Reliance Infrastructure Limited (Generation) (RInfra-G) and Reliance Infrastructure Limited –Distribution (RInfra-D) have filed a petition before MERC seeking approval for Power Purchase Arrangement (PPA) relating to supply of 500 MW from RInfra-G’s Dahanu Thermal Power Station (DTPS) for the period 23-02-2018 to 15-08-2036.
However, the power sector is in a state of flux and this is particularly true in case of Mumbai. The prices of renewable energy (both wind and solar) are rapidly falling making renewable energy based open access a highly lucrative option. In case of Mumbai, the network rollout plan is yet to be finalized and that will also affect consumer migration. Additionally, issues such as transmission constraints may need some time to be fully resolved. Given all this uncertainty, Prayas (Energy Group) has submitted that signing a cost-plus PPA for such a long duration is not be advisable at this point of time. In stead, Prayas has proposed an interim arrangement which allows RInfra-D to continue the existing cost-plus PPA (which is valid till February 2018) with RInfra-G at the existing tariff decided by the commission, only for the next three years, i.e. till the end of the current MYT period. This would ensure continuity of supply till there is better clarity on the many issues enumerated in the submission.
The submission can be downloaded using the link below. It draws from the analysis report “In the Name of Competition: The annals of ‘cost-plus competition’ in the electricity sector in Mumbai” published by Prayas (Energy Group) in February 2017 and the submission made by Prayas regarding TPC's network rollout plan.
With significant capacity addition in the past decade, many states in India have transitioned from having chronic power shortages to having sustained power surplus. The growing volume of surplus capacity in various states is a matter of concern as it implies rising fixed-cost payments for the non-requisitioned or backed down power. This scenario may continue for a few more years with less than anticipated growth in demand, significant capacity in the pipeline, the decreasing costs and increasing addition of renewable capacity, as well as migration of DISCOM consumers due to increased open access and captive options. In this context, the report traces the status of surplus power at the state level and capacity addition planning across states. This is to understand causes for such surplus capacity and various efforts to manage the situation. The analysis also presents suggestions for a way forward to prevent such a predicament in the future. The report covers insights from states such as Madhya Pradesh, Gujarat, Punjab, Haryana, Rajasthan, Maharashtra, Andhra Pradesh and Telangana. The study shows that with the given capacity addition planned, DISCOMs will be facing sustained surplus and backing down in foreseeable future.
For over two decades, the sector has been struggling to address the two crucial issues of excessive transmission and distribution losses (including commercial losses) and excessive cross-subsidy in tariffs. This has severely affected financial viability of the entire sector. Unless urgent attention is given to the management of surplus power and more importantly, preventing build-up of more surplus capacity, this would become an equally significant challenge to the financial viability of the sector. The issue of surplus capacity would be more difficult to address as it involves huge capital investments, lock-in of scarce resources and long term legal contracts, often with private sector developers.
With low unmetered consumption, near-universal access, and very low distribution losses, Mumbai was considered to be the perfect candidate for introducing choice for consumers and competition amongst suppliers. Competition was eventually introduced in suburban Mumbai through a unique protocol called ‘changeover’. Today, Mumbai is the only major city in India where two electricity distribution companies operate in the same area and compete for consumers, and as of 2015-16, 19% of suburban Mumbai consumers are exercising this option through changeover. This ‘competition’ in retail supply, however, has not succeeded in meeting the expectations of increased efficiency and reduced costs.
This report attempts to understand this unique experiment and chronicles Mumbai’s experience with competition under a ‘cost-plus’ tariff regime. It analyses three themes in detail, namely, power purchase planning, operationalisation of the parallel licence arrangement, and the role played by key stakeholders. Highlighting some of the key regulatory and operational challenges in implementing the arrangement, the report also shows the impacts of the regulatory and policy decisions on consumers. As the electricity sector becomes increasingly complex with an increase in open access, greater role of renewables and markets, and the proposed separation of the carriage (wires) and content (supply), Mumbai’s experience offers useful lessons and insights to ensure that policy keeps pace with these changes and translates into real benefits for consumers.
