Following a decline in solar tariffs, power distribution companies (discoms) are increasingly negotiating for short-term contracts with power generation companies.
Over the past few months solar power hit a record low tariff of Rs 2.44 per unit resulting in fewer clean energy deals for solar projects with high tariffs. This has also put more pressure on discoms to revise the terms of the solar power projects which were struck at higher price points.
And to tide over this problem, discoms are looking favourably at short-term contracts, which are roughly for a period of 1 to 5 years, as this would help them minimise their losses. A normal, long-term power purchase agreement can last up to 25 years which, against the backdrop of changing tariffs, can be unviable for discoms.
The rules under the long-term PPAs makes it difficult for discoms to terminate the contract, which is usually for 25 years, even if there is a change in power demands.
According to an Energitica India study, the discoms have to pay the capacity charge (or a mandatory fixed charge) irrespective of the power consumed by the discom. Even if the supply outstrips demand, discoms will have to pay the capacity charge for the entire 25-year period for the power it does not even require.
Also, an expected increase in demand for solar power commensurate, with its supply, has given discoms another reason to consider short-term contracts.
“Multiple factors have contributed to this shift, including a general expectation on continued reduction in power costs driven by renewable energy. This aspect, coupled with the fact that demand growth (in solar) has been tepid, has resulted in unwillingness of procurers to tie themselves up with long-term, potentially ‘higher cost’ power,” Abhishek Poddar, a partner at consulting firm AT Kearney Ltd, told Livemint.
Experts believe that for the new model to succeed, banks and financial institutions have to be on-board given the large long-term debt requirement for such projects.
“Ultimately, new projects need to be financed up to 70 percent-80 percent through debt. The FIs (financial institutions) and banks want tariff certainty for the lending period. There is a desire of utilities to move towards medium-term contracts because cost of generation has fallen,” said Deepak Amitabh, chairman and managing director at PTC India Ltd, India’s largest electricity trader told Livemint.
However, discoms’ inability to pay power generating companies on time has often placed a heavy burden on the banks which had lent to these discoms. Although UDAY, government’s revival package has helped pare the revenue losses of these discoms, they are now facing competition from solar generating companies.
It is a win-win situation for both stakeholders: discoms and the power generation companies (gencoms). Even the gencoms are resorting to short-term power procurement contracts in order to better guard themselves against low green energy tariffs. And gencoms’ justification is that discoms might default their payments if the tenure of the agreement was longer.
According to the Central Electricity Regulatory Commission (CERC) report on Short-term Power Market in India 2015-16, India’s installed electricity generation capacity increased to 302088 MW in FY16, an increase of 11 percent from the year before.
The CERC’s report shows that volume of short-term transactions account for 10 percent of the total electricity generation in FY16 — a sign that shorter-duration agreements are coming into vogue.
“Indian power market has gradually shifted away from long-term PPAs to short and medium-term agreements. These days we find most of the procurers, even regulators at times, favouring relatively shorter-duration PPAs. Even long-term PPAs are being entered for 7-10 year duration instead of the conventional 25 years,” Poddar told Livemint.
According to the CERC’s report, the renewable energy certificate (REC) transaction, which is an instrument to promote renewable sources of energy, has increased by 62 percent in FY16 alone.