Encouraging Emission Control

CERC proposes a compensation mechanism for ECS installation

The Central Electricity Regulatory Commission (CERC) recently issued a staff paper on a mechanism for compensation to competitively bid thermal power plants (TPPs) for complying with the environment ministry’s revised emission standards. The staff paper, notified in September 2020, aims to initiate discussion and seek inputs from stakeholders regarding the compensation mechanism and is not binding on the commission or the stakeholders. Private power producers have for a long time been seeking the formulation of a mechanism to fix a provisional tariff in order to provide visibility on the recovery of the costs incurred for the installation or upgradation of emission control systems (ECSs). It must be noted that the installation of ECSs such as flue gas desulfurisation (FGD) systems, electrostatic precipitators (ESPs), selective catalytic reduction (SCR) systems or selective non-catalytic reduction (SNCR) systems requires substantial capital and operational expenditure, which impacts the tariff fixed under the power purchase agreements (PPAs).

The capex is funded in the form of debt from financial institutions, which seek regulatory approval for the recovery of this capex through tariff. In several petitions filed before the commission, the regulator has stated that the installation of an ECS constitutes a “change in law” event with respect to PPAs, and that the gencos should, therefore, be compensated. Now, through the staff paper, the CERC proposes to have a uniform mechanism for compensation and determination of the impact of ECS installation on the tariffs of competitively bid TPPs covered under Section 63 of the Electricity Act, 2003.

The proposed compensation mechanism would apply only for the operation period of the plants in accordance with the provisions of the PPAs, such that the parties affected by the change in law are restored to the same economic position as if the change in law had not occurred. The compensation during the operation period will be based on the impact on the genco due to additional capex, operations and maintenance (O&M) expenses, interest on working capital (IWC), expenses due to the consumption of reagents, and auxiliary energy consumption.

Impact due to additional capex

The expenditure on ECS installation is an additional capital expenditure for gencos, and comprises the base cost of the ECS, taxes and duties, interest during

construction (IDC) and miscellaneous costs. This additional capex should be serviced by way of an increase in the monthly tariff, spread over the useful life of the ECS through supplementary capacity charges, including depreciation and cost of capital employed for the ECS.

To calculate depreciation, the useful life of the ECS is a key parameter. Since the minimum lifetime of a thermal generating station is taken as 25 years, the useful life of the ECS is considered the same, in line with the other major plant equipment. However, many generating stations have already been in operation for a few years and would have less than 25 years of useful life left. Therefore, when considering the useful life of an ECS as 25 years, the useful life of the corresponding generating station would subsequently be extended. The salvage value of an ECS has been determined as 10 per cent upon completion of its useful life.

Meanwhile, the cost of capital employed can be taken at the weighted average rate of interest on loans raised by the generator, or the marginal cost of the lending rate of the State Bank of India (for a one-year tenor) plus 350 basis points as on April 1 of the year in which the ECS is put into operation, whichever is lower.

Additional O&M expenses and IWC

The operation of an ECS would involve additional recurring expenses for O&M and IWC towards maintaining the stock of reagents, receivables, and other operations. These need to be reimbursed to the genco on a monthly basis in order to restore it to its previous economic position. The staff paper proposes that additional O&M expenses for the first year may be allowed at 2 per cent of additional capex for the installation of the ECS, admitted by the commission after a prudence check. For subsequent years, the first year O&M expenses may be escalated at 3.5 per cent. These expenses may be reviewed based on the actual O&M expenses of ECSs installed at various generating stations.

Additional expenses due to reagent consumption

ECSs require certain reagents, and so the Central Electricity Authority (CEA) has specified norms for specific reagent consumption (SRC). However, these SRC norms are applicable at the generator terminal, that is, for gross generation from the generating station. Accordingly, to arrive at the cost of reagents per unit of electricity generated ex-bus of the generating station, the cost of reagents at the generator terminal will be grossed along with the auxiliary energy consumption of the generating station after the installation of the ECS. The same may be included as a supplementary energy charge rate (SECR).

Additional auxiliary energy consumption

The ex-bus energy charges quoted by  gencos may undergo changes due to additional auxiliary energy consumption on account of ECS installation. However, after ECS installation, although the fuel cost for generating one unit generator terminal would remain the same, due to the increase in auxiliary energy consumption, the fuel cost for generating one unit ex-bus would increase. Accordingly, all four components of a quoted tariff – non-escalable capacity charge, escalable capacity charge, non-escalable energy charge and escalable energy charge – would need to be increased by a specific factor.

Payment of supplementary charges

Based on the impact of the above factors, the supplementary annual capacity charges (SACC) and monthly SECR to be paid to gencos by procurers will be calculated using a set of formulae proposed by the commission. The SACC pertain to the whole capacity of a plant and will be divided according to the PPA quantum of the respective procurers.

The commission notes that a power plant may have more than one concurrently running PPA for different contracted capacities, of different tenors, with different start/end dates. Often, the term of a PPA may end earlier than the useful life of the corresponding generating station. In such cases, a procurer would be liable to pay compensation only for the duration of its contract, commensurate with its contracted capacity. Further, the compensation for the installation and operation of the ECS should be available to the gencos from the date of operation of the ECS.

The way forward

The provisions proposed by the CERC for determining compensation for gencos are indeed progressive and augur well for the industry. However, there are certain issues that could be delved into further by the commission. For instance, Prayas Energy suggests that the compensation payable to gencos should be subject to timely adherence to environmental norms as per the schedule prescribed by the CEA and within the deadline set by the ministry.

It further proposes that the supplementary capacity and energy charges should be paid to a generating station only after it produces a certificate issued by the pollution control board, validating that the environmental norms have been complied with for a minimum threshold duration (say 95 per cent of the period for which the plant has been operational and has met the norms). Further, the current CERC-proposed mechanism only covers specific ECS technologies such as ESP, FGD and SCR, but not other options. For instance, certain plants may be able to meet the emission norms by using better qualities of coal, which would not lead to additional capex but would affect the variable cost of generation. The CERC should permit avenues for meeting the norms by ways other than ECS installation and devise ways to reimburse costs in such cases as well.

To conclude, the CERC must take steps to expedite the finalisation of guidelines for compensation, as that would provide greater visibility to gencos on cost recovery and prompt them to accelerate the implementation of ECSs. n

Neha Bhatnagar

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