New Delhi: In a move that could force private power producers to put new projects on hold and crimp nascent power trading exchanges, the electricity regulator has proposed price controls on short-term sales of energy generated by hydroelectric and coal-fired plants.
The Central Electricity Regulatory Commission, or CERC, has suggested a cap of Rs6 per unit on sales of power between the peak hours of 6pm and 10pm, and Rs5 for power drawn in off-peak hours.
The proposal comes against the background of several state governments, such as Punjab and Haryana, being forced to pay as much as Rs8 per unit to bridge supply shortfalls. The proposal exempts gas-based power projects from its purview because prices of natural gas have been volatile and supply scarce.
CERC proposes rationalization of tariff terms (PDF)
Industry as well as power trading companies responded sharply to the proposal, which the CERC posted in a staff paper, “Measures for restraining the prices of electricity in short term sale/trading,” on its website on Tuesday, inviting public comments on it until 22 September. These comments will then be incorporated in a final proposal, which a senior CERC official, who did not wish to be identified, said would be “soon”.
Since the proposal is related to the short-term sale and purchase of power, it will apply to private power projects, merchant power projects, or MPPs that generate electricity to sell on the open market, captive power projects and power trading exchanges.
Existing norms allow companies setting up captive power units for their exclusive use to sell surplus electricity.
“This will kill the market,” the head of a power trading firm who did not want to be named said about the proposal. “The Electricity Act 2003 states that CERC’s jurisdiction does not apply to MPPs. MPP investments will dry up. This will be a retrograde step and the power exchanges will close down.” India has an installed capacity of 6,000MW for short-term power. That makes up about 4.2% of the total installed capacity of 143,000MW.
A senior CERC official, who did not wish to be named, defended the proposal. “Promoting MPPs does not mean encouraging profiteering,” this official said. “How can an MPP developer sell power at Rs8 per unit while it is only costing him Rs2 to generate. This proposal will be discussed further with the stakeholders.”
As an incentive to power trading, CERC has proposed that once the price cap is in place, it would withdraw the ceiling on the trading margin at 4 paisa per unit. This, it says, would encourage more firms to enter power trading.
If implemented, analysts believe the proposal could affect plans by Reliance Industries Ltd, or RIL, and Anil Agarwal-owned Vedanta Resources Plc.’s Sterlite Industries (India) Ltd that are setting up large captive power units. Anil Ambani-owned Reliance Power Ltd has plans to set up merchant power plants.
An RIL spokesperson declined to comment while a Sterlite spokesperson didn’t respond to emailed questions.
“CERC has put up the information recently and will be open for comments till the 22nd of this month. We would not like to comment on this at this stage,” said a spokesperson for Reliance Anil Dhirubhai Ambani Group,
Jayant Deo, managing director and chief executive of Indian Energy Exchange Ltd, said, “We are studying the implications of this capping. And it is a bit early to comment.”
Though India’s existing merchant power capacity is negligible, firms such as Jindal Steel and Power Ltd, or JSPL, and JSW Group have MPPs. While JSW could not be immediately contacted, phone calls made to JSPL executives were not answered.
The proposal won’t apply to companies generating power from renewable sources such as wind, and small hydro, solar, bio-gas and gas or liquid fuel such as regasified liquified natural gas, diesel, or naphtha-based plants.
“Trading activities may suffer and margins may shrink due to the cap on merchant power sale,” said Rupesh Sankhe, an equity research analyst at Centrum Broking Pvt. Ltd.