Flicker of hope after conflicting signals

After months of conflicting signals from power sector regulators and state governments that were pushing for expansion of renewable power capacity but were not approving tariffs or signing power purchase agreements (PPAs) for auctions that had been concluded, a flicker of hope has come from Karnataka. It was more than visible at a recent climate finance conference in New Delhi that saw many renewable energy company executives meeting over dinner. The general impression was things would change henceforth and states would be more willing to abide by contracts and commitments.


It is not that the road for stuck PPAs has suddenly been cleared but with Karnataka asserting its powers under Section 108 of the Electricity Act, other states, too, can take this route to enforce commitments made during the bidding process. Section 108 allows the central and the state governments to issue directions to regulatory commissions in matters of “policy involving public interest”.


Worried that the investment climate for renewable energy was being impacted by stranded PPAs, the Union Ministry of New and Renewable Energy in August wrote to seven wind energy producing states to ensure that PPAs signed at higher tariffs were approved by state regulators and duly honoured by their distribution companies.


Under the Karnataka government directions to the Karnataka Electricity Regulatory Commission (KERC) last month, PPAs for wind power projects totalling 270 Mw that were commissioned prior to March 31, 2017, would be approved at feed-in tariff set by the regulatory commission in February 2015 which was Rs 4.50 a unit (kilowatt/hour). Projects that were likely to be commissioned prior to March 31, 2018, and that add around 1,500 Mw, would get Rs 3.74 or the tariff approved by KERC in September.


The problem was that the September order bringing down the tariff was applicable to “all new wind projects, PPAs for which are entered into and approved by the commission” after the issue of order or prior to the order but were not approved by the state commission. The KERC order was categorical in noting that periodic upward revision of tariff, especially for wind power, could no longer be taken as the “norm” for promoting the sector. Rather, time was ripe to promote competition in the wind power sector.


The regulator was clearly looking for excuses when it pointed out to the August 2016 order of the Gujarat Electricity Regulatory Commission that revised the wind power tariff downward to Rs 4.19 a unit from the earlier Rs 4.23 and the March 2016 order of the Andhra Pradesh Electricity Regulatory Commission that reduced the wind power tariff from Rs 4.70 to Rs 4.25 per unit. Besides, in the bids called by the Solar Energy Corporation of India, the lowest tariff quoted was Rs 3.46.


KERC had said the mid-term tariff revision was to ensure that consumers get the benefit of lower cost of wind power generation and that adoption of efficient and improved technology is incentivised. Interestingly, even the Karnataka government cited promotion of renewable energy as the public interest cause while issuing directions to KERC. It can, however, be argued that higher tariff need not be in the interest of the “public” at large. At the same time, encouraging renewable energy has a longer-term impact of reducing carbon emission and creating conducive investment environment for sustainable development.


During the KERC hearings, a major point of argument was that why should the wind tariffs in Karnataka require regulatory approval in projects where procurement of renewable energy — except from waste-to-energy plants — is only through competitive bidding conducted under a notified framework. More so when the Central Electricity Regulatory Commission did not determine the wind tariff for FY18 after it was decided to determine project-specific tariff in line with the 2016 Tariff Policy. In any case, the idea of regulatory clearance for tariffs arrived through bidding in itself runs contrary to the transparency attached with auction. Besides, the approval for cost of purchase of electricity is intrinsic to the regulatory approval for the annual revenue requirements for distribution companies, and hence a separate approval for tariff-based bids was not necessary, it was argued.


In a matter relating to the Terms and Conditions of Tariff Regulations, 2014, CERC said the regulations cannot be applied for revision of tariff adopted under Section 63 of the Act “as this will defeat the purpose of the Act which provides for two distinct processes for determination of tariff. Further, such modification to the draft regulations may vitiate the sanctity of the bidding process and may allow generating companies to approach the commission for modification of tariff adopted under Section 63 of the Act, which may also be against the commercial interest of the procurers”.


For the record, Section 63 says the regulatory commission will “adopt the tariff if such tariff has been determined through transparent process of bidding in accordance with the guidelines issued by the central government”.


Karnataka’s decision to stick to the agreed feed-in tariff — which guarantees developers a certain rate and is not based on tariff-based auction — indicates that there can be different dynamics to project costs and competition every time new capacity comes up or is put out for bidding. No two projects can be assessed on the same parameters. Yet, it is important to benchmark costs and see that tariffs reflect it, especially when power distribution companies have seen little gains from the government’s debt restructuring programme.

Power play
  • KERC in its Feb 2015 order approves wind tariff of Rs 4.50 a unit (kilowatt/hour)
  • Bids called by Solar Energy Corporation of India throws up lowest tariff of Rs 3.46
  • In Sep 2017, the regulatory commission brings down wind tariff to Rs 3.74
  • On Nov 10, 2017, Karnataka government issues order under Section 108 of Electricity Act
  • Section 108 allows the government to issue directions to regulators in public interest

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel