Reducing the cost of power has been a key priority for the present government. On many occasions in the past, the government has reiterated its intention of providing electricity at affordable prices. It wishes to do this by improving the efficiency of supply and passing on these benefits to the consumers. As another step in this direction, the government recently announced guidelines for short-term power purchase. Power Line takes a look at these guidelines and the likely impact they will have on the sector…
Short-term power market
The short-term power market has an important role to play in the power sector. It provides an avenue of meeting the peaks and troughs in power demand for utilities as well as industrial consumers. The generating companies not having power purchase agreements (PPAs) for part or full capacity are able to sell their power through the short-term power market. Power that is not scheduled can also be sold through this route. Short-term power is traded through the two power exchanges, trading licensees, as well as directly through bilateral trading between discoms. Transactions through the deviation settlement mechanism (DSM) are also a part of short-term power trading. The volume of short-term power transactions stood at around 99 BUs in 2014-15. More than one-third of this was through licensed traders, around 30 per cent through power exchanges, and 16 per cent was bilateral trading between discoms. At present, the short-term power market is around 11 per cent of the total power generated in the country. In 2015-16 (as of February 2016), the short-term trading volumes stood at 106.6 BUs.
Electricity transacted through traders and power exchanges accounted for 64.6 BUs of the total short-term transactions during 2014-15. The transactions through the two power exchanges – Indian Energy Exchange (IEX) and Power Exchange India Limited (PXIL) – were 28.46 BUs while DSM transactions stood at 19.40 BUs during 2014-15.
The bilateral trading segment registered a negative growth of 1.57 per cent in its volumes traded in 2014-15 when compared to 2013-14, decreasing from 35.11 BUs to 34.56 BUs, although over the years, the volume traded through bilateral trading has shown healthy growth. The volume of electricity traded increased at a compound annual growth rate (CAGR) of 7.88 per cent between 2008-09 and 2014-15.
Between December 2013 and December 2015, the weighted average price of electricity transacted through traders was Rs 4.30 per kWh. It was the lowest in June 2014, at Rs 3.92 per kWh and the highest in October 2015, at Rs 4.70 per kWh during the period under consideration. The price of electricity during peak periods was the lowest in April 2015 at Rs 3.05 per kWh whereas the off-peak price was at its lowest in December 2015 at Rs 2.92 per kWh.
The volume of electricity transacted directly between distribution companies (discoms) increased at a CAGR of 11.04 per cent between 2010-11 and 2014-15, reaching 15.58 BUs in 2014-15. Its share in the total short-term market increased from 13 per cent to 16 per cent in the past five years. This trend could be due to the increasing interactions among discoms through various workshops and forums. With the knowledge of available sources of short-term power, the discoms then directly negotiate prices and trade short-term power among themselves instead of involving a trader to finalise the terms of the contracts. As per Sabyasachi Majumdar, senior vice-president, ICRA Limited, “Discoms prefer the bilateral PPA route since it gives certainty of power in terms of both price and quantum (more in terms of price). Most discoms prefer bilateral short-term PPAs, which are signed through mutual negotiation.”
Power purchase costs are estimated to form 70-80 per cent of the total costs of distribution utilities. The increase in fuel prices and capital costs of generation projects in the past few years has led to an increase in the power purchase cost of discoms. Further, short-term power procurement costs are a significant part of the power purchase costs of discoms. So, any reduction in short-term power purchase costs can have a direct impact on the bottomlines of the discoms, and ultimately the end-consumers.
New guidelines for power procurement through tariff-based bidding
On March 30, 2016, the government notified the guidelines for procurement of power for the short term (that is, for a period of one day to one year) by distribution licensees through the tariff-based bidding process using the national e-bidding portal. These guidelines have come into effect from April 1, 2016. Earlier, in May 2012, the government had notified guidelines for short-term procurement of power by distribution licensees through the tariff-based bidding process. The guidelines had provided that the government would examine and introduce a system of reverse auction through the e-platform within five years of the issue of the guidelines.
The new guidelines are expected to meet the following objectives:
- Promote competitive procurement of electricity by distribution licensees for their short-term demand (less than or equal to one year);
- Reduce the power purchase bill of discoms through a process of planned procurement based on transparent guidelines;
- Provide benefits to consumers;
- Facilitate transparency and fairness in procurement processes;
- Introduce a system of e-tendering and e-reverse auction.
The guidelines do not apply to power procured through the power exchanges or through the banking mechanism. They permit procurement by more than one procurer through a combined bidding process. In such a scenario, the procurers will have the option of conducting the bid process through an authorised representative.
