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The Central Electricity Regulatory Commission has offered some level of relief to Tata Power by allowing the company to temporarily raise tariffs for power produced at its Mundra plant. Photo: Priyanka Parashar/Mint (Priyanka Parashar/Mint)
The Central Electricity Regulatory Commission has offered some level of relief to Tata Power by allowing the company to temporarily raise tariffs for power produced at its Mundra plant. Photo: Priyanka Parashar/Mint
(Priyanka Parashar/Mint)

CERC and the power market

CERC’s decisions bring to fore the restrictive climate that power companies are forced to operate in

The Central Electricity Regulatory Commission (CERC), the country’s apex power sector regulator, has offered some level of relief to Tata Power by allowing the company to temporarily raise tariffs for power produced at its Mundra plant. This comes soon after CERC allowed another private power producer, Adani Power, to revise tariffs. In both cases, the regulator found sufficient reason in the increase in the price of imported Indonesian coal to allow the tariff hike.

As many believe, permitting power companies to raise tariffs may improve their short-term financial situation. But, more importantly, the episode brings to fore the restrictive climate that power companies are forced to operate in. Ordinarily, in the case of rising input costs, a private company may decide either to pass the burden to its consumers, or internalize the effect of higher costs. Any private company, then, will price its product by carefully considering the trade-off to revenue involved between choosing the two available options.

In cases where private companies pass on the burden of higher costs to consumers, such market pricing of power is often considered undesirable from the point of view of consumers who may be adversely affected by higher tariffs. But this frequent objection does not take into account the fact that restricting companies from freely pricing their products can achieve lower prices only in the short run. The long-run effects of such policy are often undesirable as it tampers with market prices that signal relative scarcity of resources.

Now, all that the CERC has done is grant permission to a couple of private companies to temporarily raise prices owing to coal-supply conditions. These companies can raise prices now, albeit within the strict limits set by the CERC. This should not be mistaken for a genuine market with an unrestricted price system reflecting actual conditions of supply and demand for power.

With no scope, then, for private firms to embark on investments in the search for profits—thus benefiting consumers by increasing supply and eventually driving down prices—such regulatory interventions, while welcome, only offer a partial solution to the problems of an imperfect power market in India.

Should power companies be permitted to freely price their output? Tell us at views@livemint.com

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