Given the extant tariff policy and Power Purchase Agreements, the Centre’s plans to reform PPAs to provide power at competitive prices and make discoms viable fall far short

The Union Government has set up a committee to reform Power Purchase Agreements (PPAs) to ensure power availability at competitive prices and make distribution companies (discoms) viable. A PPA is a contract between a generation company (genco) and discom which lays down the terms of electricity purchase by the latter from the former, including the tariff, which is subject to approval by the State Electricity Regulatory Commission (SERC).

The Cabinet is also considering a new tariff policy which will inter alia require discoms to pay a surcharge to the genco for delayed payment, which would be equal to the commercial rate of interest. The Government has already made it mandatory for discoms to open Letters of Credit (LoC) for getting supply from gencos from August 1, 2019. However, State-owned gencos are not covered by this dispensation.

The discoms would be allowed to recover only up to 15 per cent of under-recovered power supply cost from other consumers implying they need to absorb the remaining 85 per cent. Also, they won’t get any grant or loan if they don’t reduce losses.

When seen in juxtaposition with the extant tariff policy environment as also the architecture of PPAs, the intended reforms and proposed measures are laughable.

On tariff policy, under directions from the State governments, discoms sell electricity to poor households and farmers at heavily subsidised rates, even free in some States. To make up for the under-recovery, they charge exorbitant rates from industries and businesses; yet they continue to incur losses forcing the Centre to come out with packages to bail them out. Three packages have already been given since 2000, with the latest being Ujjwal DISCOM Assurance Yojana  (UDAY) launched in 2015 and the fourth is in the offing as alluded to by Power Minister RK Singh.

In this backdrop, if discoms’ recovery of under-recovered power supply cost from others (industries) is restricted only to 15 per cent, their losses will multiply.

Instead of allowing proper pricing of supplies to households and farmers and curb theft (the only logical way to cut under-recovery), the Government wants discoms to absorb losses. Do they have Alladin’s lamp? Penalising them by charging commercial rates of interest, insisting on LoC or denying them loans, for not reducing losses, amount to adding insult to injury. 

Yet another factor adding to the woes of discoms is the unusually high price they are forced to pay to gencos under long-term PPAs which account for nearly 86 per cent of the power sold (of the balance, ten per cent is covered under short-term agreements and four per cent sold on trading platform). Herein, two extreme scenarios are discussed to show how discoms and eventually the consumer and the taxpayers are taken for a ride.                   

First, in consonance with Prime Minister Narendra Modi’s plan of giving a big push to renewable energy, in Andhra Pradesh, promoters of 139 power plants based on solar and wind energy had signed agreements with the discoms during the last five years under the erstwhile dispensation led by N Chandrababu Naidu. Under the PPAs, the discoms had agreed to pay to the gencos `4 to 6 per unit which is almost double the cost of supply, about `2.4 per unit. At such high tariff, discoms are incurring huge losses. Of the total loss of close to `7,000 crore in the last five years, an overwhelming `5,500 crore was on account of excess payments to the generators of renewable energy. 

This prompted the new Government led by YS Jaganmohan Reddy to set up a high-level committee in July, to review those agreements with a view to bring down the tariff. But  the decision has been stayed by the Andhra Pradesh High Court (APHC). The issue is heading for a protracted legal battle and it will be some time before the proceedings get concluded and final pronouncement from the Supreme Court comes.

Meanwhile, investors in these projects (mostly foreign investors) have raised the pitch, arguing that any review will dent the sanctity of contracts, thereby eroding their confidence in India as an attractive investment destination. The countries from where these companies come have taken up the matter with the Centre, which in turn, has asked the AP Government to honour the PPAs. The way events are unfolding, it is unlikely that the issue will get settled in favor of discoms.

At another extreme, gencos had agreed to charge from discoms low tariff — using the Tariff-Based Competitive Bidding (TBCB) method. Under the long-term PPAs signed by Tata Power Ltd (TPL) and Adani Power Ltd (APL) with regard to their Ultra Mega Power Projects (UMPP) in Gujarat, these companies had committed to sell at `2.26 per unit and `2.35 per unit respectively for supplies to discoms in the State. Both projects are based on coal; TPL is entirely on imported coal, APL uses 70 per cent domestic and 30 per cent imported coal.

Unlike all other PPAs wherein increase in the cost of fuel is pass-through, for supplies from these UMPPs, the consumers were fully shielded. In fact, TPL/APL had arrangements in place to ensure that they got coal supplies at a fixed price all through the project life.

These included TPL acquiring 25-30 per cent equity in three Indonesian mines. Likewise, Adani acquired a coal mine in Queensland, Australia in 2010. But, this turned out to be an illusion.

In 2012, TPL/APL petitioned the Central Electricity Regulatory Commission (CERC) seeking ‘compensatory tariff’ — a sophisticated nomenclature for hike in tariff. They argued that following an order of the Indonesian Government in September 2011, fixing a Minimum Export Price (MEP) of coal, they were forced to pay more which should be compensated. This was instantly allowed by the CERC and confirmed by the Appellate Tribunal for Electricity (APTEL) in December 2016.

The Supreme Court (SC) after initially rejecting the claim (order of April 2017), finally directed CERC “to amend the PPAs to enable pass-through of fuel price escalation subject to a cap” (order dated October 29, 2018).

We see a typical syndrome of “head I win and tail you lose.” While, on one hand, there are PPAs which allow gencos to charge more from day one, even where the agreements were crafted to charge low tariff, those were subsequently altered to provide for escalation (TPL and APL).

 For the discoms being squeezed at both the ends by having to pay more to gencos and compelled to charge less from preferred users (farmers and poor households), any talk of making them financially viable or reduce tariff burden on industries — as contemplated in the new tariff policy— is meaningless.

The Government should look at as to why cost of supplying power is high; especially aspects such as ‘gold plating’ (a euphemism for claiming higher investment than actual), over-invoicing of fuel bills need to be seriously examined and remedial steps taken. For instance, PPAs should have a clause to provide for cancellation of the contract if any irregularity involving corruption is noticed. On the consumption side, they should do away with subsidised or free supply and bring down power theft to zero. Sans these reforms, there is no way of salvaging discoms and protecting industries and businesses from high tariff.

(The writer is a New Delhi-based policy analyst)