Centre to relook long-term power sale pacts between generators and states

Many states have gone back on their contracts with renewable power companies and have sought reduction in tariff.
Long-term power purchase agreements (PPAs) between generators and states could soon go away. The power ministry is planning to rework the PPA regime to address issues of states not honouring the pacts and, at times, reneging on the contract.


PPAs are typically of 25-30 years duration. The ministry is designing a policy paper to dwell on the alternative for long-term PPAs. The policy will also address the issue of cost escalation within the contractual clauses laid down by PPAs.


In his submission to the parliamentary standing committee on energy, the power ministry secretary said: “PPAs are a big issue. Generators enter long-term PPAs because no bank or financial institution will finance the projects if there is no long-term commitment for sale of power. But the issue is that prices get fixed but cost escalation keep

happening, and technology gets depreciated.”


He said most of the state-owned power distribution companies (discoms) faced the conundrum of cost revisions due to market forces or technological changes but were tied within the terms of the PPA.


“Discoms can’t be held responsible for cost escalation in power. If tariff increases, then it’s up to the discom whether it wants to buy that power or not. If cost of power increases, why the discom should suffer?” said the secretary.


The move comes at a time when thermal power sector is facing stress due to non-payment by discoms. At the same time, a lot of states lately have reneged on their contracts with renewable power companies, including seeking reduction in tariff.


During this decade, no state except Kerala has issued any new long-term PPA for procuring from private thermal power generators. The existing PPAs of private power generators is also under a cloud. Of the 40,000 Mw of stressed power assets in the country, close to 11,000 Mw are the ones with no or inadequate PPA. This has also caused build-up of non-performing assets for lenders.


Senior sector executives said policymakers were looking into ‘market-based economic dispatch’ of power. The approach suggests dispatch of power based in demand available in the market.


The Central Electricity Regulatory Commission (CERC) has studied several models across the globe to support a market-driven electricity supply model.


“States should be willing to take up such an initiative. A market-based approach would lead to overhaul in the tariff design. Coal supply allocation would also need to change accordingly,” said the executive.


Given the increasing share of renewable energy in the energy mix and reducing operating ratio of thermal power plants, several experts believe a dynamic market supports a vibrant energy mix.


The average plant load factor (PLF) of thermal power generation units is on the decline in the country. At 57.61 per cent, PLF in January touched a five-year low. PLF during 2019 witnessed double-digit slump during most months of 2019, Business Standard reported recently.


The PLF decline of thermal units over the years corresponds to the increasing share of renewable energy sources in the overall energy mix during the same period. However, the current fall in PLF is also due to a drop in electricity demand in the country. During January-December 2019, the growth in electricity demand was meagre 0.28 per cent, the lowest since 2014.


The standing committee report stated: “When the committee pointed out the shortages (power demand), the ministry had stated that it has been observed that despite availability of adequate power in the country, there is a marginal mismatch in demand and supply of power in various states/Union Territories.  The ministry stated that this demand-supply gap is constraints in sub-transmission and distribution network, commercial reasons, financial constraints of the state utilities (discoms), etc.”

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