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Merchant Power Plants: Problems and Prospects, Shri R V Shahi, Former Secretary, Ministry of Power

Indian power sector has been used to, over the years, sale and purchase of power either through an arrangement between two Government agencies, which did not need any commercial agreements as such, or through long term Power Purchase Agreements between the power generating companies and the distribution companies. The concept of power being purchased and sold through arrangements otherwise than such long term contracts commenced with the introduction of Power Trading as an instrument to support State distribution utilities in tiding over their shortages. Power Trading got further strengthened when, under the Electricity Act 2003, the vision of the role of Trading was further clarified by making trading a licensed activity. Though there are more than 100 licensees, at the national level alone, engaged in this activity, its role, in terms of quantitative terms, has been somewhat limited because of very small proportion of power being available for such transactions. As of now, Trading Licensees and the two Power Exchanges, put together, transact sales and purchase of power which is less than 3% of the total power generated and supplied.

The consequence of this meager amount of electricity, which is transacted outside the long term contract, has been excessively high prices, particularly during certain seasons and during peak hours. This cannot be avoided in the face of severe shortages. The only way to strike a right balance, under which interest of both investors and consumers are reasonably taken into account, will be to increase the proportion of power through arrangements beyond long term contracts. In the year 2006, Ministry of Power organised an extensive discussion with power project developers and financiers to understand from them their perception about the role of the Government agencies to encourage such power project developments. Merchant plants could be developed beyond long term PPA's to meet demands during different time slots - weeks, months and a few years. At different points of time for different durations such plants could have different buyers. It was articulated that development of electricity market and creation of competition in the sector to take care of the interests of developers as well as consumers would be possible only when such merchant capacities are encouraged to be developed. This interaction encouraged the Power Ministry which come out with a Scheme on Merchant Power Plants.

InfralineEnergy organised a Round Table on 4th November, 2009. I coordinated the discussions and presented a brief overview of the issues. We had Presentations made by Senior Executives of Reliance Energy, Power Trading Corporation and Indian Energy Exchange. Based on these Presentations and the subsequent discussions, the following issues broadly summarise the main highlights of the Round Table :

  1. Delicensing of power generation, as per the Electricity Act 2003, is a very powerful enabling provision with the potential of facilitating large amount of merchant capacities in the country. This provision was indeed necessary. But to think that this is sufficient to facilitate project development would be an over simplification. We may have got rid of the permission of the State Governments under the old Electricity Supply Act, and the Techno Economic Clearance by the Central Electricity Authority, which used to be the primary requirement is no longer valid, yet, developers have a number of hurdles to cross. Land acquisition, fuel linkage, water linkage, Transmission access and environmental clearance are the most important concerns of the project developers. In the case of Ultra Mega Projects, it was amply demonstrated that right type of facilitation by the Government, and its continued hand holding, can lead to highly satisfying outcomes. If not similar, the essential assistance and support from the Government on the issues mentioned above would go a long way in expeditious development of merchant plants. If Authorities think that merchant plant developers are going to get substantial returns and, therefore, there is no need for such assistance and support from the Government, a perception which appears visible in many cases, this route of capacity addition will obviously be severely constrained. The mindset needs to change. All the agencies, which are in places of power and authority, need to remind themselves again and again that it would take some years before power sector is made free from severe shortages and load sheddings. Excessive tariffs during certain peak hours should not give us any wrong signal that a situation of profiteering has been created, that power projects have become too attractive for investors and, therefore, there is a need of certain degree of restraint. In fact, the situation is just the other way round. There are many hurdles which stand in the way of smooth financial closure and even more problematic is the phase of construction and commissioning of these projects. There is a need of an institutionalised mechanism in the Ministry of Power or in Central Electricity Authority which could regularly oversee the implementation of merchant plants with a view to resolving the problems, which concern many Central and State Government agencies, which stand in the way, apart from close coordination with financing agencies.

  2. Since the provision of coal to such merchant plants may not have been possible in all cases on the basis of linkages with the Coal India Subsidiaries, the initiative to allot coal blocks for captive mining was indeed an important encouragement for developing merchant plants. However, issues concerning development of such captive coal blocks require to be addressed. Master Plans of these areas where coal blocks have been allotted, with necessary provision for rail and road connectivity, is something which can be done only by the concern Government agencies. Individual coal block developers may not be able to develop roads and rail connectivity, because it may neither be feasible nor an optimal solution. Similarly acquisition of land will require special dispensation both by Central and State Governments. It has been seen that in a number of cases, because of the long gestation of coal mine development, which begins from investigations to Geological Reports and subsequently various clearances, the delays could take these mines development beyond the expected date of commissioning of power projects. In such a situation developers, who are going ahead with the projects and have shown serious commitments, need to be assured that there could be a time phase to take care of coal supply through a tapering-down coal linkage which could stand withdrawn once the coal production starts in these captive blocks. In absence of such a formal assurance, even financial closure of these projects may be difficult.

