Economy

Why is UP utility paying more for private power?

Anil Sasi New Delhi | Updated on September 10, 2011

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It is a deal that has raised quite a few eyebrows in the power sector.

A cash-strapped Uttar Pradesh Power Corporation (UPPCL) has signed a one-year deal with a private power generator in Gujarat, routed through a private power trader in the western State, to buy some 600 MW at around Rs 4.70 a unit. The price is well above the average of less than Rs 3 a unit on the power exchanges over the last two months.

The deal, in more ways than one, exemplifies the power trader-distribution utility nexus evident in many of the recent bilateral deals, analysts say.

That UPPCL has chosen to buy expensive power, which is being lifted since mid-June, suggests reasons could go beyond pure commercial considerations. Ultimately, consumers in Uttar Pradesh will be asked to foot the high tariff.

But industry players say this deal is no exception. Such deals are rampant in the over-the-counter (OTC) market, which comprises all spot market deals struck outside the power exchanges.

This is evident from the fact that the average electricity price discovered on the two operational bourses — IEX and PXIL – was Rs 3.47 a unit, well below the corresponding price of Rs 4.79 a unit for deals involving traders in 2010-11.

Apart from Uttar Pradesh, Punjab, Haryana and Tamil Nadu are among the States that are big buyers via the bilateral route involving traders.

Regulatory failure

According to analysts, such deals denote regulatory failure, since these clear deviations from the prevailing price trends often go unquestioned.

While the Central Electricity Regulatory Commission (CERC) has a market monitoring cell, they say there is effectively no intervention even when there are obvious price abnormalities.

In contrast, the US Federal Energy Regulatory Commission deploys about 900 personnel who work round the clock in a control room to keep a tab on the market prices.

“In case of deals involving electricity traders, prices are negotiated. Even though the trader's margin in such back-to-back deals is capped by the regulator, there is ample scope for price manipulation,” a power market expert said.

However, it needs to be noted that OTC prices are for monthly, customised contracts whereas the prices on the exchanges are for spot standardised contracts.

Published on September 10, 2011

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