Power price spike: Ex NTPC boss has a solution | Economic Times

August saw a steep rise in the cost of power, which in the exchange market was at an average of nearly ₹5 for the month and ₹16-17 a unit during peak hours, even touching ₹20 a unit in some blocks. As a result, distribution companies (discoms) had to cough up huge amounts towards procurement of power. This raises the question of power procurement under long-term power purchase agreements (PPAs) vis-a-vis dependability on power from the market.Prior to the Electricity Act, 2003, generation and supply of power were controlled by the state and central authorities at rates determined by them. After the Act's enactment and the setting up of state regulators, not only has there been transparency, efficiency and accountability, but the foundation for growth and development of the sector was laid. With the delicensing of power generation, the private sector set up multi-crore generation projects across the country.GoI's enabling guidelines saw installed capacity going up from 104 GW till 2002 to 384 GW in June 2021. Today, India has 97 GW installed capacity in the state sector, 104 GW in the central sector, and 183 GW in the private sector. These guidelines also ensured that new thermal plants were set up on tariff-based bidding.GoI introduced two sets of tariff-based bidding: Case 1 and Case 2. Under Case 1, players could set up a power plant anywhere and sell power to any state or procurer. Under Case 2, land, fuel, water, power evacuation and environmental clearance were to be obtained by the procurer and the bidder could only sell power to the same procurer. Such projects were awarded to the lowest bidder under the oversight of respective state regulatory commissions.The states adopted a two-stage bidding process. This included a request for qualification (RFQ) documents and a request for proposal (RFP) from private players while ensuring full transparency. The PPAs were open to public suggestions before being duly approved by state regulators. Plant efficiency parameters improved significantly as competition ascertained the lowest fixed charge and improved the heat rate of a plant. The selected players are bound to perform as per the quoted efficiency for the entire term of the PPA, or face losses, which are not passed on to consumers.Tariff-based bidding guidelines also secured accountability. It transferred all risks to the bidder, both during the construction and operational phases. The quoted rates were fixed, with no scope for any capital expense enhancement once the bid was finalised. Under the cost-plus regime, any subsequent spendings on retrofitting, repair and maintenance, etc, are borne by discoms.During the term of the PPA, the fixed cost remains unchanged, while variable cost is subjected to any increase in the cost of coal and railway freight. These costs have, indeed, increased by 145% and 126%, respectively, since 2009. Variable cost is the factor of net heat rate and landed cost of coal. But it's the cost of coal that is passed through and is responsible for the increase in the cost of power. Unlike the cost-plus power plants, the net heat rate from bid projects is fixed for the entire life period. The plants set up in 2008-09 had fixed charges between ₹1.20 and ₹1.50 a unit. If these plants were to be installed today, the fixed costs would have been over ₹2.50 per kWh. So, the cost of power is not higher on account of PPAs.When it comes to buying power from outside the state, there are two aspects. One, the transmission charge at about 50-70 paise a unit. There is also limiting capacity for inter-state power transfer. Two, market instability, as evident in August 2021. Having a mix of intra-state power and inter-state generation, tied up both in equal proportion, is the best way for any state to meet its power demand. This will enable a state to meet its base power demand from its own sources in the state, without facing wide fluctuations in quantity and price of power in the market.The notion that discoms are paying fixed charges without procuring power does not hold much water. These fixed charges are equally being paid for all state and central plants on a cost-plus basis without procuring commensurate power, and shall also be required to be paid while sourcing outside power from the market on a bilateral basis.So, instead of finding fault with a well-laid process and PPAs, efforts should be made to arrange quality and cheaper coal by rationalising coal and freight charges. Coal is going to remain an indispensable source of power for the next 30-40 years. Without such a policy, discoms may become heavily dependent on the market for meeting base and peak loads, thereby triggering a spike in the cost of power.