  3. In the coal bearing States, such as Chhattisgarh, Orissa and Jharkhand, a large number of power projects are coming. Many of these are partially or fully on merchant basis. They will all need access to Central and/or State transmission systems. A lot of simplifications have taken place in last one year in so far as dealing with request for Open Access on Power Grid transmission systems are concerned. But, the access on the State transmission systems does pose a problem because of lack of clarity on the subject in many States. In order to facilitate development of merchant capacities and, therefore, electricity market, Working Group on Power for Eleventh Plan had recommended, and the same is being implemented, to create addition cushion in the transmission capacity to the extent of 30%, so that such merchant plants could transmit their power to even such destinations which may not have been pre-determined at the stage of conceiving the project. This approach is bound to give the required relief to merchant capacities. A more positive and encouraging approach is needed in a number of States at the level of State Load Despatch Centres (SLDC's) while dealing with the issue of permission to merchant plant developers for transmission of their power.

  4. The recent Policy changes in the Mega Power Project Scheme which allows certain percentage of the rated capacity to be treated distinctively for the purpose short term trading is indeed a positive development in the direction of electricity market. This would not only make financial closure easier, but also power from such capacities would significantly enhance the proportion of power to be traded outside the long term PPA. Another development in this regard is the initiative of NTPC to set up certain capacities on merchant basis for which they may not enter into long term PPA. Similarly, the Policy in respect of hydro power projects, which allows as much as 40% of the power to be kept outside the PPA, will make a big difference, when these projects get commissioned, in the development of electricity market. What is necessary is that the Central Transmission Utility (CTU) and State Transmission Utilities (STU's) keep re-visiting their plans and programmes of augmenting the transmission systems, so that they are able to cope with these additionalities in the generation capacities.

  5. The Presentation from the Indian Energy Exchange brought out a totally new concept by giving an interpretation to Section 86(1) of the Electricity Act, which says that when Open Access has been permitted to a section of consumers, the State Commission shall determine only the wheeling charges and surcharge for the said category of consumers.

"Section 86 (1) The State Commission shall discharge the following functions, namely:-

(a) determine the tariff for generation, supply, transmission and wheeling of electricity, wholesale, bulk or retail, as the case may be, within the State :

Providing that where open access has been permitted to a category of consumers under section 42, the State Commission shall determine only the wheeling charges and surcharge thereon, if any, for the said category of consumers;"

This is an interesting provision and the interpretation given by the Managing Director of the Indian Energy Exchange is that once the State Commission provides Open Access to consumers above 1 MW, they have to deal with the power suppliers on their own. The Regulatory Commission will be dealing with tariff fixation for consumers of below 1 MW requirement. This provision if implemented, in the manner that is being suggested, will open up the electricity market in a very big way, leading to development of merchant plants. Accordingly, a new chapter in the competitive market structure in the electricity sector will emerge. This issue needs careful and thorough discussion. Another perception is that it should not happen that the larger consumers including industry, trade and commerce are left on their own once the Open Access for consumers above 1 MW has been introduced. While this may be another School of Thought, the provision of the Act which allows such an interpretation needs to be pursued and modality of implementation needs to be evolved, giving due regard to implementational issues.

  1. Finally, the financial closure of merchant power plants is also a real issue. This is partly because of some of the genuine areas of concerns, as mentioned in the foregoing paragraphs, but also partly because of the mindset of the financial market. In the past, the institutions dealing with financing of power projects got so much used to long term Power Purchase Agreements for the entire capacities that any new modality is seen by them with lot of scepticism and risks. Though debates and discussions in last two years have brought about visible change in their thinking, and there are a number of institutions which are prepared to consider lending for projects which have tied up or propose to tie-up long term PPA for about 60% of the capacity, there are many others who keep raising this issue. The financial sector needs to recognise that unless they allow such capacities away from long term contracts to supply power for a reasonable proportion of their total capacity, competition in electricity market, which is so vitally needed, will not be developed. The silver lining is that more and more of the financial institutions and Banks have started recognising this need and have become sympathetic to this approach.

Though there are a number of other issues, which do come in the way of developing merchant plants, which include environmental clearance, water linkage etc., I have tried to cover, in this paper, the major issues. Obviously, one does not need to be pessimistic because any new initiative normally meets with initial resistance which comes out of a fixed mindset, teething problems of stabilising the procedures and the normal risks that get associated with such new activities. What is, however, heartening that gradually these issues are getting overcome. Initial concerns of many that such projects would be hard to be realised are gradually getting mitigated. The suggestion that Ministry of Power or Central Electricity Authority could institutionalise an arrangement through which periodically there are interactions with merchant plant developers with a view to resolving their problems needs to be considered, so that many of these projects which are at the initial stage of development could get into fast track.