In a key development, the Ministry of Power (MoP) has recently issued a concept note on the pooling of tariffs of efficient coal and gas-based power generating stations that have completed 25 years or more. Explaining the rationale for the policy move, the MoP has noted that there are numerous factors that have contributed towards the conceptualisation of this draft.
A key reason for the proposal is that the states, specifically those with surplus power, have approached the MoP to relinquish their share of power from central generating stations after a period of 25 years. Many states and discoms, due to commercial considerations, are exiting power purchase agreements (PPAs) with costlier plants, which are mainly non-pit head coal stations and gas-based generating stations, while reatining PPAs with cheaper plants. The MoP notes that this selective approach adopted by procurers risks the shutdown of significant thermal capacities, especially gas-based capacities.
Another reason for the proposal is the need for grid load-balancing. Greater integration of renewable energy is expected to impact the grid stability due to intermittency and supply-demand imbalances associated with it, thus requiring energy storage systems, which may take a few years to develop. The Central Electricity Authority (CEA), in the draft National Electricity Plan 2022, has estimated a requirement of 51.5 GW of five-hour duration (about 255 GWh) battery energy storage systems and 18.8 GW of pumped storage projects by 2031-32 for integrating the planned renewable energy (333 GW of solar and 133 GW of wind) into the grid. Until then, the MoP notes, ensuring continued operation of older plants that have already completed 25 years of operation, will be in the interest of the grid, taking care of balancing needs.
Finally, the MoP notes that there are many older, vintage plants that have operated beyond 25 years but are still running efficiently to their full capacity with the help of better operations and maintenance practices. Given the long gestation period for the construction of new thermal capacities and the need for constant power supply, a proposal has been formulated to continue operating existing efficient thermal capacities and deferring capex to construct new facilities.
Proposed methodology and approach for a common pool
According to the MoP, a genco-wise common pool of 25 years-plus stations will be created. When any station of a genco completes 25 years of operation, it shall be automatically added to the pool.
For the requisition of power from the common pool, a willing state or discom can approach the genco through a letter of intent (LoI) for requisition. The LoI should include the quantum of power to be procured, along with the procurement period. As per the note, the minimum period from the common pool would be five years.
The willing state or discom would be required to enter into a PPA for the same and then the concerned states or discoms shall be allocated (in percentage terms) a share from the common pool. Although the station-wise percentage allocation will be the same as that from the common pool, it may change owing to addition or deletion of units to the common pool with time.
Power from the pool that has not been claimed by any willing beneficiaries would remain at the disposal of the genco and can be sold alternatively through power exchanges. The existing coal linkages and supply of coal as per the present Fuel Supply Agreement provisions at the notified rate shall be continued and allowed for the balance power available with the generating company.
The total capacity charge of the pool will be worked out as the sum total of the capacity charges of each station in the pool as per the extant tariff regulations. Then a uniform capacity charge in (Rs million per MW) will be determined as per the percentage allocation and the total capacity charge of power from the common pool and shall be billed to states and discoms.
States/discoms would be billed a uniform-weighted average pooled energy charge determined by station-wise monthly energy charge rate (ECR) and the final implementation schedule. Station-wise monthly ECR shall be computed as per the extant Central Electricity Regulatory Commission (CERC) Regulations. Hence, the total ECR shall be the aggregate of the total schedule of the beneficiary from each station of the pool, multiplied by the uniform weighted average pooled ECR.
The gencos would aim to bundle renewable power as per the scheme for flexibility in generation and scheduling of thermal/hydropower stations through bundling with renewable energy and storage power notified in April 2022 for the coal-based generating stations of the common pool. The tariff for beneficiaries of renewable power shall be less than the station-wise ECR. Generating units are required to share operational gains, if any, with beneficiaries as per the provisions of extant CERC tariff regulations. However, since hydropower plants have zero marginal cost of generation and a useful life of 40 years and beyond, they will not be included in the common pool. Similarly, merchant plants too are excluded from the common pool as their tariff is not determined under Section 62 of the Electricity Act 2003.
Gencos will be required to provide information on all stations that have completed 25 years, and the process of power scheduling and despatch from each station of the common pool shall be governed by the CERC. Further, stations in the common pool are to necessarily participate in all regulatory mechanisms operated and coordinated by the National Load Despatch Centre and regional load despatch centres.
The way forward
For implementing the proposed pooled tariff mechanism, the government is looking at modifying regulation 17 of the CERC Tariff Regulations 2019, in which a special regulatory provision was introduced by the CERC. As per regulation 17, states/discoms have an option to either retain or exit from PPAs with stations that have completed 25 years from their date of commissioning. Considering this regulation and the subsequent MoP guidelines, which were issued in March 2021, many states and discoms are exiting PPAs with costlier plants. The MoP is thus considering the withdrawal of unilateral rights for states and discoms and modifying regulation 17 for operationalisation of the common pool.
According to the CEA’s “Optimal Energy Mix by 2030” report, a requirement of 250 GW of coal-based generation capacity and 25.3 GW of gas-based generation capacity is projected for meeting the peak requirement of 340 GW. Thus, to fulfil future demand, there is a need to explore procurement from efficient thermal power plants. The pooled tariff proposal is currently in its draft stages and is awaiting comments from stakeholders. If implemented, it is expected to have a significant impact on power markets, helping discoms tap efficient sources of power from older stations with efficient operation practices.