7/18/2019 Discoms may suffer massive Rs 18,000 cr setback; here is how - The Financial Express

Discoms may suffer massive Rs 18,000 cr setback;

here is how
By: Anupam Chatterjee
New Delhi | Published: December 11, 2017 6:11:27 AM

If state-owned distribution companies (discoms) are mandated to put in place power purchase
agreements (PPAs) to meet 100% of their electricity “requirement”, they may end up shelling out
extra Rs 18,000 crore annually, whether or not they consume the extra power.

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Currently, it is mandatory for discoms to pay PPA-equipped generation units the capacity charge, roughly 40% of the tariff,
even if they do not have any use of the power.
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7/18/2019 Discoms may suffer massive Rs 18,000 cr setback; here is how - The Financial Express

If state-owned distribution companies (discoms) are mandated to put in place power purchase
agreements (PPAs) to meet 100% of their electricity “requirement”, they may end up shelling out
extra Rs 18,000 crore annually, whether or not they consume the extra power. Currently, it is
mandatory for discoms to pay PPA-equipped generation units the capacity charge, roughly 40% of
the tariff, even if they do not have any use of the power. The new policy could hit discoms while the
Uday scheme has helped them cut their interest costs by Rs 15,000 crore since November 2015.
The government’s rationale for the proposed 100% PPA policy seems to be to discourage discoms
from rushing to the expensive spot market to meet demand during peak hours. However, in the final
analysis, the additional cost of paying the capacity charge against unutilised PPA units could be
higher than the expenses incurred for spot market purchases. Industry sources said given the
subdued demand for power, financially stretched discoms might not have to evacuate all of the
additional electricity to be tied up with new PPAs: At some peak hours, the extra capacity might get
utilised, but during longer intervals, it might not.

According to industry sources, discoms need to tie up PPAs for about 30,000 mega watt (MW) of
capacity in order for all of them to have “PPAs to cover 100% of requirement” as stated by power
minister RK Singh in an event held by Assocham in late October.

Discoms have to pay ‘fixed charges’ as per the PPAs

to recover the costs of establishing and operating a
power plant. The annual fixed charge usually
amounts to about 10% of the installation cost of the
power plant. Going by the industry estimate of Rs 6
crore/MW as an installation cost, the fixed capacity
charge for 30,000 MW comes to around Rs 18,000
crore a year. The average national power purchase
cost is Rs 3.48 unit.

Discoms spent Rs 4.15 lakh crore in purchasing electricity in FY16, which was about 76% of their
total expenditure. To improve the discoms’ health, the Uday scheme intends to minimise the gap
X
between power supply cost and revenue earned; the gap has reduced to 42 paise/unit now from 58
paise in FY15.
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The situation can be graver for discoms in the contemporary scenario where the country’s installed
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generation capacity is twice its peak demand. This calls for discoms to occasionally back down from
evacuating power from contracted capacities when requirements are low. In FY16, Punjab backed

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7/18/2019 Discoms may suffer massive Rs 18,000 cr setback; here is how - The Financial Express

down from evacuating power from 3,457 MW, or 27% of its contracted capacity, ending up paying
Rs 3,000 crore to power plants operated by companies such as GVK Energy, L&T Power
Development’s NPL and Vedanta.

Power demand is always dynamic depending on seasonal consumption factors. For example, peak
power demand in Uttar Pradesh and Gujarat was 20,007 MW and 15,476 MW in September,
respectively, while the figures were up to 17,966 MW and 16,566 MW in October.

Currently, states buy power through bilateral arrangements and from the electricity exchanges at
spot market rates to cater to power requirements beyond PPA capacities. More than 4,630 million
units (MUs) of power were traded through the power exchanges in October. An industry expert, who
did not wish to be named, said the idea is also against the “economic wisdom” of increasing
competition in the power sector, as it may deter states from trading power at the energy exchanges.

Will 100% PPA policy help stranded power plants? Research firm Icra noted that only 1,400 MW
capacity was tied up through long-term PPAs over the past three years. About 20,000 MW of private
coal-based power plants in the country do not have any PPAs. However, even if additional 30,000
MW of PPAs are signed through this scheme, it does not guarantee any improvement in plant load
factor (PLF) of the coal power plants. Generation capacities would remain un-utilised when
electricity loads are not high, perpetuating the low-PLF scenario.

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