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Business News/ Industry / Energy/  Peaking power policy may provide for up to 5-year contracts
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Peaking power policy may provide for up to 5-year contracts

The policy may also provide a pass-through of fuel price increases to help fuel-starved power projects become economically viable

India has a power generation capacity of 232,164.94MW, of which 20,380.85MW is fuelled by gas. Photo: Hindustan TimesPremium
India has a power generation capacity of 232,164.94MW, of which 20,380.85MW is fuelled by gas. Photo: Hindustan Times

New Delhi: As part of efforts to provide a lifeline to fuel-starved power projects, the government’s so-called peaking power policy may provide for up to five-year contracts and a pass-through of fuel price increases to help these projects become economically viable.

In addition, such short-duration arrangements will help power distribution companies (discoms) effectively manage demand. Currently, discoms enter 25-year power-purchase agreements (PPAs). In the event of a sudden fall in demand, they are stuck with long-term capacity, with an obligation to service the fixed costs as these PPAs have a take-or-pay clause.

The draft model agreement for procurement of power for the medium term or peaking power being formulated for discoms to invite bids from generation utilities may include new provisions, according to documents reviewed by Mint. These may include provisions such as for revising the base fixed charge annually to reflect a 20% variation in the Wholesale Price Index and for pass-through components of variable charge.

Such arrangements will immediately help gas-fuelled power projects with an aggregate capacity of 8,000 megawatts (MW) that are close to being commissioned and another 1,500MW that have been commissioned but are stranded in the absence of gas. Another 18,000MW capacity is operating at a plant load factor (PLF) of just 20%.

India has a power generation capacity of 232,164.94MW, of which 20,380.85MW is fuelled by gas.

While utilities can run their projects on imported liquefied natural gas (LNG), the difference in costs when compared with domestic gas dissuades consumers from buying expensive imported LNG. The new policy will encourage procurement of such power.

The much-awaited policy proposal has other highlights: “Contract period to be fixed between 1 to 5 years commencing from appointed date", and an “option for procurement of supply during off peak hours has been provided to the utility".

These provisions are aimed at encouraging discoms to invite bids during peak consumption hours—normally between 8am and 11am, and 6.30pm and 10pm. This policy may be applicable for all fuel types such as hydro, gas, coal and renewables.

The proposed policy will also help prop up and increase the share of hydropower and gas-fuelled power projects in India’s energy mix. Unlike coal-fired projects, these capacities can be turned on instantly to meet peak energy requirements.

The power ministry was working on a plan to provide a cheaper substitute for diesel sets used to meet peak power demand, Mint reported on 9 May.

According to the peaking power policy under formulation, there will be a two-stage competitive bidding—request for qualification (RFQ) and request for proposal (RFP). Only plants that are already constructed or under construction will be eligible for participation.

An RFQ indicates a company’s intention to compete for a project. After short-listing from among the companies that submit RFQs, RFPs are called for.

India Ratings and Research Pvt. Ltd in a 15 January report titled Green Shoots in Power Sector wrote: “New standard bidding documents for peaking power and medium-term power procurement" was one of the issues that needed resolution to ensure viability of investments in the power sector.

This comes at a time when the government is working on a proposal that will provide repayment concessions for gas-based projects. The government had earlier served up a bailout plan for coal-fuelled power projects and gave a concession on its policy on so-called mega power plants wherein fiscal benefits were extended to developers of thermal power plants.

The other conditions under consideration are for concessional fuel not to be used for production of electricity and supply, and for foreign exchange risk to be borne by the utility in the case of imported coal.

Experts welcomed the provisions. “Guidelines on peak power procurement is a very good development, both for stranded gas IPPs (independent power producers) and utilities having peak deficit," said Debasish Mishra, a senior director at Deloitte Touche Tohmatsu India Pvt. Ltd, an audit and consultancy firm. “Till today, utilities in India have been only procuring long-term power catering to their base load. As we have seen in some states, with slowing down of demand growth, this result in base surplus and commitment of fixed charges without even getting supply."

“It may look like peak power is more expensive than base load power. But when one compares with the fixed charge commitment, (peak power) may work out as a cheaper option for distribution utilities to procure only peak requirement," Mishra said.

In an attempt to prevent promoters from completely exiting these projects, the proposed policy also states: “Promoters to maintain equity not below 51% in the total equity till 1st anniversary of appointed date."

Also, the technical and financial criteria envisaged states that the “installed capacity shall be equivalent to at least twice the generation capacity" and minimum net worth shall be equivalent to 1 crore per MW of capacity offered by the applicant". In addition, the bidders may not be able to bid for less than 50% of the capacity for which the tenders will be called for.

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ABOUT THE AUTHOR
Utpal Bhaskar
"Utpal Bhaskar leads Mint's policy and economy coverage. He is part of Mint’s launch team, which he joined as a staff writer in 2006. Widely cited by authors and think-tanks, he has reported extensively on the intersection of India’s policy, polity and corporate space.
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Published: 01 Feb 2014, 12:18 AM IST
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