Temporary Relief

Pilot scheme offers a short-term solution to financially stressed thermal power assets

One of the biggest issues faced by the thermal power industry has been subdued demand, primarily due to the lack of power purchase agreements (PPAs) being signed by discoms. In order to provide some relief to the stressed thermal assets, the power ministry recently launched a pilot scheme for centralised procurement of 2,500 MW of coal-based capacity for a period of three years through the competitive bidding process. Industry experts share their views about the impact of this scheme on the power sector…

What is the likely impact of the MoP’s pilot power procurement scheme on the sector?

Rajesh Ivaturi

Rajesh Ivaturi Partner,
Deloitte

The MoP’s pilot scheme is an ambitious step to help stressed power assets by relaxing power purchase guidelines and thus make additional power available to the national grid. This initiative will bring great

relief to the financially distressed power generators that have commissioned their plants but have not been able to despatch power due to the non-availability of PPAs. Currently, about 20 GW of coal-based capacity has been classified as stressed due to the lack of PPAs. It is expected that many of these players will

  • New capacity addition has slowed down considerably.
  • There is a review of older and inefficient power plants and many of them could be decommissioned in the coming years.
  • Solar capacity addition has not kept pace with ambitious plans.

With a combination of these factors, there could be a silver lining emerging for coal-fired generators in the coming three to five years.

Sabyasachi Majumdar
Senior Vice-President,
ICRA Limited

Sabyasachi Majumdar

This scheme is a positive development for independent power producers (IPPs) as it will provide some visibility on PPAs, given the lack of progress in signing long-term and medium-term PPAs over the past three to five years. Moreover, the state distribution utilities may follow with fresh bids in a similar manner, given that the scheme appears favourable to distribution utilities, in view of the single-part nature of tariff with fixed capacity charge being kept nominal at Re 1 per unit and the minimum contracted off-take at 55 per cent of the contracted capacity. The scheme can only provide partial relief to the IPP segment, given the medium-term nature of PPAs proposed and the significantly large coal-based capacity, about 26 GW, without any long-term PPAs. About 60 per cent of this capacity is operational and the balance is under implementation.

 

 

Kameswara  Rao  Partner, Energy and Utilities, Pricewaterhouse Coopers

Kameswara Rao

It is a case of the glass half-full, that is, while it helps generators maintain operational capability and meet some of their loan obligations, it does not solve the underlying issues that stranded assets face. On the positive side, centralised procurement undertakes the obligation of entering into a contractual agreement with state utilities. The successful bidders of projects without coal linkages (the Shakti scheme, tendered last year) are still working out the regulatory and PPA provisions at the state level. This, and the direct credit risks, will be avoided in this pilot scheme. The downside is the fuel price risks and volume risks that generators will continue to carry in this structure. Although, as the contracts are of a shorter term now, it will be possible to make reasonable assumptions and hedge against them.

 

 

Ashish Singla Senior Consultant, Energy Practicez, ICF

Ashish Singla

It is a great move for the power sector. Medium-term market purchases have for long been left to mutually negotiated contracts between the buyer and the seller. There were no standard terms and conditions, which discoms (or buyers) could rely on. Non-standard contracts created confusion and could not be benchmarked against each other. A standard structure for medium-term procurement contracts will introduce transparency in procurement, provide clarity in contracting terms and encourage competition between different sellers. This will make procurement faster and hassle-free for discoms. It is likely that prices in the bilateral market, which were always at a premium in short-term markets, will reduce and converge with prices in the short-term markets.

 

 

What is the near to medium-term outlook for discom power demand? What is a lasting solution to resolve the issue of limited power procurement bids?

