schemes which help IPPs to reduce the cost of generation say, by lowering the cost of fuel such as coal or gas, its faster transportation at low cost or fixing technical snags etc) with the sole objective of making it affordable to consumers. Unfortunately, the reality is far from it. Let us take a few examples.
In Andhra Pradesh (AP), promoters of 139 power plants based on solar and wind energy (aggregate capacity 8,000 mega watt or MW) had signed agreements with the discoms during the last five years under the erstwhile dispensation led by Dr N. Chandrababu Naidu. Apart from being environment friendly, the other advantage of buying electricity from these sources is the low cost of supply about Rs 2.4 per unit which is nearly half of the cost of sourcing it from thermal (coal based) power plants. Yet, under PPAs, the discoms had agreed to pay to IPPs @ Rs 4.8 per unit i.e. almost double.
The new government led by Y. S. Jaganmohan Reddy set up a high level committee in early July, 2019 to review those agreements citing malpractices with a mandate to bring down the tariff. The decision was challenged by IPPs in Andhra Pradesh High Court (APHC). In its order (September 2019), the APHC struck down the state’s order on reviewing/renegotiating PPAs and asked the AP Electricity Regulatory Commission (APERC) to decide on the matter. During the interim period, it directed the discoms to pay these plants at a provisional rate of Rs 2.43/unit.
The matter being under judicial scrutiny, there is no guarantee that the lower rate will eventually prevail. Meanwhile, suspending older provisions, the state government has asked APERC to levy transmission and distribution charges for wheeling power for these plants which sell power directly to industrial consumers through the ‘open access’ mechanism. These charges include: Rs 3/unit wheeling, Rs 1.5/unit cross subsidy and Rs 0.5/unit as distribution charge. What is given from one hand, it is being taken away from the other.
At another extreme, IPPs had agreed to charge from discoms low tariff – using tariff-based competitive bidding (TBCB) method. 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 had committed to sell @ Rs 2.26 per unit and Rs 2.35 per unit respectively for supplies to discoms in the state. Both projects are based on coal; TPL is entirely on imported coal, APL uses 70% domestic and 30% imported coal.
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].
In short, the low tariff advantage emanating from the TBCB concept that was to be available on supplies all through the life span of these UMPPs was taken away. For all future projects, bidding process excludes fuel cost which is pass-through implying whenever, there is hike in fuel cost, discoms have to pay more.
The policy of ‘open access’ under the amended Electricity Act (2003) allows bulk consumers (those with consumption > 1 MW) to choose their supplier. This enables a consumer to draw electricity directly from an IPP who offers lower tariff. The SERC is expected to exercise regulatory oversight and ensure that correct tariff is charged. But, another provision in the Act requires him to pay an ‘open access surcharge [OAC]’ to the discom he/she wants to leave.
The state governments fix the surcharge at a level as to ensure that post-switch, the effective cost to the consumer viz., tariff charged by new supplier plus OAC is higher than what they pay to the discom. In other words, the levy of surcharge (embedded in the Act itself) kills the very soul of ‘open access’ policy. The OAC was meant to be temporary – to be reduced over a period of time – but states continue to use this as an instrument to shield discoms.
In the above example, even as discoms in Andhra Pradesh are now required to pay to generators of solar and wind power at lower rate of Rs 2.43 per unit under orders from APHC, the consumers are unlikely to get this benefit as the state gears up to collect OAC of Rs 1.5 per unit (besides Rs 3 per unit wheeling charge and Rs 0.5/unit as distribution charge) from these consumers. In case, the APHC decides in favor of the IPPs requiring discoms to pay @Rs 4.8 per unit as per the original agreements, the tariff chargeable from consumers would be Rs 9.8 per unit – close to Rs 10. This is bizarre!
The talk of reducing cross-subsidy by reducing charges from industries and businesses (under the ‘New Tariff Policy’ in works now, discoms can recover only up to 15% of under-recovered power supply cost from other consumers) is theoretical. Charging more from those who, the government thinks, can pay is intertwined with its decision to charge less from poor households and farmers (or no charges at all). Besides, it needs to cover up the revenue loss arising from large-scale theft and under-billing which continue unabated.
As long as status quo continues in all these areas (very likely, as almost every state government thinks that touching them will be politically suicidal), it won’t be possible to reduce tariff on supplies to industries and businesses.
DBT is a transformative reform. Under it, subsidy is given directly to the beneficiaries even as tariff is market determined. It will foster competition, improve efficiency, reduce cost, eliminate theft and augment revenue. This is the most potent way of making electricity affordable to consumers, reducing subsidy burden on the exchequer and making discoms viable. The powers that be have talked about it but no one has the gumption to walk the talk.
Opening of power exchanges for trading is a good innovation for better price discovery and may help some consumers get attractive price for their needs. Given that electricity sold on the exchanges is a miniscule 4% of the total, this won’t matter much.
All reforms tom-tommed by policy makers have remained on paper even as consumers pay high tariff and discoms make losses. The ball lies in the court of political brass. It needs to crack the whip on reforms, or else it will be business as usual.