The year 1991 was an inflection point in the history of modern India. The country embarked upon wide-ranging economic reforms in what came to be known as the Liberalisation, Privatisation and Globalisation or LPG era. The electricity sector — indeed, the entire energy sector — has seen multiple waves of reforms since then. It has been a quarter century since the beginning of the reforms and there are indications that a fresh wave of reforms are in the offing in the electricity sector. Over this period, Prayas (Energy Group) has keenly followed and participated in the reforms process as a proactive, independent organisation offering constructive critique and suggestions to further public interest.
Prayas (Energy Group) has authored a book born out of this unique engagement and understanding of the sector. The book critically examines many of these reforms and the impacts they have had, to understand if they achieved their expected objectives and if they helped in achieving the desirable socio-environmental outcomes. The in-depth analysis over eight chapters covers thermal, hydropower and renewable generation, electricity distribution, and associated fuel sectors of coal and natural gas. We hope that the book contributes to improve the design and implementation of further reforms, so that the sector overcomes its challenges in an equitable and sustainable manner.
The book is dedicated to Girish Sant, founder coordinator of Prayas (Energy Group), who continues to inspire our work.
The Maharashtra State Electricity Distribution Company Ltd (MSEDCL) has submitted petition seeking revision of its tariffs. The proposal is regarding final True Up of FY 14-15, Provisional True Up of FY 15-16 & Multi Year Tariff for FY 16-17 to FY 19-20. The petition is availabe on the company's website.
MSEDCL's total revenue requirement for FY 2015-16 is around Rs. 59,000 Cr and it is seeking a total increase of more than Rs. 56,000 Cr over the next four years. This is largely due to revenue gaps arising from previous years, cost increase (both in generation as well as distribution and transmission). MSEDCL is also proposing backing down of 4000 MW-6000 MW of capacity on an annual basis for the next four years, though it will have to pay for the fixed costs of this capacity. MSEDCL has not projected any new open access sales, i.e. the open access quantum in FY 15-16 is assumed to remain constant over the next control period. It has also not considered the impact on account of the clean energy cess and increase in coal prices as declared by Coal India Ltd recently. Further, it has not included the carrying cost impact of more than Rs. 5,000 Cr that would accrue if the claimed revenue gap is allowed.
Even with all this, MSEDCL is forced to increase tariff by around 5%-8% across all categories for the next four years and has proposed to levy an additional surcharge on open access on account of the generation that it has to backdown.
Further, MSEDCL is projecting agriculture sales of around 27,000 MUs and distribution losses of 13-14%. This is in spite of the fact that at the time of the technical validation session itself it was demonstrated that agriculture sales estimate of MSEDCL is incorrect and impractical and the losses are likely to be much higher than what is being claimed.
The present proposal as well as the current business model of MSEDCL is not sustainable. The submissions made by Prayas at the Pune and Aurangabad public hearings highlight this based on data and analysis. The submissions also provide ideas that can be considered to reduce the tariff impact.
Operationalization of parallel license mechanism in Mumbai brought in new hope and significantly piqued interest in a city that was reeling under high tariffs. It also set high expectations for efficiency improvement and better planning, as it was felt that competition would help counter the incentive for overspending, inherent in a ‘cost-plus’ tariff approach. However, nothing of the subsequent Mumbai experience met these expectations.
The most interesting aspect of the Mumbai experiment was the use of existing licensee’s (i.e. Reliance Infrastructure ltd, referred to as RInfra) wires to enable the parallel licensee (Tata Power Co Ltd, referred to as TPC) to provide supply. This mechanism was termed as ‘changeover’. It meant that the consumers did not have to wait till the new licensee laid a parallel network and more importantly, in a highly congested city like Mumbai, it also avoided unnecessary duplication of wires and substations.