The state electricity regulatory commissions (SERCs) will continue to play a key role in approving the short-term power procurement plan. The distribution utilities will be required to intimate their respective regulatory commission regarding the initiation of the procurement process. Also, prior approval of the SERC will be needed in case the procurement of short-term power exceeds the approved short-term power procurement plan.
Bids can be invited on a round-the-clock (RTC) basis or for different time slots as per the requirement of the procurer. Utilities may also give flexibility to the bidders to bid for a part of the tendered quantity.
The tariff to be quoted is a single tariff at the delivery point, including the capacity charge, energy charge, trading margin, point of connection charge applicable, and all taxes, duties, cess, etc. The delivery point for interstate transmission of power will be taken as the state/regional periphery of the procurer, while for intra-state transmission, it will be the interconnection point of the seller with the state or central transmission utility. No escalation of the tariff is allowed during the contractual period. In the case of power being supplied through an alternative source, any additional charges and losses due to the cancellation of the existing corridor and the booking of a new corridor will have to be borne by the seller.
DEEP e-bidding and e-reverse auction portal
The government recently also launched the Discovery of Efficient Electricity Price (DEEP) e-bidding and e-reverse auction portal for the procurement of short-term power by discoms. The portal can be accessed through the MSTC website. The government expects the portal to curb prices by introducing competition. It will also lead to transparency in power procurement by weeding out illegal transactions. The scope of this portal is expected to be expanded soon to cover medium-term and long-term procurement of power. The central government expects all states to put their power purchase data on the portal within one month.
The online e-bidding will comprise two parts – e-tender and e-reverse auction. All bidders will be required to submit separate non-financial technical bids and financial bids, that is, initial price offer (IPO) through the portal. Bidders can indicate their minimum threshold, which would be considered for allocation of power.
The bidders will be ranked as per their price bids and the highest bidder will be eliminated if the total quantity on offer is not less than or equal to twice the requisitioned quantity. The reverse auction, which will start within 120 minutes of opening the IPOs, will give the bidders the option of reducing their quoted tariff by one paise or its multiples and of increasing their quoted quantum by 1 MW or its multiples. The lowest tariff will be visible to all the bidders during the course of the reverse auction. After the e-reverse auction, the bidders will be ranked in the ascending order of tariffs quoted by them. The utility will procure power from the bidders in the order of their ranking, decided on the basis of the tariff quoted until the entire requisitioned capacity is met.
Bidders have the option to bid multiple bids from separate logins either from the same or different sources. Bidders also can quote their best prices and need not match or bid lower prices against the prevailing lowest bidder.
The new guidelines are expected to increase the activity in the short-term trading market. Over the past few years, there has been a lull in long-term power procurement and PPA signing by the discoms owing to their weak financial position. The low demand for power from discoms has led to a situation where power plants are forced to run at low plant load factors (PLFs). In such a situation, if the short-term power market picks up, it will provide an avenue to plants not having PPAs, or having only part-PPAs to sell their power.
Although short-term power transactions at the power exchanges follow the market mechanism and are fairly transparent, bilateral power trading has not been as transparent and is based on mutual negotiations. This is expected to change, given the new guidelines. “The new guidelines for short-term power will make it more transparent and will increase the competition. Hence, it will be beneficial for the utilities,” says Majumdar.
The e-reverse auction mechanism will also provide a common e-bidding platform with e-reverse auction facility and provide nationwide power procurement to a wider network, including industry stakeholders, to bring uniformity in the process of power procurement.
In the past couple of years, the government has had success with e-auctions, which has led to its increased adoption across sectors. The coal block allocation process through e-auctions saw very aggressive bidding, with players quoting negative bids to secure coal blocks. Similarly, the bidding route has also seen solar power tariffs coming down significantly to reach levels below Rs 4.50 per unit. This experience provides confidence that the competitive bidding route will help in lowering the cost of power. As per Majumdar, “We expect a lot of competition in e-auctions for short-term power. It could lead to bilateral trading tariffs declining by 50-60 paise per unit.”
In terms of the impact on the power exchanges, since they are not under the ambit of the guidelines, there is not expected to be any impact. However, since the exchanges and bilateral trading are complementary services, the price discovery for bilateral trading through e-auctions could have a slight impact on the trading volumes/prices on the exchanges.
Overall, the new short-term power purchase guidelines are another positive step by the government to boost the power sector. It will encourage discoms to go for short-term power procurement to meet consumer demand, rather than resort to load-shedding. It will also ensure that power is available at affordable prices to consumers. Already, three states – Andhra Pradesh, Kerala and Bihar – have reportedly announced short-term power procurement through this route. Together, the three states will purchase 1,000 MW of short-term power through the reverse e-auction process.