Energy prices have increased tremendously which has created controversy and unrest in the country. IPP (Independent Power Producer) contracts are under great debate.
Many people argue that these are unfair and unjust. Take or Pay contracts are criticized arguing that IPPs are paid even if no electricity is produced and supplied.
Capacity charges (in ordinary language) fixed charges are too high being two third of the total and fuel cost being one-third. It used to be opposite earlier. Some people even proposed nationalization of the total electrical system.
DISCOs are already in public sector. Nationalization would mean nationalization of the IPPs. Some Ex-Wapda experts yearn the Wapda days and criticize the whole idea of power sector restructuring and break-up of Wapda. We will examine in this space as to the validity of these arguments and proposals and investigate if some relief is possible to the consumers.
Apart from IPP charges in the consumer tariff, there are a number of add-ons in the IPP selling price. Bulk of these add-ons are from Discos.
There are, what people consider unreasonable add-ons from Discos; apart from technical losses which may be reasonably added at 5-10%, there is theft and uncollected receivables which bring these add-ons to more than 20%.
Some Discos have rather excessive and unacceptable add-ons such as PESCO, HESCO and SEPCO exceeding 30%. Some Discos have quite low add-ons under or around 10%, which may however be reduced also under better circumstances and controls.
There are two types of energy contracts with some variations; Take or Pay and Take and Pay. We have Take or Pay contract system with IPPs. Under these contracts, a fixed percentage of the IPP capacity is to be bought by the power purchaser mandatorily.
Generally, 80-85% of the capacity is specified in case of thermal power plants. If an IPP does not and cannot supply this much, it has to pay a penalty, although there are force-majeure conditions which protect both the sides under extraordinary conditions.
An unwanted situation under Take or Pay contact system, from the point of view of the buyer or consumer, is that it has to pay even if it does not need the electricity and does not buy it as per contracted capacity. This results in an increase in the unit cost or selling tariff of electricity. It has to be clarified that only fixed cost are to be paid by the buyer in case of not buying. Fuel and other variable costs are not paid in case of non-supply. Thus part of the cost is paid not all.
Reportedly, GoP is at an advanced stage of negotiations with IPPs to reach an amicable and mutually agreeable solution. Some of the Take or Pay IPP contracts are being converted to Take and Pay, reportedly.
We will in the following examine the issues that may have to be solved. The case of the IPPs which are in debt servicing may be very difficult. One may, in the first instance, consider the projects that have paid off their debts. Let us call these Equity-only projects.
Take and Pay conversions of these IPPs have a much reduced determined tariff than the ones which are yet in debt servicing mode. It may be detrimental to the buyers’ (consumers’) interest to leave the price issue dangling and not covered by some upper limit. One may argue that in that case why not have the status quo? However, let us postpone this part of the discussion for later.
On the other hand, If you pay the already reduced tariff of Equity-only IPPs and buy lesser quantity as and when you have the requirement (supposedly much lesser than what is provided in take or pay tariff), IPPs may not accept it. The GoP negotiators may not have yet come across the pricing issue. What then is the solution?
The solution may be that IPPs are allowed to sell it to the third parties, either under a bilateral contract system provided in the CTBCM frame-work or by creating a spot market exchange.
However, in this particular situation, bilateral contracts may have direct or indirect harmful impact on the buyers and the market, e.g., price collusion.
Bilateral contracts and spot market for Take and Pay spot market may not be mutually exclusive. Spot market pricing that is being proposed by this scribe is a compromise solution that may be win-win for both the parties.
Spot market exchange offers a solution wherein there is a provision of upper limit. Equity-only IPPs (Debt-paid projects) can be provided an upper limit equal to the Take or Pay tariff.
Fixing upper limits is not an unknown concept in most world market exchanges. These are used for dealing with extra-ordinary situations or market conditions.
The upper limit of tariff in spot market exchange of electricity varies by region and country, depending on market rules and regulatory frameworks. In India, the upper ceiling for spot market tariffs in India is IRs 12 per unit (approximately $0.16 USD/kWh) on power exchanges like IEX and PXIL. Upper limits, however, in this particular situation of ours is to balance the buyer-seller interests.
One of the major objections against CTBCM has been that almost all of the capacity is contracted. And none would be available for CTBCM market operations. Only future projects may be eligible for CTBCM and that also under competitive bidding which may itself be bound in a Take or Pay situation, e.g. the recent KE bidding for a Solar PV project.
This is a huge opportunity for market enthusiasts that Take or Pay contracts are being converted to Take and Pay as a consequence of a highly aggressive public campaign and what is termed as an unacceptable and unaffordable consumer tariff.
It is a long time now that the people have been looking forward to a competitive electricity market under which undue or unfair prices have not to be paid by them.
Many steps have been taken starting from breaking the monolith of Wapda and many independent actors, organizations and companies have been created which together will form to be the part of the competitive market.
However, CTBCM has taken undue delay, partly, due to the market design issue. For example, Wheeling charges (payments to be made by the producers (IPPs) to the distribution companies for providing their distribution services) could not be determined for the last two years.
And now, GoP has decided to privatise the Disco, which would further complicate the issue. A situation is developing under which GoP may have to decide which to do first-CTBCM or Disco privatization. We will take up the linkage and complications of the two in the forthcoming article.
Copyright Business Recorder, 2024
