In a key development, the Ministry of Power (MoP) has recently notified a scheme for pooling the tariffs of central sector-owned thermal (coal or gas) plants that are older than 25 years. These plants have expired power purchase agreements (PPAs), but they are technically fit to operate.
As per the scheme, the minimum requisition period for power from the common pool will be five years. A single-window system (SWS) will be established to streamline the submission of power allocation requests by interested states/ discoms. All new interested beneficiaries will be allocated power from the common pool and the unallocated power can be sold through the power exchanges. The scheme will be implemented with effect from July 1, 2023. Hydro stations and merchant plants will not be included in the common pool. Discoms that do not find value in pooling can opt out from the pool after five years.
The MoP believes that it is wise to maintain the operation of the existing efficient thermal capacities owned by central public sector undertakings (CPSUs) that have expired PPAs, but still have remaining operational life. This will help in deferring the capital expenditure required for creating new capacities. Furthermore, thermal generation plays a crucial role in grid balancing and renewable energy integration until adequate storage capacity is developed.
Rationale for the scheme
The MoP notes that due to better operations and maintenance practices, the CPSUs’ generating stations are operating efficiently at full capacity even after the completion of 25 years of their useful life. These thermal stations comprise pithead coal stations for catering to baseload, non-pithead coal stations, and gas stations to meet peak demand and provide the much-needed cycling and balancing services for smooth renewable energy integration.
The ministry further explains that with an abundance of generation capacity, the low price of recently signed renewable PPAs and low tariffs in the market, several states, particularly those with power surpluses, had approached the MoP with proposals to relinquish their share in central generating stations.
In response to the states’ request, in the guidelines dated March 22, 2021, the MoP allowed them to exit PPAs with CPSUs after the expiry of the PPA period. Thereafter, many states/distribution companies exited the PPAs of costlier plants while retaining the PPAs of economical plants. According to the MoP, “The selective approach adopted by procurers that are exiting the PPAs may lead to the shutdown of significant thermal capacities, especially gas-based capacities, which would be detrimental to the power sector.”
Despite adequate availability of generation capacity in the grid, there is a generation capacity crunch during peak demand seasons due to the forfeiture of PPAs by buyers. Therefore, there is a need to restore these generation capacities and make them available on the grid once again.
Details of the scheme
Creation of a common pool: A genco-wise common pool of central sector thermal generating stations (coal and gas based) that have completed the term of their earlier PPAs will be created. Whenever any station of a generating company completes its PPA period, it will be automatically added to the pool. Plants/Capacities that have completed their PPA period and have entered into fresh PPAs will be excluded from the pool.
Allocation of power: All PPA holders will be allocated power from the common pool. Power within the common pool for which no PPAs have been signed will remain under the control of the generating company and can be sold through alternative arrangements such as the power exchanges. The sale proceeds from the power markets will be shared with discoms that have PPAs in the pool, as per the Electricity (Late Payment Surcharge and Related Matters) Rules, 2022. The existing coal linkages and supply of coal, as per the present fuel supply agreement provisions at the notified rate, will be continued and allowed access to the balance power available with the generating company.
Uniform charges: The total capacity charge of the pool will be worked out by adding the capacity charges of each station in the pool as per the extant tariff regulations of the Central Electricity Regulatory Commission (CERC). The states/discoms will be billed a uniform capacity charge based on percentage allocation and total capacity charge of power from the common pool. Further, the states/discoms will be billed a uniform energy charge rate (ECR) computed based on station-wise weighted average pooled monthly ECR computed as per the extant CERC Regulations and final implemented schedule.
Implementation of merit order despatch: The states/discoms will stack power requisitioned from each individual station in the common pool into the merit order list. The system operator will provide the schedules for operation of security constrained economic despatch (SCED), reserve regulatory ancillary services and automatic generation control as per the existing methodology based on the ECR of each station in the common pool. The generating company must fully utilise low-cost generation for supply to the beneficiary states/discoms and only the marginal power from the stations may be offered in the power exchanges in case of a surplus. In case a generating company sells power in the market from a station whose tariff is less than the power stations supplying power to the states/discoms, the generating company will have to pay a penalty of twice the market clearing price to the discoms.
Bundling of renewable energy: The generating company can bundle renewable energy as per the MoP’s Scheme for Flexibility in Generation and Scheduling of Thermal/Hydro Power Stations through bundling with Renewable Energy and Storage Power. The renewable power will be supplied to the beneficiaries at a tariff less than the station-wise ECR of the common pool.
Modification in regulations: For the implementation of the proposed pooled tariff mechanism, the unilateral right of states/discoms to continue to draw power even after the expiry of the PPA must be withdrawn. Accordingly, Regulation 17 of the CERC Tariff Regulations, 2019 is required to be modified for the operationalisation of the common pool.
Roles of different stakeholders: The generating company will inform the existing beneficiaries, one year in advance, the date on which power will get deallocated from the generating station and get added to the common pool. The generating company will be responsible for developing the SWS, which will contain information related to the number of generating stations, the capacity to be offered from each generating station in the common pool, and the likely uniform capacity and energy charges. In addition, the SWS will include the information related to the year-wise addition of new capacities in the common pool in the next five years along with a tentative change in uniform charges.
The states/discoms will express their willingness to the SWS for the allocation of power, specifying the period of requisition, which will be a minimum of five years. They will enter into PPAs with the common pool and will be responsible for obtaining approval from the state regulator for the PPA. Further, the MoP will be responsible for the allocation of power based on the requisition specified by the willing states/discoms through the SWS. Preference will be given to the original beneficiaries of thermal generating stations constituting the pool. If the total requisition of power is more than the capacity available in the common pool, the allocation of power to the willing beneficiaries (excluding original beneficiaries) will be made on a pro-rata basis.
The government has made a compelling case for implementing the scheme, aiming to support the energy transition while capitalising on existing resources that have already undergone substantial capital expenditure recovery. If existing thermal generation plants were to be shut down, additional investments would be necessary to add new thermal capacity to meet the balancing and peaking requirements. Moreover, the installation of larger battery energy storage systems and pumped storage plants will be required, subject to factors such as high capital costs, availability of critical raw material, production batteries or on imports. In contrast, power stations that are 25 years or older have already recovered their capex, have fully depreciated their assets, become debt-free, established fuel supply agreements and maintained good operational conditions.
However, experts have raised concerns and believe that the concept of pooling is contradictory to the principle of SCED. They have highlighted that pooling would undermine the principle of despatch from the least costly plants, as it would result in a weighted pooled price applicable to multiple generators. In addition, they believe that discoms should not be compelled to relinquish their cheaper power after a period of 25 years simply to keep expensive generating units afloat through pooling. Instead, they propose that all such units that have a high variable cost should sell their power through the power exchange.
Currently, the ministry is identifying plants that will be included in the scheme, while the regulatory commissions have been assigned the responsibility of determining the necessary regulatory changes to facilitate the implementation of the scheme. It is crucial for the power sector to ensure the availability of adequate resources in the grid for peaking, balancing and flexing, as well as the fair distribution of benefits. If pooling can effectively achieve these results would be interesting to see.