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Electricity Transmission Pricing, Shri R V Shahi, Former Secretary, Ministry of Power

In the last three to fours years, when a number of organisations both in the public sector and private sector have started showing greater interest to develop power projects, on merchant basis, the transmission system needed for evacuation of power and its wheeling upto distribution utilities and other consumers has emerged as a major area of concern. Many of these developers are not able to firmly fix up their business plans in absence of an assurance that transmission would not prove to be a bottleneck when the power plant is commissioned. In the context of many of the developers attempting to participate in the Bidding process by various distribution utilities to supply them power, from a specified date, and for the period such supply is needed, transmission and transmission charges have surfaced as one of the most uncertain variables. Similarly, the utilities intending to purchase power with reference to such Bidding exercises also find it difficult to evaluate various offers because they are unable to take into account the cost of transmission from the power plants to their Receiving Sub-Stations, because these power plants may be located in different regions. It may be relevant to mention that in the Electricity Act 2003, Open Access on Transmission was provided right from the beginning. The objective was that this provision may be used liberally and conveniently in order to promote electricity market development. It was well recognised then that Open Access on Distribution Systems, under which consumers may directly access power from generators or traders or through Power Exchange, may take sometime because it is associated with the vexed issue of the respective Regulatory Commissions coming out with their Regulations. State Regulatory Commissions also found it difficult, and in many cases, continue to find it tricky, because it requires determination of cross-subsidy surcharge which a consumer would be required to pay to the distribution utility, in addition to other usual charges.

Open Access in Transmission has been used, but it has facilitated Power Trading to the extent of not more than 3% of total transactions in the system. This is hardly anywhere near the critical mass to facilitate development of electricity market. Even this limited amount of Trading has not been without difficulties primarily on account of transmission constraints - technical constraint as well as procedural wrangles. In all these cases, transmission pricing has also been one of the core issues.

Transmission pricing as such, even unrelated to the issue of Open Access, has been a complex problem. Every project including an extension/expansion project - and their number is more than one hundred for Power Grid alone - has a different tariff. And, therefore, Regulatory Commission is required to fix tariff for each of these projects and later on revise their tariffs once the duration of the earlier notification ends. Therefore, there is nothing like a per MW per Kilometer charge or any such indicative tariff on the basis of which one can plan generation projects and, keeping in view the likely customers, develop one's business plans. One has to only wait to know the answer to such uncertain parameters and yet be expected to convince the lenders for financing of the project.

In a way, total power sector pricing is facing a similar dilemma. In case of all other commodities, the tariff is based on the product. Within a range of products, based on parameters like quality and other features, the price may vary. But, the tariff does not vary because the product is coming out of an old plant or of a new plant. In case of power, electricity pricing differs because the power is from an old plant which might be fully depreciated and therefore the burden on tariff is on account of current costs of fuel, maintenance etc. This is primarily because power tariff fixation is mainly a cost plus exercise. Expectation of the State Electricity Boards from the generating companies for such an approach emanates from their understanding that if during the initial period of ten to twelve years the tariff has covered the burden of depreciation, loan repayment etc., in the later years that benefit of reduced tariff, whose determination would be free from the burdens of interest depreciation etc., should accrue to the Electricity Boards. No doubt, there is considerable weight in this argument. But, it is also a fact that in cases of all other commodities such an approach is not expected and not followed. If Gas Authority of India develops gas pipelines at different points of time and yet has there tariff fixed on the basis of the nature and extent of service rather than on the basis of the age of the pipelines, why is it that in the case of power similar approach could not be adopted. Coal India Subsidiaries develop coal mines at different points of time, engage their machinery in these mines, some of them may be old, some of them may be new, but the prices are fixed on the basis of grades of coal and not on the basis whether the coal is produced in a new coal mine having larger capital investments or in an old mine having depreciated plant and machinery.

Having said this we also need to recognise the unique character and limitation of power industry as compared to other industries and also analyse and understand the international practices in this regard. Perhaps, until the time we are able to develop a mature electricity market, having a large number of competing players, and also parity between demand and supply - in fact, demands exceeding supply - we may have to live with the situation of regulating tariff in the larger interest of consumers. In such a situation, cost cum efficiency based tariff becomes an inevitable consequence. The second best option, in view of these constraints, has been the policy of fixing tariff on the basis of Competitive Bidding under certain given parameters.