However, unfortunately, all these benefits were short-lived as lack of clarity regarding apportioning of cross-subsidy and regulatory asset significantly reduced the benefits of changeover for many. Further, as changeover was an interim process, there was confusion regarding whether TPC was supposed to lay a parallel network or not. Detail developments in this regard are captured in PEG’s submissions regarding TPC’s and RInfra’s recent tariff petitions.
While initially changeover seemed to be based on the principle of non-duplication of network, TPC-D has been expanding its network right from the inception of changeover. This has created serious issues regarding how the duplicate network can be utilised and operationalised. Recently, MERC issued another Interim Order in November 2015, inter alia constituting a committee to make recommendations on these issues. On 21st June 2016 MERC held a separate public process for TPC-D's network rollout plan and the said committee's recommendations.
During the public hearing PEG made a presentation in which it argued that the current piecemeal approach towards parallel license operationalization is not going to help and instead a completely different and bold approach is needed to tackle the problem. In this regard, PEG has also proposed an alternative, which if implemented can lead to following benefits for suburban Mumbai:
In such a scheme, instead of managing and reviewing individual costs and expenses of each licensee, the regulator can focus on ensuring:
In its petition for the third control period, Tata Power Company Limited – Distribution (TPC-D) has claimed a past revenue gap of Rs. 816 crore along with unrecovered regulatory asset of Rs. 570 crore. This is in addition to the aggregate revenue requirement, which increases from Rs. 2991 crore in 2016-17 to Rs. 4037 crore in 2019-10. These amounts would be recovered over the next four years.
Operationalization of parallel license mechanism in Mumbai brought in new hope and significantly piqued interest in a city that was reeling under high tariffs. It also set high expectations for efficiency improvement and better planning, as it was felt that competition would help counter the incentive for overspending inherent in a ‘cost-plus’ tariff approach. However, nothing of the subsequent Mumbai experience met these expectations. Instead, the story of parallel licensing in Mumbai is one of consistent planning failures, litigious utilities, ineffective regulation and tariff- burdened consumers.
This submission brings out the key issues in planning and regulation that are at the root of these failures and which continue to remain unaddressed. It argues that so long as the regulator fails to ensure proper power purchase planning and continues to assure full recovery (with carrying cost) for all expenses claimed by the licensees; the consumers will continue to bear the burden of high tariffs, in spite of competition and in spite of technical and commercial losses being low.
Here is a link to our submission in case of Reliance Infrastructure Limited (Distribution business), which is the other competing licensee in the Mumbai area. Past submission regarding issues pertaining to Mumbai power sector can be downloaded from here.
In its petition for the third control period, for Reliance Infrastructure Ltd.-Distribution Business (RInfra-D) has claimed aggregate revenue requirement, which increases from Rs. 7227 crore in 2016-17 to Rs. 8083 crore in 2019-20. This implies a revenue gap of Rs. 1326 crore along with unrecovered regulatory asset of Rs. 3257 crore. These amounts would be recovered over the next four years. This is without accounting for fuel cost adjustments and any other costs arising out of litigation or other such factors. RInfra-D’s average cost of supply is already one of the highest in the country, even in comparison to other similar urban city areas.
The operationalization of parallel licensees in Mumbai is a unique experiment in the Indian electricity sector. It set high expectations of increasing efficiency and prudent expenditures. However, nothing of the subsequent Mumbai experience met these expectations. In fact, as this submission highlights, things seem to have moved from bad to worse. Seven years since the experiment, RInfra-D has an unrecovered revenue gap of Rs. 4583 crore (including the regulatory asset), which is close to 65% of its ARR for FY 2016-17, and it continues to purchase around 20% of its power from short-term sources.
