Power regulator may tilt towards three-part structure for new multi-year tariffs

The regulator seems to be veering towards the three-part structure because of the changed dynamics of the power sector since the last tariff structure came into force almost five years ago.

The National Electricity Plan of Central Electricity Authority -- the nodal agency of the power ministry that that makes all plans and forecasts -- has indicated that there will be no need for additional non-renewable power plants till 2027 with the commissioning of 50,025 MW of under-construction coal-based power plants and additional 1,00,000 MW renewable power capacity.

The country’s renewable capacity has increased manifold in this period while the plant load factor of the conventional thermal plants has slipped to 50s. It was 59.68 percent in 2017-18, down from 64.46 percent in 2014-15 when the current tariff norms came into place and 75.10 percent in 2010-11.

PLF represents the output of the plant as against its capacity. It is different from another key metric called the plant availability factor which represents the quantity that the generator can supply. There are times when the plant produces power (PLF a measure of that) but is unable to supply to the grid making its PLF meaningless and reducing its availability. The final stage is the dispatch which depends on how much the distribution company is willing to buy.

The National Electricity Plan estimates that the PLF of coal-based stations is likely to come down to around 56.5 percent by 2021-22, taking into considerations likely demand growth of 6.34 percent compounded annually and 175 GW capacities from renewable energy sources.

While the new capacity additions in the renewable sector (mostly solar) are obviously dampening the demand for thermal, what is making the matters worse for the sector is the refusal of state electricity boards to enter into long-term power purchase pacts.

Even when the PPA is in place, the boards back down which means they do not lift the power they had promised to buy and escape their contractual burden by simply paying the fixed charges and not paying the variable part called the energy charge.

Given the volatility in power prices and their own poor financial health, electricity boards now favour buying power on a short-term basis, thus making the task of management of power demand and supply a difficult one.

The two-part tariff structure works well when the gap between available capacity and dispatch is low. That scenario doesn’t exist anymore nor is forecast to make a comeback anytime soon. It is this dynamic the CERC thus looks to address through a three-part tariff structure.

The current tariff structure comprises two components -- fixed and energy charges (a variable component). The fixed cost of a generating station represents the infrastructure cost (capital cost) and operation cost of a project. It covers the money spent on plant equipment, operations and maintenance, interest on loans, depreciation and return on equity promised to the project developer. Energy charge refers to fuel and transportation costs.

As per the approach paper, the thee-part tariff could comprise fixed charge (for recovery of fixed cost), variable charge (incremental return above guaranteed return and balance operation and maintenance expenses) and energy charges (fuel cost, transportation cost and taxes, duties of fuel).

The recovery of fixed component could be linked to target availability, whereas variable component could be linked to the difference between availability and dispatch. Fuel charges could be linked with dispatch.

The approach paper represents the views of the staff of the CERC and is circulated with prime aim of initiating discussions on various aspects of tariff determination and soliciting inputs of the stakeholders in this regard. The CERC will seek the views of the stakeholders on the draft recommendations and issue its final norms in February.

The draft recommendations are important as they represent the views of the CERC and lay out the guidelines that it will like to adopt. The new tariff principles will be effective April 1.