How coal-power policy has unplugged independent producers

Pratim Ranjan Bose Guwahati | Updated on March 10, 2020

Between 2009 and 2014, India added 66 GW coal-power. Nearly half of the added capacity was stranded for want of fuel or PPA   -  THE HINDU

Over the last decade, India’s coal-based power generation capacity increased by nearly 2.5 times to 198 gigawatt (GW), courtesy an investment rush by the private sector, which now controls 47 per cent of the total coal-power capacity. The share was less than nine per cent in 2009.

Higher stakes should ensure more favourable terms for the private sector. But the reverse happened.

According to the Association of Power Producers (APP), Independent power producers (IPPs) are facing a double-whammy in the form of competitive bidding both for fuel purchase and long-term electricity sales to distribution utilities (DISCOMs).

In contrast, the public sector, led by NTPC, gets fuel at the price notified by Coal India (CIL) and sells electricity on a “cost-plus” basis to DISCOMs.

In a petition before the Delhi High Court, on February 4, the APP said that such discrimination is not merely against the original policy promises, but also against the November 2018 recommendations of a High-Level Empowered Committee, headed by the cabinet secretary.

The petition was filed challenging the constitutional validity of recently held linkage auction under the Scheme for Harnessing and Allocating Koyla (coal) transparently in India (SHAKTI) for utilities that did not have a PPA. Failure to secure a PPA within a stipulated time will cost IPPs the bank guarantee.

Mess created by UPA

The auction witnessed lukewarm response. Of the roughly 12 million tonnes offered by CIL, about half remained unsold. The rest fetched an average premium of 8.5 per cent. SHAKTI auction is not new and is part of the Modi government’s effort to rescue power plants which were stranded without PPAs or fuel supply agreements (FSAs).

The mess was created by the UPA government that went hyper-active in attracting private investment in coal power during 2005 and 2007. The National Electricity Policy came in 2005. In 2006, a Tariff Policy mandated that beginning 2011 all PPAs must be entered through tariff bidding.

In 2007, the National Coal Distribution Policy (NCDP) promised that, as a monopoly, CIL would meet the entire fuel requirement of the power sector on priority, at a notified price. CIL was even mandated to import coal, if necessary, and blend with its own produce.

The policy was correct in principle as it visualised a level playing field in accessing fuel and competition on electricity tariff. Private investments happened based on Letter of Allotment, a preliminary promise to offer fuel. But CIL was never ready to meet this huge expectation.

The government became aware of the mess by 2008. But, instead of alerting investors and banks, it stopped holding meetings for granting LoAs. And, by 2013, tried a face saver by bringing a Presidential decree on CIL to give coal.

CIL drafted the FSA that allowed it to get away by offering barely half the total requirement. This created different classes within Gencos depending on the fuel availability and the resulting impact on the cost of generation.

Private sector suffers

But that’s just half the problem. The mad rush for setting up power stations coincided with an era of scams. Some power plants came up without any assurance for coal but armed with PPAs at questionable rates. Between 2009 and 2014 India added 66GW (gigawatt) coal-power. Nearly half of the added capacity was stranded for want of fuel or a PPA.

With another 50GW capacity under implementation, supply was far outstripping demand, DISCOMs saw the opportunity. Instead of entering into long-term PPAs, they focussed attention on extracting better value through short-term purchases.

The trend continues. Over the last five years, India has added a little over 50GW coal-power capacity. But only 4.5 GW electricity was sold through long-term PPAs entered through tariff bidding. Rest are on short-term sales.

Capacity utilisation (PLF) declined from 84 per cent in 2009-10 to 55 per cent. Ideally, generators should expect higher tariff for operating at lower PLF. But over-supply of coal-power and increasing supply of renewables added to their misery. Tariffs remain low across platforms.

The crisis did not touch the State sector as these units are passing on the higher operational cost on account of low utilisation to the DISCOM.

Forced renegotiating PPAs?

The APP alleges that while SHAKTI auctions are intended to ease pressure on IPPs, it is exploitative in nature.

The exploitation is evident in the auction of linkage for IPPs which have PPA but no FSA. Here, the bidders are asked to offer discounts on tariff to get fuel. Two such auctions have already been held with discounts ranging up to seven paise per kilowatt-hour (kWh) for the entire 25-year span of the plant.

In other words, the Centre has forced renegotiation of legally valid contracts (PPA). In a bad precedence, some IPPs even agreed to this. The APP didn’t raise the issue either in its petition.

Published on March 11, 2020

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