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Expect more competition, higher tariffs: Experts

Expect more competition, higher tariffs: Experts

Vox pop: Expect more competition, higher tariffs: Experts

The brand new clause that permits high-volume users to purchase power under OA will both impact and benefit the dismally ailing distribution companies. Our experts variously believe that the demand for power may go up, but sufficient care must be exercised to protect discoms from plunging into further losses.

Experts:
Lalit Jalan, CEO & Wholetime Director, Reliance Infrastructure, one of the first private power distribution companies in India, covering a major portion of Mumbai.
Sudhansh Pant, CMD, Jaipur Vidyut Vikas Nigam, Rajasthan is one of the states most affected by banks’ refusal to lend to unviable power.
Kamesh Yalamarty, MD, Sujana Towers, the listed power arm of the Hyderabad-based Sujana Group with interest in turnkey power transmission and in solar generation.

How will the New Deemed OA (DOA) affect discoms’ demand? Do you agree with the new directive?

Jalan
The implementation of the power ministry circular, specifying non-determ­ination of tariff for all the consumers with demand in excess of 1 MW, will impact the load profile of the discoms in view of the fact that their demand curve is the sum of the demand of various categories of consumers. Depending upon the consumer demand, the demand curve varies not only during the day but also seasonally. To optimise the power procurement cost, the power purchase by discoms is separately for base load and peak load. With the migration of OA consumers, the change occurring in the demand curve would depend squarely on the nature of migrating consumers, ie, with migration of co­m­mercial consumers, discoms would avoid peak power, whereas with migration of large industrial con­sumers, which are round-the-clock (RTC) consumers, the load curve would reduce accordingly.

An important point for debate, however, is whether the discoms will be relieved of their universal service obligation under Section 43 of the Electricity Act 2003 (EA) if OA consumers insist on fall back supply from the discoms. The circular from the Ministry of Power to State Electricity Regulatory Commissions (SERCs) is not a direction under Section 107 or 108 of the EA and thus merely an advice. SERCs, which are quasi-judicial bodies, are not compelled to implement the circular but are free to deliberate on the issue independently based on interpretation of the various sections of the Act. The implementation by SERCs would be guided by their perception of impact on the consumers and development of the sector.

Pant
I agree with the new directive as it is in accordance with the provisions of the EA. The discoms’ demand with these new directives is certainly going to be affected, but at present, it would be too premature to comment whether it would increase or decrease. However, prima facie, it appears that discoms’ demand would increase, since there are not many private generators in the field. In the present situation, there is a lot of uncertainty about getting long term power from a private generator at a more competitive rate than from the discoms. Hence, initially the consumer is likely to opt for power supplied by discoms.

Yalamarty
OA is not a new demand. The private sector has been demanding for this process as it enables them to plan their consumption and also control costs. By allowing the OA by consumers of a certain volume of power, we are exempting them from paying for the inefficiencies of the discoms. This is a welcome change to the policy. However, the modalities of implementation are yet to be seen and understood. I personally believe that there should be no clause as to the prerequisite of a No Objection Certificate (NOC) from the concerned discom to a customer to allow OA to power markets. Likewise, the discoms, too, may impose conditions for re-entry of a consumer to its network at a later date—these should be ensured to be reasonable. I am sure that over a period of time, this procedure will mature and evolve into a win-win situation for all the players. On the flip side, I am afraid that the discoms could be financially crippled, if all the major customers, (present policy threshold is 1 MW) walk away from them due to OA, whose contribution to the cash flows of the concerned discom is vital. In such a situation, the government and quasi-government institutions must be made to pay their bills regularly, so that the discoms are not crippled.

What are the positives from this new policy? Will it lead to better competition? Induce privatisation?

Jalan
If the new policy is implemented, the OA consumers would be compulsorily deregulated and the Discoms would be relieved from their statutory obligation to supply such consumers at a regulated tariff. OA consu­mers would be free to negotiate the price of the power from any supplier including the Discom thereby optimi­sing their power purchase cost through blending of multiple sources.

In the transition period, till such time assured supply availability at an affordable price on power exchanges is established through week-ahead contracts (this would depend upon the Supreme Court [SC] decision on forward trading), it is expected that the OA consumer would prefer merchant generators and traders for assured direct long-term contracts rather than opt for the power exchanges. This would give rise to competition among the merchant generators. Additionally, most of the OA consumers may not have resources to scout for power sources that match their demand. Also, inadequate exposure of OA consumers on energy scheduling and accounting would give rise to new business opportunities for traders to manage the portfolio of the OA consumers to optimise their power procurement cost.

Pant
From the consumers’ point of view, the positive aspect is that they are now Deemed OA (DOA) consumers and not at the mercy of the discoms to opt for OA. From the discoms’ point of view, it is better because consumers using 1 MW and above are its key consumers who subsidise the lower category consumers and also lower the losses. At their voltage level, the losses are very low, and as per the new directive, the SERCs would have no role in fixing the tariff. So discoms can lure them with a better tariff option and include certain terms and conditions which would suit the discoms. So, yes, it would lead to better competition as more private entrepreneurs would enter into generation.

Yalamarty
It is too early to predict about privatisation. However, entry of many new consumers into power trading will improve the platforms of power trading and this will contribute to the improvement of the performance of independent power producers (IPPs). For the consumers, this will allow them to hedge the costs of power and also to have quality power supply, which will offset the higher costs they (may) pay for purchase of power under the OA system. However, the weak link is the current archaic transmission and distribution (T&D) system in most parts of the country, which, I am afraid, may offset the benefits accrued by the new OA.

How much will consumer pricing likely to be affected as a result of this policy?