With reference to transmission pricing, it needs to be stated that its importance was well recognised even before the Electricity Tariff Policy was formulated and notified by the Ministry of Power in January, 2006. The National Electricity Policy (February 2005) emphasise the need for a proper tariff mechanism and stipulated:

"5.3.5 - To facilitate orderly growth and development of the power sector and also for secure and reliable operation of the grid, adequate margins in transmission system should be created............ to facilitate cost effective transmission of power across the region, a national transmission framework needs to be implemented by CERC. The tariff mechanism would be sensitive to distance, direction and related to quantum of flow. As far as possible consistency needs to be maintained in transmission pricing framework in Inter-State and Intra-State System. Further it should be ensured that the present network deficiencies do not result in unreasonable transmission loss compensation requirements".

While the National Electricity Policy (2005) itself emphasised the need for the CERC to come out and implement a national transmission tariff framework covering both Inter-State and Intra-State Systems, the Tariff Policy (2006) provided specific direction and it said "7.1.2. - The National Electricity Policy mandates that the national tariff framework implemented should be sensitive to distance, direction and related to quantum of power flow. This should be developed by CERC taking into consideration the advice of the CEA. Such tariff mechanism should be implemented by 1st April, 2006".

The anxiety of the Government, therefore, may be well appreciated from the above specific provision which gave a time bound guideline that CERC should implement a national transmission tariff latest by April 2006. It is almost three years beyond this date and it has not happened and, developers, equity providers and lenders are now all expressing their concern about uncertainty on transmission and transmission pricing. This has become particularly pronounced in view of a large number of developers trying to develop substantial portion of their plant capacities as merchant capacity delinked from long term Power Purchase Agreement.

The Infraline Energy and IDFC organised, at Delhi, a Round Table on 4th February, 2009 to discuss about the approaches on transmission pricing. Presentations were made by Senior Officers of Mercados, an International Consulting Firm, Power Links, the first private sector transmission development company, Central Electricity Authority and Power Grid. Some of the important points that emerged during these discussions are outlined below:

  1. Even though, the tariff fixation approach in the power sector in general and transmission in particular is unique, and is not in line with a common approach relevant to other sectors, for quite sometime the cost and efficiency norm based pricing will have to be continued. In foreseeable future it is unlikely that transmission sector may be able to create a mature market structure in which competing transmission systems, in an optimal fashion, could provide options to customers and therefore under competitive pressure, appropriate pricing would emerge. Until then the sector will have to wait, and it is the regulated tariff on the basis of cost, norms of efficient operations and other relevant factor, which will have to be determined.

  2. An answer to cost plus tariff, however, has been provided under the Electricity Act itself, which stipulates that tariff determined on the basis of Competitive Bidding will be adopted by the Regulatory Commissions. This provision, in action has been demonstrated successfully by the Ministry of Power initiative on Ultra Mega Project. Highly aggressive prices of electricity to be produced from these plants have emerged because the competing companies have taken pains to choose right equipment (of course in accordance with the specified parameters), optimal means of funding, good construction contracts and efficient operating practices. This initiative has shown how under pressure of competition, price and quality of service could improve to the benefits of consumers at large.

  3. What was done for generation projects was also intended to be done for transmission projects. A number of specific transmission projects were identified along with important contours and parameters. They were to be offered to developers on the basis of Competitive Bidding for transmission charges (equivalent to price of power in case of generation projects). This approach takes away the need for Regulators to fix tariff keeping in view the capital cost and other parameters including efficiency norms. Unfortunately, unlike in the case of Ultra Mega generation projects, the Competitive Bidding process for selecting transmission project developers has been rather slow. As a result, many of the projects are inevitably being handed over to Power Grid because if these projects are not completed in time, evacuation of power from certain new power plants may be affected.

  4. Quite apart from these considerations, a few other factors make transmission pricing exercise somewhat more difficult than generation project electricity pricing. Some of these are given below:

  1. Power flow linked to sources of generation and the points to which power is wheeled i.e. the Load Centres is a complex exercise. In a simple model under which there is one power plant and there are a few transmission lines which terminate at various Load Centres, it would be easy to identify the consumers (distribution companies or large individual consumers) who become the beneficiaries of power from that plant. Pricing under such a simple model would be of the easiest form. Reality is, however, entirely different. There are a large number of power plants which get connected to transmission grid. Physical flow of power is dependant upon so many factors such as proximity of Load Centres, configuration of the transmission system, and availability of power from the power plant etc. The power flow is not a static phenomenon. It is dynamic because even from a given power plant availability of power may not be of the same order at all times. Similarly, demands of the Load Centres would also be dynamic and may change from season to season and even over 24 hour period during the day.

