Editorial January 2018

The discoms have been wary of entering into long-term PPAs for the past few years. This is due to several factors including excess generation capacity and the availability of power at lower rates in the spot market as well as subdued demand growth. Further, the burden of having to pay fixed charges despite not actually procuring any power from power plants under existing PPAs is exasperating for the already financially stressed discoms.

However, not entering into term contracts at all cannot be a solution, particularly with huge investments locked in 40-50 GW of stressed operational thermal capacity that is facing various issues, including lack of PPAs.

On the demand side, an upward push is expected with the revival of manufacturing and the improvement in rural electrification and last-mile connectivity, supported by the Saubhagya scheme.

At the Conference of Power Ministers held last month, the centre insisted that the states should schedule bidding for power procurement regularly, ensure faster signing of PPAs where bids have been closed, and honour the terms of contracts to maintain their sanctity. These issues are also relevant in light of the non-signing of PPAs by discoms, particularly in the wind segment on the grounds of the discovery of lower tariffs in other similar tenders. This adversely impacts investor confidence.

To address the issue of the slowdown in the signing of PPAs, the government has proposed aggregating power demand in various states through central agencies and procuring power from operational generation capacities (including stranded ones) through competitive bidding. Power plants that have unutilised capacity could offer discounts on fixed costs as the bid criterion. In a related development, PFC Consulting and PTC India recently entered into an MoU to explore opportunities to procure power from commissioned thermal plants stranded due to the lack of PPAs.

Given the government’s objective to provide 24×7 power for all by March 2019 as a basic service obligation for discoms, load shedding (except that due to technical faults) will become liable to penalties. Therefore, the demand projections and procurement strategies of discoms must be aligned to meet this objective. The discoms must annually prepare long-term load forecasts and sign PPAs of, say, five to seven years (to allay fears regarding getting locked up at higher rates under 25-year contracts) for baseload. The balance requirement, particularly to meet seasonal variations and peak demand, could be managed through the medium- and short-term market. In the long term, discoms may no longer have to worry about PPAs, with the transfer of existing PPAs to new retailers (with carriage and content separation) and the wholesale market. However, for now, there is an urgent need to put the sector in order and ensure that demand and supply are matched by the discoms through appropriate contracts.

 

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