Yalamarty
We expect that in the long run, this is a cost-neutral one for the bulk consumers. However, for the remaining consumers of the discoms, a certain price increase is inevitable as the costs of the discom would need to be distributed on a lowered volume of power.

Jalan
Had there been a surplus scenario, the OA consum­ers would have been better placed to negotiate the price and thereby benefiting from such policy. However, under the prevalent shortage situation, the implementation of the policy may only lead to higher prices for such OA consumers through cartelisation by merchant generators and traders. Further, the OA consumers would be largely dependent on the incumbent discoms for the standby supply. In view that the discoms would be relieved of their obligation to supply OA consumers, any regulation of the charges for standby supply would be beyond the purview of the SERC.

Since the regulated tariffs of high-end consumers have an element of cross-subsidisation for low-end con­sumers, the exodus of OA consumers from the regu­lated consumer base of discoms would result in loss of cross subsidy. The tariff policy formula of Cross Subsidy Surcharge (CSS) is adopted by most of the states. It is assumed that even if the price of the power paid by the OA consumers is mutually negotiated, the reference tariff ‘T’ for CSS determination would be the same as that applicable for the regulated category of consumers. Moreover, since most of the states are facing shortage of electricity, the freed-up generation capacity would be utilised to supply the remaining regulated consumers. The revenue gap of discoms on account of lower reali­sation of such power from regulated consumers would result in higher tariff requirement from the small regul­ated consumers.

Pant
The consumers pricing is not likely to be affected very much by this policy as the consumers of this category are already paying electricity charges more or less equal to the average cost of supply. Any further increase may force them to leave the discoms and opt for OA. It would encourage a more competitive market with multiple options.

How will this policy impact private players’ plan to enter power distribution?

Pant
Private players will also consider power generation as a viable option and try innovative marketing of their power products.

Yalamarty
It is my opinion that this will positively impact on the private power distribution projects. However, the extent of the effect is to be seen in the long run.

Jalan
Under the existing provisions of the EA, a distribution licensee company is required to have its own network for supplying power. The cost of laying a parallel distribution network is economically prohibitive. Hence the EA needs to be amended to separate Distribution (Wire) and Supply (Retail) businesses such that the Distribution, by virtue of its very nature remains a natural monopoly and a regulated business, whereas the Retail Supply ought to be deregulated. Segregation of distribution from retail supply business would help developing the two businesses independently. Once the metering and energy accounting requirement is settled, the SERC may consider lowering the eligibility criteria for OA from the existing 1 MW level and issuing multiple retail licences in the same area to promote competition.

How do you believe power finance to discoms will be impacted by the new norm? Will viability be affected by any uncertainty of returns that may result from this policy?

Jalan
Discoms are regulated entities and their tariff rates are governed by the Tariff Regulations specified by the SERC. The returns of discoms are protected as the Wheeling Charges include in them 16 per cent Return on Equity on distribution business. Since the OA consumers would continue to use the distribution network of the discoms, the entire cost of the wire business of the discoms, including returns, is recoverable through the Wheeling Charges. Until such time the retail supply business of the discoms is regulated, its cost would get spread over the regulated consumers. The stranded cost of power purchase, if any, would get recovered through additional surcharge. Thus the imp­lementation of new policy may not adversely impact the returns of the discoms.

Yalamarty
The cash flows of the discoms would be subjected to great stress, and without proper payments for the power consumed by the public institutions. This will, in turn, lead to defaults, which will have impact on their future funding. Unless the discoms improve their delivery and collection mechanisms and control power theft, many of them would find themselves in the red, and
seek government’s budgetary support and impacting the poorer sections of the society, which depends on subsidised power.

Pant
There would not be much impact on the power finance because the new norms entail the option as to whether consumers would purchase electricity from dis­coms or through OA. Once the number of consumers who opt for discoms is decided, there would not be much impact on the power finance. Rather, the position of discoms is likely to improve.

Do you believe that Power Purchase Agreements (PPAs) are no longer an adequate and sufficient condition to ensure a strong financial backing to power projects? How much are discoms to blame in this respect?

Yalamarty
What is the validity of an agreement if a party to it is unable to pay? I wouldn’t put my money in a project that is solely dependent on PPAs from government agencies. This policy change will further worsen the financial health of the discoms and consequently, these PPAs will become toothless in the near future.

Jalan
Generally, lenders insist on a long term PPA for financing the power project. The discoms would conti­nue to prefer long term firm supply contracts to meet their Universal Service Obligation. The stranded cost of power purchase contracts of the discoms, if any, due to migration of OA consumers, would however be prote­cted through recovery of Additional Surcharge from such OA consumers.

With a substantial capacity addition over the past few years, power trading activity in India has increased manifold, with around 40 BUs traded in the short term market. Also, post-2008, national level power excha­nges have emerged and, albeit with limited products, have shown significant improvement in liquidity both in terms of participants and traded volume. Hence, even in the unlikely scenario of discoms resisting long term contracts, the generators may consider selling power directly on exchange with adequate payment security mechanism.

Pant
In my opinion, the PPAs are still adequate and sufficient to ensure a strong financial backing to power projects as majority of the PPAs are done by the dis­tribution licensees as they are the only bulk purchasers from the generators.

Do you believe that there should be an easily invokable exit clause in PPAs?

Jalan
In a shortage scenario, long term PPAs provide cer­tainty of availability of power to the Discom. In view of prevalent shortages in the states, the freed up capacity would be utilised to meet the shortages. An easily invo­kable exit clause in the PPAs would not be acceptable to the generators and their lenders. In fact, such a move will result in reduction in capacity addition.

Yalamarty
Yes, but for both sides.

Pant
Normally, since PPAs are mutual agreements bet­ween the two parties, almost all of them do have an exit clause and it is up to the contracting parties to include such a clause.

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