Following the reasonable response to the first round of medium-term power purchase agreement (PPA) auctions in 2018, which saw PPAs being signed for 1,900 MW of capacity, the Ministry of Power (MoP) recently issued guidelines for the second phase of the Pilot Procurement Scheme. This round is aimed at facilitating the procurement of 2,500 MW of power, for three years, from commissioned coal-fired plants that have not entered into PPAs. Power Line invited sector experts to comment on the impact of the scheme…
What are your views on Pilot Scheme-II?
T.N. Arun Kumar
A sizeable portion of the total installed capacity of independent power producers (IPPs) in India is not tied up through long-term PPAs, which precludes them from sourcing coal through the linkage route. A high-level empowered committee constituted by the government has estimated that of the total 40.1 GW of capacity pertaining to the 34 stressed projects, 21.6 GW is not tied up through PPAs. To this end, the government had first issued the Pilot Scheme for alloting 2.5 GW of medium-term PPAs. The scheme met with moderate success and PPAs for 1.9 GW of capacity were signed. The Pilot Scheme provided some relief to stressed power plants by improving their capacity utilisation and reducing their burden.
Pilot Scheme-II thus provides a good opportunity for competitive plants in the short to medium term. Due to the competitiveness in bidding and the short tenor of PPAs, the scheme may not generate substantial gains for power plants. However, the plants may expect cash flow stability as a result of the committed offtake.
It is a good price discovery mechanism to understand the market rate of medium-term contracted power supply, especially keeping in mind the changing dynamics of the market due to the influx of cheap renewables into the power market. It, moreover, provides a neutral platform for demand and supply matching for the national grid in the medium-term time horizon. This will help in passing on the benefits of a power surplus economy to end-consumers for whom load shedding is still a harsh reality (especially during the summer).
The Pilot Scheme is a good concept and has the potential to help in the utilisation of stranded capacities. The involvement of the nodal agency and aggregator makes the process smooth and sustainable.
Will the scheme bring substantial relief to stressed gencos?
T.N. Arun Kumar
The scheme has provided some relief to the stressed gencos, but not substantial. The under-subscription in the first round indicates that PPAs alone cannot improve the financial state of the plant. The scheme may help only a handful of stressed assets that have the capability to generate power at competitive rates. Moreover, the move is unlikely to help banks in resolving these stressed assets as the three-year PPA period seems insufficient. The lack of PPAs is one of the several broad issues that have crippled the plants under stress today. Issues related to coal supply, captive mine de-allocation and regulatory disputes also have a sizeable share in the problems pertaining to stressed assets.
It is quite likely that stressed gencos will get some relief from such medium-term contracts by increasing their plant load factor and recovery of fixed costs from the bidding discoms, but the question of coal linkages for many of the stressed assets still looms large.
What are the key issues and concerns regarding Pilot Scheme-II?
T.N. Arun Kumar
Tying up capacity through PPAs under the scheme may solve part of the problem for a stressed plant. Full coal availability under the linkage scheme is yet to be seen, given the recurring shortfall in Coal India Limited’s actual production vis-a-vis target in the past and Indian Railways’ logistics-related issues.
A relatively financially weak discom may prioritise the payment of dues to a genco with stronger bargaining power in terms of ownership, geographical presence, size of contracted capacity and competitive tariff. Also, a small capacity tie-up through the scheme with a weaker discom and advances in rake prioritisation for coal supply may escalate the debt level of a stressed plant due to higher working capital requirements.
The scheme addresses the issue of PPAs for stressed assets, but it does not have any plan of action for the lack of coal linkages. Other key issues include:
- The market rate of coal could be escalated due to increased demand.
- The stressed assets are all coal-based power plants. Increasing their utilisation will have adverse environmental impact.
- Government intervention to save the stressed assets is commendable, but it does set a wrong precedence for the financial prudence of private investment by bailing out such investments.
- These PPAs will impact the long-term tariff projections being made by the regulators and the utilities.
- Legal issues may arise with many IPPs approaching the National Company Law Tribunal for addressing non-performing assets .
Mid-term procurement and reverse auction can lead to unviable commitments by the gencos bidding for a project. The tenor of a project at three years is less for the viability of stressed assets. It should be at least five to seven years while a three-year period could be set for review of terms and conditions for ascertaining and addressing the viability of its future course. While for reverse auction, even if this mechanism is followed, competitive bidding should be done on the basis of the average power purchase cost of coal-based plants in the state as the floor price. And a base price (on the basis of the average fixed cost of coal-based plants) should be set to ensure that viability is maintained while bidding.
What is your outlook on long-term power procurement by discoms?
T.N. Arun Kumar
Except for the north-eastern states, the peak and base load deficit is not significant in other regions. Discoms already have a sizeable portion of their demand tied up through long-term PPAs. Further, the weak operational performance of discoms is a hindrance in the signing of new PPAs at remunerative tariffs. Discoms that have a relatively strong cash position find PPA tie-ups unattractive, given the easier and competitive availability of power on energy exchanges.
The peak electricity demand in India was 163 GW as on January 2019 and is projected to reach 226 GW at the end of 2021-22 and 299 GW at the end of 2026-27, according to the National Electricity Plan. A large portion of this is expected to be met by the plants commissioned by central public sector undertakings (PSUs) and state PSUs where PPAs are already in place. If the demand registers double-digit growth, discoms will have to contemplate higher power purchase through long-term PPAs.
Such initiatives will provide discoms with a middle path between a lifetime contract with a power plant and short-term buying from power exchanges. These instruments will give discoms incentives to put in more effort for accurate medium-term (three to five years) planning, which will eventually help in providing better quality of power to end-consumers. It provides a learning platform for discoms for matching load and generation, and gives them adequate time to for long-term planning.