In a recent meeting, the Forum of Regulators discussed factors affecting the cost of power and stressed the need to analyze and evolve measures to reduce or contain the retail tariff.

The working group made certain recommendations, highlighting the need for a coordinated effort by the central and the state governments to address high retail tariffs.

The Forum considered the data from 12 states-Andhra Pradesh, Assam, Bihar, Gujarat, Haryana, Jharkhand, Karnataka, Kerala, Madhya Pradesh, Odisha, Uttar Pradesh, and Uttarakhand. Cumulatively, these states account for 50% of the total energy consumed in the country.

The working group observed that the power purchase cost was the largest contributor to the average cost of supply, with an average of more than 70% share in the cost for a distribution company (DISCOM). Following the power purchase cost, transmission charges and operation and maintenance expenses contributed a major share.

External Factors

Coal

The panel observed that coal cost was a major contributor to the power purchase cost. The increase in coal price was 28% higher compared to the estimated price increase based on the weighted average of the wholesale price index and consumer price index. The group recommended that the coal sector be brought under an independent regulator at the earliest.

Also, there was a need for the electricity regulators to monitor and suitably regulate the station heat rate and gross calorific value of coal-based power projects. Coal pricing also needed to be regulated as in other sectors since it is currently a monopoly.

Railway freight

The working group noted that the railway freight charges increased 40% in the past four years. The members recommended that the railways be brought under an independent regulatory body. They also suggested that the central government consider subsidizing railway freight for a distance beyond 750 km.

Clean energy cess

The committee questioned the rationale of continuing with the clean energy cess considering the increasing investment in renewables. If it was to be continued, then the proceeds from this cess should be brought back to the electricity sector to mitigate the incremental cost of new environmental norms, the panel proposed. Since 2010 as of the financial year 2019-20, over ₹1.15 trillion (~$15.6 billion) has been collected in clean energy cess.

In January 2020, the Prime Minister’s office proposed waiving the cess on coal to reduce the financial strain on distribution companies, besides helping the thermal power projects install flue gas desulphurization to curb pollution.

The history of clean energy cess

In 2010, the government created the National Clean Energy Fund (NCEF) to sponsor the cost of research and innovative projects using clean energy technologies by public and private sector entities. The idea was to collect tax from the polluting coal industry to fund clean energy. The cess, which was ₹50 (~$0.74)/ton when it was introduced in 2010, was raised to ₹100 (~$1.5)/ton in 2014 and ₹200 (~$3)/ton in the 2015-2016 budget. It was again doubled from ₹200 (~$3)/ton to ₹400 (~$6)/ton in the 2016-17 budget.

In March 2017, the fund was rebranded as Clean Environment Cess from the earlier Clean Energy Cess to include river cleaning and other projects.

In April 2017, the government enacted a bill that said it would utilize the Clean Environment Cess (India’s version of carbon tax) collected on coal to finance the Goods and Services Tax (GST) Compensation Fund, a non-lapsable fund that will form part of the public account of India.

New environmental norms

India had initially set a 2017 deadline for thermal power plants to comply with emissions standards installing Flue Gas Desulphurization (FGD) infrastructure to cut toxic sulfur dioxide emissions. The deadline was later moved to separate timelines for different regions, ending in 2022. The Ministry of Power also proposed a ₹835 billion ($11.70 billion) plan to meet the cost of development of Flue Gas Desulfurization units at coal plants.

With the implementation of new environmental norms (FGD installation), the cost per unit of energy will increase substantially. This increase in cost should be compensated from the clean energy cess, which has been collected from the consumers of the electricity sector, the panel suggested.

Norms for disposal of fly ash

As per the draft notification issued by the Ministry of Environment, Forest, and Climate Change, the cost of transportation of fly ash is to be borne by the thermal power projects, which will substantially impact the cost of power generation. The group recommended that the cost of transportation of fly ash be partially borne by the central and the state governments.

Internal factors

High transmission costs

The group recommended that transmission planning be based on accurate demand forecasts by the DISCOMs and the state transmission utilities in the future.

Also, the central government should share the cost of the stranded assets by utilizing the clean energy cess, the team noted. As the cess is being collected from the power sector, it should provide relief to the sector, the members opined.

All the state electricity regulatory commissions (SERCs) should decide a normative threshold above which projects should be selected through tariff-based competitive bidding, the members said.

Back in 2017, the Ministry of New and Renewable Energy had amended the guidelines for the disbursal of grant for the development of intra-state transmission system under the green energy corridor project in the states of Andhra Pradesh, Himachal Pradesh, Gujarat, Karnataka, Madhya Pradesh, Rajasthan, Maharashtra, and Tamil Nadu. The grant was part of the clean energy cess.

Generation assets are stranded

As in transmission assets, the fixed cost of stranded generation assets is being paid for by the consumers without getting any benefit. In addition, the additional stranded capacity cost estimated on account of renewable energy integration is in the range of ₹1.02/kWh. As per the suggestions proposed by the group, the government should extend help to DISCOMs to meet the fixed cost of the power purchase agreements (PPAs) associated with the stranded assets.

Return on equity to be made realistic

The performance of DISCOMs has a significant impact on retail tariffs for consumers. Therefore, there is a need to link recovery of return of equity with the performance of the utilities, based on indicators such as supply availability, network availability, and aggregate technical and commercial loss reduction, the body suggested.

Impact of depreciation on tariff

The depreciation rate should be rationalized, and the period of depreciation should be extended. The team suggested the tenure be extended to 15 years from 12 years. Accumulated depreciation, over and above debt repayment, should be used to reduce the equity base for return on equity, they added.

The growing share of renewable energy

The group observed that although green power was available at ₹2.50 (~$0.034)/kWh or less, the costs of transmission and balancing cost were eating into the benefits it could have brought. The group suggested that apart from large-scale renewable projects, the focus in the future should also be on the distributed generation that would minimize transmission infrastructure and help reduce the cost.

The case for short-term PPAs

The group also proposed that the 25 years’ life of PPAs for new projects contracted through competitive bidding is too long. They insisted that shorter duration PPAs with exit clauses should be promoted.

Cost optimization through greater use of market

As per the suggestions proposed by the group, the power purchase cost could be reduced if the Merit Order Dispatch was followed strictly and the power market and other platforms were used for the optimization of power procurement.

Trading margin be curtailed

The group also noted that although the average trading margin was in the range of ₹0.03 (~$0.0004)-₹0.04 (~$0.0005)/kWh, the ceiling of ₹0.07 (~$0.0009)/kWh set by the Central Electricity Regulatory Commission (CERC) was being misused by public sector traders. The group proposed that the CERC should look into the matter and cap the same at ₹0.02 (~$0.0003)/kWh. Solar Energy Corporation of India’s trading margin of ₹0.07 (~$0.0009)/kWh is already being disputed by generators.

Waiver of water usage charges for hydro projects

According to the suggestions, the matter of waiver of water usage charges for hydro projects should be taken up by the Ministry of Power.

Distribution level efficiency in operation

The SERCs should provide a long-term trajectory for loss reduction and ensure that the DISCOMs follow the trajectory, the panel said, adding that common regulation also needed to be brought in to curtail the losses of DISCOMs.

Other suggestions

Apart from the suggestions mentioned above, the panel proposed that all future generation projects, except hydropower and nuclear projects, should be set up only through competitive bidding. Also, the norms for operation and maintenance expenses should be made more stringent, members added.

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