Why states are changing their mind on power tariff

If low tariff was behind the financial stress of mega power projects in the past, high tariff is bothering them now. Many power producers are staring at uncertainty, as states renege on contracts to keep costly power out of their purchase list.


Until recently, the states were happy to buy power at tariffs decided by competitive bidding that came into effect in January 2011. But now they think the tariffs are too high, especially for renewable energy.


In Uttar Pradesh, the newly-elected Bharatiya Janata Party government has cancelled power purchase agreements (PPAs) with seven coal-based plants, totalling 7,040 Mw, for failing to meet their commissioning targets. The investment into these projects is pegged at Rs 35,000 crore.


The state has also terminated PPAs for 3,800 Mw, as the cost of power under these agreements was higher than the price in the spot market. The state had signed power contracts to procure 5,056 Mw in a price range of Rs 3.2 to Rs 5 per unit (kilowatt/hour) in December 2015, when the Samajwadi Party was in power.


Besides, the UP New and Renewable Energy Development Agency has asked developers to slash tariffs for a 215-Mw tender closed nearly two years ago. It said the state electricity regulator did not approve of power procurement at tariffs in the range of Rs 7.02 to Rs 8.60 per unit. At the time of bidding, the benchmark regulated tariff for the tender was Rs 9.33.


In the same vein, since the emergence of a tariff of Rs 3.46 in the Solar Energy Corporation of India bids for 1,000 Mw, distribution companies in Andhra Pradesh have been making a case for revising the PPAs signed for wind energy two years ago. If the tariffs are slashed, it could adversely affect investments worth Rs 6,000 crore


The clamour for tariff cuts is growing in other states as well. In Karnataka, the state regulator has cancelled PPAs for 400 Mw, seeking fresh agreements with lower tariff. The regulator worked back the capital cost of a wind project from a tariff of Rs 3.46, and arrived at a figure of Rs 4.50 crore per Mw. After adding 10 per cent to adjust for locational differences, it said Rs 4.80 crore for one Mw was a fair capital cost of installation.


Jharkhand that bid out PPAs for 1,200 Mw of solar power in 2016 did not sign the contract at the discovered price. The state now wants winning bidders to renegotiate rates.


Madhya Pradesh, on the other hand, wants to end the must-run status for renewable power. This will put many companies in a spot, as the state will no longer buy power from them on a priority basis.  “We have met 96 per cent of our renewable purchase obligation for wind and 117 per cent for solar in 2016-17. But we are power surplus by 3,000 Mw, and so we have requested the regulator to give us a comfortable road map for renewable power obligation,” says a senior state energy department official.


Unlike in the past, the state regulators are supportive of the call for tariff revision made by the discoms. In 2013, Gujarat Urja Vikas Nigam wanted to re-negotiate its PPA after solar panel prices fell drastically. The Appellate Tribunal for Electricity, however, rejected the appeal.


Industry players say the move by states to renegotiate tariffs after signing PPAs will dent their credibility among investors. They say UP’s move to renegotiate mere 165 Mw when the state is targeting to add more than 10 Gw of solar capacity over the next five years is irrational.


“States should consider the weighted average cost of power. For instance, wind power at Rs 3.46 a unit can be bundled with high-cost power. The distribution companies should design power that way and not cancel bids,” says Rudranil Roysharma, head (power, oil and gas), Feedback Consulting.


The trend to revise tariffs, he says, will not just hit investor confidence, but in cases where construction has started, loan advances will turn into non-performing assets.


Globally, Spain and Greece, for example, amended feed-in tariffs retrospectively, and imposed taxes on renewable energy. China, too, in 2009, amended its renewable energy law to modify renewable energy surcharge collection and distribution mechanism. The surcharge, paid by industrial and commercial consumers, is supplemented through central government budget, to meet the additional cost of power from renewable projects. The utilities then pass this on as subsidy to the renewable energy generators.


“When there was peak deficit, the government invited independent power producers to put up capacity. But with secondary market prices falling, PPAs are not being respected,” says Roysharma. Instead of cancelling PPAs, in cases where commissioning is delayed due to coal linkage, he says, the government should ensure fuel supply agreements are in place.


According to Roysharma, the Union government is following a carrot-and-stick approach under UDAY, the flagship programme for restructuring the debt of discoms. States want the discoms to either increase tariff or keep costs low through reduction in transmission and distribution losses and backing out of high-cost power.


He says the issue with renewable is that the country started to adopt it even while technology was still developing. “Now, we have companies bidding at 1 per cent internal rate of return just to get an entry. Suddenly, capacity addition will come to a halt, since there is so much bubble in the market,” he says. A senior discom official, however, says “renewable energy will survive as long as the discoms survive”.


One way out of the quagmire, says Roysharma, is to provide viability gap funding for high-cost power already contracted as the Centre pushes for 175 Gw of renewable capacity. As things stand today, the termination of PPAs  not only points to a disregard of contracts signed by the state governments, but also puts a question mark on the efficacy of tariff-based competitive bidding.

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