Rajesh Ivaturi

The discoms’ power demand is expected to grow at a rate of 5-6 per cent over the next few years. In the past five years, the compound annual growth rate of power demand has been 5 per cent and in the short and medium terms, the growth rate is expected to increase marginally. While there are several growth drivers, discoms are still struggling to operate efficiently and manage their financials. Most of the discoms are still reeling under huge losses and at the national level, the gap between the average cost of supply (ACS) and the annual revenue requirement (ARR) is still in the range of 30-40 paise per unit, while aggregate technical and commercial (AT&C) losses are in the range of 21-22 per cent. We must admit that some of the government schemes are helping discoms to operate efficiently and release the latent power demand in the country. For example, the Ujwal Discom Assurance Yojana is helping discom financials through debt restructuring, AT&C loss reduction and bridging the ACS=ARR gap. The Power for All and Saubhagya schemes are some of the other initiatives that will take the country towards 100 per cent rural electrification and last-mile connectivity. Saubhagya is expected to create an additional demand of 28-30 GW annually. All these initiatives are directionally great and will have a positive long-term impact. However, in the near term, we do not see any major uptick in industrial and commercial demand and an immediate revival of discoms’ financial health. Without that, the overall power demand from discoms is not likely to see a significant increase. We have seen that in the past four years, only 8,000 MW of bids for long-term power procurement have been invited by discoms and of this, PPAs have been signed for only a small subset. This trend is likely to continue for the next two to three years as discoms currently have quite a few options, especially in the short-term market, to meet their demand.

One of the reasons for discoms not preferring long-term power procurement is the issues related to overcontracting and the obligation of fixed charge servicing for a very long period (20-25 years). We may not see a strong uptick in the new bids for long-term power procurement in the future. With the steady increase in power demand and the expiry of existing PPAs owing to the retirement of old plants, we may see some new bids coming into the market. By end- 2018, 40 GW of plants will have reached a life of more than 25 years and many from this fleet may be due for gradual retirement. This will encourage some bidding activity for short- to medium-term supply and the percentage of long-term PPAs may gradually come down in the portfolio of discom PPAs. This is a structural shift that the power market is likely to witness. Accordingly, generation utilities may look at developing a portfolio of long-, medium- and short-term contracts.

Kameswara Rao

The medium-term outlook for demand remains promising, given the reliable trend in the growth of per capita consumption of 5-6 per cent per annum. The growth in the number of consumers on top of this gives an added boost to demand. The robust efforts under the Saubhagya scheme, which aims at 100 per cent household electrification, has seen the addition of 1 million households in each of the past four months. The nature of the demand is changing too, especially in the more urbanised southern and western regions. It is showing considerable peaks in demand, and this is exacerbated by generation from a higher percentage of renewable energy capacity. So, in these states, system operators do not just need baseload generation, but suppliers that are able to provide flexible output. The reluctance of utilities to procure new power capacity reflects this. In some states, it is the need for a different class of generators and the need for procurement models that allow it. In other states, it is just an issue of affordability and the need for tariff reforms.

Ashish Singla

India’s electricity demand is expected to see higher growth (of around 7.5 per cent) over the next two to three years. This is primarily expected to be driven by the government’s initiative to supply power to all households (Saubhagya scheme and Power for All). Significant growth is expected to come from Uttar Pradesh, Bihar, Jharkhand, Madhya Pradesh and Odisha. India has significant latent demand, which is getting captured. However, this may lead to a situation where discoms accumulate higher financial losses. Therefore, it is important to note that most of the country’s latent demand sits with consumers who have the least willingness to pay for discoms’ power supply. In the last few years, there were no (or limited) long-term procurement bids (under Case 1 and Case 2). Most of the states relied on NTPC to set up generation plants to meet the increasing demand requirements (under the MoU NTPC had signed with states a few years back, to set up plants for the states’ discoms). Setting up coal plants is a lengthy process and it takes up to five years for a greenfield plant. To bring clarity and provide proper signals to power developers, states need to do (and publish) long-term (20-year) procurement bids. This would give the market proper signals as to when the states would need new capacity. Additionally, states should only procure power through competitive bidding and the past MoUs should be nullified. Another aspect is that states now require generation during specific times in a day. New contracting structures like peaking contracts should be brought in to meet the changing system requirements.

GET FREE ACCESS TO OUR ARTICLES

Enter your email address