Regulator Approves Tariff of ₹7.45kWh for a Waste-to-Energy Project in Maharashtra

The Maharashtra State Electricity Regulatory Commission (MERC) has set a revised tariff of ₹7.45(~$0.10)/kWh to procure power from the waste-to-energy project based on a municipal solid waste processing unit (750 tons per day) to be commissioned in Pune. The Commission had earlier determined the tariff of ₹6.95 (~$0.093)/kWh for the project.

Pune Bioenergy Systems, an integrated waste management company, had filed a petition with the state Commission to review certain critical rulings to determine a new tariff for the project.

Background

The company requested the Commission to rectify the error of considering the SBI Marginal Cost of Funds-based Lending Rate (MCLR) rates for the financial year (FY) 2019-20 (8.14%) instead of FY 2020-21 (7.05%) to calculate the interest rate.


The petitioner also requested the Commission to address the issue related to inconsistent tax rates while calculating return on equity and discount rates. The petitioner said that the same tax rates need to be considered to calculate the weighted average cost of capital and to gross up the post-tax return on equity. It requested the Commission to gross up the post-tax return on equity from 16.96% approved in the impugned order to 19.75%.

Pune Bioenergy System asked the Commission to grant the benefit of zero contract demand charges for the present project. The company said the Commission has allowed to net off energy consumption from the grid and salable units and directed that energy charges could not be part of operation and maintenance (O&M) cost. It requested the Commission to either remove contract demand charges for the project’s life or allow it to be part of the O&M cost.

The petitioners said that the proposed transmission line for the project is underground in a municipality urban area. However, the Commission has considered 15% compensation for ‘diminution of land value’, but did not consider 15% compensation towards ‘non-usability allowance’. Therefore, the petitioner requested to allow compensation of 30% of land cost amounting to ₹99.6 million (~$1.33 million) for the right of way compensation for transmission lines.

The company submitted that the Commission had disallowed the receivable from tipping fees that should be considered for two months as per the concession agreement. It said the Commission considered revenue from the sale of power as working capital. However, the Commission did not consider receivable from tipping fees as a part of the working capital.

The company pointed that MERC RE Tariff Regulations, 2019, provided for CFA to be considered as a part of tariff only if the company avails it. However, the Commission has taken it as the CFA is already availed by the company and reduced the tariff to the extent of CFA.

The O&M cost is the major cost driver for the waste-to-energy projects and has a higher impact on the tariff and needs to be accurately estimated to protect the commercial viability of the project. Therefore, the company requested the Commission to consider an O&M escalation rate of 5.73%.

The company stated that the Commission did not allow the contingency cost of 3% by arguing that contingency risk like variation of dollar rates may positively or negatively impact the company. However, the Ministry of Housing and Urban Affairs’ guidelines under the Swachh Bharat Mission provided a 3% contingency cost of the project’s capital cost. Therefore, the company requested the Commission to allow it as 3% of the hard cost.

Commission’s analysis

The Commission noticed that in its impugned order dated March 22, 2021, it has notified that FY 2020-21 was coming to an end, and therefore it considered MCLR for FY 2020-21 instead of FY 2019-20. The Commission also declined to review the issues of the petitioner.

The government of India, through its Finance Act, 2020, provides an option to all eligible companies to opt for lower corporate tax of 22% and drop all exemptions/deductions, including minimum alternate tax, or continue with a regular corporate tax of 30%. So, the Commission approved the request and considered a lower corporate tax of 22% to gross up return on equity and calculate the weighted average cost of capital. The Commission also accommodated changes in tariff computation.

The Commission informed that it had specified, in the impugned order, that a netting-off arrangement must be allowed to the petitioner, and it did not need a separate connection from the distribution licensee. So, the Commission directed that issue of levying contract demand charges does not emerge.

In its impugned order dated March 22, 2021, the Commission had allowed 15% compensation for the diminution of land value. However, it did not allow 15% compensation of land value towards a non-usability allowance. Therefore, the Commission allowed the petitioner 15% of land value as a non-usability allowance and revised the right of way compensation costs from ₹50.9 million (~$682,169) to ₹97.2 million (~$1.30 million).

Tipping fees contribute to around 9-10% of the company’s annual cost, and it is utilized to reduce tariffs. Therefore, the Commission directed that those two months of receivables from tipping fees would have to be considered as a part of working capital requirement.

In its ruling, the Commission directed that it has determined the tariff considering CFA to protect the interests of the company and the distribution licensee. Therefore, there is no error on this issue in the impugned order.

The Commission had calculated the O&M escalation index of 2.5% based on the five-year data relating to wholesale price index and consumer price index as provided for in the regulations. However, it allowed a higher O&M escalation index of 3.59%. Therefore, the Commission could not accept the request to consider an O&M escalation rate of 5.73%.

In its ruling, the Commission recognized that the project timeline might be impacted by the current Covid-19 lockdown, which could escalate the project cost. Therefore, it has approved a contingency cost of 3% amounting to ₹70.64 million (~$944,033) for the project.

Given its above analysis, the Commission revised the tariff to ₹7.45 (~$0.10)/kWh before applying CFA and ₹6.53 (~$0.087)/kWh after considering a maximum CFA of ₹500 million (~$6.68 million) for the municipal solid waste-to-energy project. The tariff considered in the earlier order was ₹6.95 (~$0.093)/kWh without CFA and ₹6.08 (~$0.082)/kWh with CFA.

In February 2021, the Kerala State Electricity Regulatory Commission set a tariff of ₹6.81 (~$0.093)/kWh before considering accelerated depreciation and ₹6.31 (~$0.086)/kWh with accelerated depreciation for procurement of power from a 6 MW municipal solid waste-to-energy project in Kozhikode.

In April 2019, the Tamil Nadu Electricity Regulatory Commission set the generic tariff for the procurement of power from municipal solid waste-based projects in the state at ₹6.28 (~$0.088)/kWh without accelerated depreciation and ₹5.90 (~$0.082)/kWh with accelerated depreciation.

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