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Why power utilities are dishonouring Past PPAs: Understanding the conflict

Why power utilities are dishonouring Past PPAs: Understanding the conflict


That state power utilities are in a financial mess is a known fact. The industry has expressed the need for a permanent solution to fix this mess fearing it may not take long for the sector to take an ugly turn, jeopardizing the entire economy. In their defence, the utilities cry being victims of the intertwining of electricity tariffs and their impact on socio-political environment. Their contention is that the core reason of financial problem lies in delayed subsidy payment by the state government and the time lag in approving tariff orders by the regulators. The utilities’ inefficiencies and lack of willingness to act as professional service providers seldom make up to the list of problem statements.

One of the key fallouts of growing utility indebtedness would be an inadequacy to honour financial commitments to generators or independent power producers (IPPs). This can be especially true for utilities with existing power purchase agreements (PPA) with developers at tariffs which are much higher as compared to tariffs offered for new capacity addition. It is worthy to note here that the recently concluded Rewa solar power project bid in Madhya Pradesh witnessed winning tariff of Rs 2.97 per unit while the first competitive auction for wind saw tariffs reaching a low of Rs 3.82 per unit. The market clearing price of electricity at the Indian Energy Exchange has been Rs 2.54 per unit for the month of February 2017 with an average market clearing price of Rs 2.40 per unit for the calendar year 2016 (Max Rs 5.20 per unit and Min Rs 0.71 per unit). In comparison, the Maharashtra Discom (MSEDCL) purchases solar power at Rs 6.54 per unit and non-solar renewable power (wind, biomass, small hydro) at Rs 5.56 per unit. Further, the average power purchase cost for MSEDCL, which includes central as well as state thermal generation plants, is at an approved rate of Rs 3.83 per unit for 2016-17, rising up to Rs 4.18 per unit for 2017-18.

The difference in the current and future available prices versus the price of power from projects commissioned in the past is resulting in a wide-spread behavioural apathy towards servicing old purchase contracts. A particular defence narrative put forward by MSEDCL for delayed payment to wind generators is rather noteworthy in this context. In Case file no. 53 of 2016 (Shah Promoters & Developers vs. MSEDCL regarding outstanding payments for sale of wind energy and interest on delayed payments), the utility first places the onus on the regulator for entering into expensive and stringent purchase contracts. β€œThe terms of EPA (Energy Purchase Agreement) are approved by the Commission and it is binding on MSEDCL to enter into future EPAs on these terms though it is a known fact such timely payment terms cannot be strictly observed in a bad financial situation and also there are several liabilities which are required to be taken care of.”

The company then tries to warn the regulator of an increase in customer burden as a result of costs pass-through, such as delayed payment surcharge. β€œβ€¦the relief if granted, would seriously prejudice the interest of consumers in the State, and may be allowed as β€œcost” in the ARR of MSEDCL if they are accepted by the Commission.”

And last but not the least, the utility takes a self-informed stand that the wind developers should not claim victim as they have already recovered their project’s costs. β€œWhile it is a fact that MSEDCL has been making payments with a little delay to Generators on account of the above difficulties, such delayed payment is neither intentional nor deliberate. All these wind generators have already recovered the cost of their projects and are private developers who have been paid for the energy used by MSEDCL. Such claims would be an additional benefit to one private individual to the detriment of the overall interest of consumers.”

Similar sentiments have been echoed by utility consumers, who fail to understand the nuances of a long-term power purchase contract that have a fixed cost component which needs to be paid even if the plant remains idle and which therefore is the compensation for a developer to invest in capacity for a future requirement, if need be. Consumer organizations often argue for disallowance of any power purchase cost which is higher than the average cost and question the need to run a thermal base load plant at its technical minimum as well as the must-run status to high cost renewable energy projects that were installed in the past at a time when renewable investments were hard to get by.

Technological changes and a services-oriented economy have delinked the once well-known unitary proportionality between GDP growth rate and electricity consumption. The result is a slow offtake in demand and thereby a slower growth in utilities’ revenue. With falling tariffs, all the earlier awarded renewable energy projects contracts as well as old base load thermal PPAs are under severe payment security risk.

Anand Gupta Editor - EQ Int'l Media Network


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