Long-term power supply contracts down to trickle

Notwithstanding the policy emphasis on the sector, new power supply contracts have dried up over the last couple of years, owing to a host of factors like domestic fuel shortage, increased reliance on expensive imports, poor financial health of state electricity boards (SEBs) and the continued delay in finalisation of bidding guidelines by the Union power ministry.


Using as alibi the ongoing revision of standard bidding documents (SBDs) for power procurement, SEBs are going slow on the signing of long-term power purchase agreements (PPAs). Their real problem, though, is financial. Only 4,700 MW electricity was requisitioned by the SEBs over last two years – 2011 and 2012 — under long-term contracts. In comparison, tenders were floated by them for as much as 27,000 MW in 2010 alone.

Cash-rich SEBs from Gujarat and Maharashtra have in the meantime taken recourse to the short-term power market, where prices remain quite low. For example, prices have stayed at R2 a unit at Indian Energy Exchange, which accounts for 97% of total electricity traded through exchanges in India. In comparison, discovered price was in the range of R4-10 a unit against tenders issued by SEBs in recent months. For instance, the weighted average of prices quoted by power companies for electricity supply against tenders issued by Uttar Pradesh in December was R5.89 a unit. Similarly, the average price offered by generators in April for electricity supply to Rajasthan worked out to be R5.41 a unit. The figure is estimated at R5.66 a unit for bids received by Tamil Nadu in May for power supply.


Power companies are quoting high prices because of the prevailing uncertainty over fuel supply from Coal India (CIL). Under the existing coal distribution policy, penalty clause in the fuel supply agreements (FSAs) kicks in only when coal supplied by CIL is less than 50% of the annual contracted quantity.

If a power plant gets only 50% coal of its requirement, it would be able to run at 42-43% plant load factor (PLF) only. But the developer would be able to recover full fixed-charges only if it operates the plant at a minimum 85% PLF. That leaves power companies with no option but to load unrecoverable fixed costs on power buyers.

Domestic coal production is targeted at 604 million tonnes (mt) in 2013-14 while demand is pegged at 769 mt. That leaves a gap of 165 mt to be met through imports.

“The prevailing uncertainty on fuel and bidding framework are to be blamed for drying up of PPAs,” said Shubhranshu Patnaik, a senior director at consulting firm Deloitte Touche. Former power secretary RV Shahi too voiced concern over the drying up of new power projects. “Inaction on the part of discoms, state government and the power ministry has led to a stagnation in starting new generation projects,” Shahi said.

However, another former power secretary P Uma Shankar, who was actively involved with the exercise to revise SBDs, dismissed the suggestion that the delay in SBD finalisation had anything to do with the drying up…


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