This submission brings out the key issues in planning and regulation that continue to remain unaddressed. It argues that so long as the regulator fails to ensure proper power purchase planning and continues to assure full recovery (with carrying cost!) for all expenses claimed by the licensees; the consumers will continue to bear the burden of very high tariffs, in spite of competition and in spite of technical and commercial losses being low.
This also provides an important lesson for the sector’s policy makers who often emphasize on reduction in AT&C losses as the means for improving financial health of distribution companies. The Mumbai experience, however clearly shows that failure in power purchase planning can turn even a low distribution loss business into a financially unviable one.
Here is a link to our submission in case of Tata Power Company Limited – Distribution, which is the other competing licensee in the Mumbai area. Past submission regarding issues pertaining to Mumbai power sector can be downloaded from here.
The Appellate Tribunal for Electricity (ATE) recently issued a judgment regarding Tata Mundra, Adani Mundra, Sasan and a few other power projects that were seeking an increase in the tariffs they had quoted to win their respective contracts. As one of the authorised consumer representatives before the CERC, Prayas was a party to these proceedings. It was also one of the appellants challenging the said CERC orders before the Appellate Tribunal for Electricity.
Upholding sanctity of contracts, the Tribunal has overruled discretionary use of regulatory powers to bailout projects, even when no relief is possible under the contracts. It has also significantly limited tariff impact on consumers. An opinion piece was published in The Wire on 27th April 2016 on this issue. Prayas’ earlier submissions regarding this matter can be seen here.
Maharashtra State Power Generation Co. Ltd.(MSPGCL), the state generating company in Maharashtra submitted its petition for true up for FY 2014-15, provisional true up for FY 2015-16 and Multi-Year tariff(MYT) process for the Period from FY 2016-17 to 2019-20.Prayas studied MSPGCLs petition for the public hearing process and noted that the petition lacks crucial data asked for by consumer representatives during the technical validation session. Moreover several factors considered in the petition could lead to future increase of tariffs for consumers. In this context, the commission should deliberate the issues raised by consumer representatives during the public hearing as these issues can have significant tariff impact on consumers.
MSPGCL’s current petition has several shortcomings. Many uncontrollable costs have been underestimated and controllable costs have been overestimated. In all likelihood, this will lead to additional costs which will be passed on to consumers in subsequent years.
Prayas recently developed an excel based transparent model called RATE (Revenue And Tariff analysis for Electric utilities), which allows for constructing scenarios to analyze the impact of government policies, regulatory interventions and utility performance on electric utility finances. Such scenario-based analysis can also be used to investigate the impact of uncertainties such as varying fuel prices and open access migration, thus helping identify early warning signs and assisting in more informed decision making. Inputs to the model are mostly from data available through regulatory processes.
We used the RATE model to estimate impact of the shortcomings in MSPGCL petition on consumer tariffs. We estimate a 6% to 10% increase in future consumer tariffs solely due to these shortcomings, and these will most likely be passed on to consumers through the FAC mechanism. Therefore MSPGCL’s claims and projected performance trajectories need to be examined more closely and steps should be taken to minimise impact on consumers.
Another grave issue highlighted in our presentation is backing down of MSPGCL capacity by MSEDCL. As per analysis using the RATE model, backing down itself can result in up to 21% increase in per unit fixed costs of MSPGCL. Due to the magnitude of these impacts, it is our submission that Merit Order Despatch be ensured and the Commission initiate a study to evaluate the need to run high cost units for technical reasons. As sales migration is bound to increase in the future it is our submission that commission and utilities evolve innovative methods to address the issue of surplus power and arrange for alternate mechanisms to reduce impact on consumers. In addition, given the flux in the state's power sector, the Commission should not allow MSEDCL to sign any more PPAs with MSPGCL until a public process is undertaken to determine the need for additional long term power after estimating MSEDCL's future demand in the face of open access and renewable energy options.For the capacity under construction, MSPGCL should look to sign medium term or long term PPAs with trading licensees or other DISCOMs.