  2. What makes the exercise even more complex is on account of the fact that we have certain pockets where larger amount of power is being generated and in future even more power plants would be set up. These are concentrated in areas of coal mines and also where our water resources in hilly States provide large potentials for Hydro Electric Projects. In most cases, Load Centres are far away. Development of transmission systems is, therefore, becoming more and more complex and so is the understanding about exact physical flow of power through these systems. Pricing of power, therefore, gets complicated also on account of this important consideration.

  3. In the initial years of setting up national grid, this problem got further compounded because each of the five power regions of the country was operating on different frequencies. A few interconnections facilitated inter-regional transfers of power. During the Tenth Five Year Plan, we succeeded in enhancing the inter-regional transmission capacity to a good critical mass level of about 15,000 MW when we also succeeded in having the grid fully integrated between West and North and then East and North along with North-East. By the end of Tenth Plan, we had synchronous operations of all the grids except the South, involving almost 100,000 MW of capacity. When the South is also fully integrated, while the system will provide a great deal of flexibility in transfers of power from any source of generation to various Load Centres, pricing of transmission services will need to reckon with power flow across the country in a significant way.

  1. Post Electricity Act 2003, there is considerable interest among a section of generation project developers to set up merchant plants capacities which will be de-linked from long term Power Purchase Agreement. This is the only way we can develop a competitive electricity market, because long term Power Purchase Agreement is the antithesis of competitive structure as the rules of the game of market in such an arrangement is predetermined for twenty five years. Development of merchant capacity would be a great facilitator leading to competitive price discovery, choice to buyers of power and taking electricity market to maturity. However, this would create its own complex burden on development of transmission system as also pricing of transmission services. The very fact that transmission system developers would not know the destination of power from a particular power generator because customers would be dynamic in nature, vary from time to time, sometime power would flow to a Western State while sometimes it could go to far South, makes the planning of transmission system also pricing becomes difficult. Under the circumstances, what was agreed in the Working Group on Power for Eleventh Plan was that about 30% of cushion would be created in the system to take care of such unforeseen and undetermined flows of power, keeping in view, however, an assessment of likely areas of surpluses and shortages. This approach would definitely make the exercise somewhat easier and smooth.

Issues mentioned above highlight the challenges that are associated with transmission pricing. It is important to highlight the basic considerations that need to be kept in mind in transmission pricing. Some of these are outlined below:

  1. As there are plans and programmes to develop huge power generation capacities, commensurate transmission systems will require massive capital investments. Public sector investments will have to be supplemented by private sector, which will also be financing and developing these projects. Transmission pricing, therefore, will need to appropriately incentivise these investments so as to appropriate enable and motivate both public and private sectors.

  2. Pricing formulation should be such that it does not discriminate among the network users. Hardware and software will need to be developed to support implementation of an objective formulation in a transparent manner.

  3. The systems will need to be cost effective. When a large number of developers participate in transmission projects, choice of technology, method of financing and operating practices should be so structured, on the basis of the pricing policy, that the networks created are cost effective and at the same time transmission constraints are minimised, preferably eliminated.

  4. In effect, what it will mean is that first on a regional basis and subsequently on a national basis, the transmission pricing should reflect the charges directly linked to the quantum of MWhr of power wheeled and the distance through which it is wheeled.

  5. The computation of transmission losses should be laid down in an objective way so that the transmission network users - generators as well as power purchasers - are in a position to understand the formulation. In order that investments in transmission are optimal, differential pricing in terms of peak hours and off peak hours could also be considered, so as to incentivise proper load management and reduce the need for excessive capital investments just to meet the peak hour requirement.

  6. In the initial phase, the pricing formulation should help in development of electricity market. At this point the proportion of power through Trading and through Power Exchanges is negligible. The pricing could aim at incentivising this process. After such a market develops, incentives may not be relevant.

  7. Clean energy is the need of the energy systems. Transmission pricing could consider a differential rate, though marginal, to encourage generation and transmission of larger amounts of electricity produced through non-conventional and new energy systems and technologies.

As mentioned, transmission pricing is at the core of electricity market development process. Since it is a complex exercise, it is taking time. But it cannot be avoided any longer. When developers are enthused and lenders are supportive, any uncertainty on account of this factor needs to be eliminated. National Electricity Policy and Tariff Policy stipulated a National Transmission Tariff Scheme to be evolved by April 2006. This has been overdue. It needs to be formulated and notified without further loss of time.