Grid Locked

A balanced approach needed to open up access

In a recent development, the two discoms in Telangana filed an appeal before the Telangana State Electricity Regulatory Commission (TSERC) to allow them to collect additional surcharge from open access consumers. Telangana State Southern Power Distribution Company Limited (TSSPDCL) and Telangana State Northern Power Distribution Company Limited (TSNPDCL) stated that, for 2016-17, TSERC approved sales of 11,558 MUs for HT-I general category consumers at the state level. However, both the discoms have recorded a total sales of 9,151 MUs under the aforementioned category, a decrease of 2,406 MUs from the approved level. This decline, according to them, is mainly due to open access sales, which amounted to 2,135 MUs in 2016-17.

A similar trend has been observed across the country as reflected in the increase in the volume of open access transactions at the power exchanges. These transactions grew five times between 2010-11 and 2015-16.

Open access allows organisations to purchase power from electricity suppliers other than the discoms, using discoms’ transmission and distribution network by paying certain charges. Notably, several states have offered concessions in open access charges if the competitive supply is based on renewables. These concessions are provided in the form of reductions in cross subsidy surcharge (CSS), transmission charges, or energy-banking charges compared to those imposed on thermal power generators. As a result, renewables-based power through open access can be less expensive for consumers than power from conventional sources. In addition, in some states, renewable energy providers are not being paid regularly by discoms, making the sale of renewables-based power through open access an attractive alternative because of the greater certainty of payment. Together, these two factors are leading to an increase in the sale of renewable energy-based power through open access.

Overall however, the success of open access regulations has been limited for both thermal as well as renewable sources of energy. The two discoms of Telangana have stated that the increase in open access transactions imply an equivalent amount of decline in their revenues. TSERC’s decision is awaited but the question that arises here is, if the reasoning given by the two discoms is allowed, the very purpose of introducing the open access mechanism to increase competition in the power sector will cease to exist.

In fact, the transcripts describe the futile attempts at correspondence (the number of times that power generators have requested for grant of open access without getting an answer) and the eventual answers that seem either evasive or at odds with the general principles of the Electricity Act, 2003. In one case, a state distribution utility took the state electricity regulatory commission to court for ordering it to provide open access, claiming that the regulator had no jurisdiction since the dispute was between a customer and a utility, which should have gone to the Consumer Grievance Redressal Forum.

Given this backdrop, it is important to look at the issues faced by both the power suppliers and the discoms.

Generators’ perspective

Looking at the power suppliers, specifically renewable energy suppliers, despite there being a guideline by the Central Electricity Regulatory Commission (CERC) to exempt this mode of energy from CSS, many states continue to impose it. CSS is a levy that state governments impose to pay for the free or cheap power they provide to poor consumers. These charges are often so high that they make rapid roll-outs of open access-based renewable energy projects impractical. For instance, in Tamil Nadu, Karnataka and Punjab, the CSS works out to between Rs 2 per kWh and Rs 2.50 per kWh, depending on whom they sell the power to. Rajasthan had exempted CSS for wind and solar, but has recently brought in an additional surcharge of Re 0.87 per kWh. Maharashtra charges Rs 3.20 per kWh as CSS.

Maharashtra has also imposed an electricity duty on consumers who buy directly from generators, in order to prevent customers of its discom from moving to private generators. Further, consumers in IT parks and software technology parks cannot buy power from private generators.

Renewable energy producers also face a problem over the method of levying transmission charges for using the state-owned transmission lines while selling their electricity. In most states, these charges are based on the installed capacity in MW, which is a problem. A coal-fired power plant of 10 MW will produce around 80 MUs of electricity per year; in comparison, a 10 MW wind plant will generate about 26.5 MUs and a 10 MW solar plant around 17.5 MUs. If the transmission charge is levied per MW of installed capacity, renewable energy plants will be paying a far higher price per kWh than conventional ones. In this case, Maharashtra is among the few states that impose transmission charges on a per kWh basis. In the remaining states, the transmission charges could be very steep – in Rajasthan, for instance, it works out to nearly a rupee per unit.

Therefore, in a majority of the states, the third-party sale model of wind projects, which use intra-state open access, is not conducive to competitive procurement due to the high open access charges applicable on open access/third-party wheeling transactions. Moreover, open access is not granted or is delayed by the utilities in some states. A similar scenario is faced in the solar power space as well. According to Amit Mehta, head, business development, First Solar, “There are various risks associated with changes in open access charges, which include cross-subsidy charges, wheeling/transmission charges, wheeling/transmission losses. These charges are determined by the state regulator every year and any variation in these can adversely impact the delivered cost to the customer and hence, the viability of the project. Recently, a number of states have introduced an additional surcharge over and above these charges, which further increases the delivered cost to the customer.”

The option to enter into third-party sale of renewable energy is, therefore, available to only customers with a large demand and deep pockets that enable them to handle the aforementioned risks. The credit-worthiness of the power offtaker, lack of a regulatory framework and standardisation of third-party power purchase agreements (PPAs) constitute some of the other risks. Meanwhile, obtaining financing for developers of such projects continues to be an issue.

As a result, despite the tariffs for wind and solar third-party PPAs being higher than those under discom PPAs, the private PPA market is a very small part of the overall wind and solar power market. Although hard data is difficult to obtain, the market share of these PPAs has been declining for many years. In absolute terms however, the number of such contracts is increasing gradually. At present, most of the activity is concentrated in Karnataka, which has an attractive policy, with a 10-year waiver given on most open access charges.

Discoms perspective

Already under financial stress, discoms are not entirely unjustified in protesting against the proliferation of open access. A recent working paper, “Newer Challenges for Open Access in Electricity: Need for Refinements in the Regulations”, by Daljit Singh, a visiting scholor at Brookings India presents a more sympathetic view of the discoms’ defence against the consumers’ demand for a choice in buying power. In the paper, Singh states the reasons for open access not taking off in a manner desired by the central government. He also highlights the difficulties and challenges faced by discoms in facilitating full-fledged open access.

Some state governments are restricting in-state generators from exporting power or restricting consumers from importing power. Restrictions on the export of power are usually made when the state is short of power, and restriction on import of power is done when the state has surplus power. Power Line listed several examples of such orders in an article featured in 2014. In March 2014, the Karnataka government directed all generating companies to produce the maximum exportable electricity and supply it to the state grid at a tentative tariff of Rs 5.50 per kWh, subject to final tariff determination by the Karnataka Electricity Regulatory Commission. The state had been facing a severe power shortage due to breakdowns at one of its generating units, underperformance of other plants and a drop in wind generation. About 900 MW of load had to be shed at peak time and about 500 MW during the off-peak period.

Around the same time, Gujarat restricted open access for short-term power purchases, which were being used by industrial consumers to buy power from the power exchanges. Industrial tariffs at the time were about Rs 6 per kWh, while power from the exchanges was available at about Rs 4 per kWh. As a result, about 1,500 MW was being procured from outside the state, while about 4,000 MW was lying idle due to excess capacity.

Over the years, many other states have put restrictions on the export or import of power. These include Tamil Nadu, Odisha, Andhra Pradesh and Rajasthan. The CERC has issued several orders declaring that Section 11 of the Electricity Act, 2003 cannot be used to restrict open access. In a case involving Karnataka, the Karnataka High Court quashed the CERC order on a petition by the Karnataka government. The matter is now with the Supreme Court.

More recently, there has been another challenge that creates problems for discoms in granting open access. In some states, large consumers are using open access to switch frequently between the market and the discom’s regulated tariffs. This behaviour creates greater volatility in the load to be served by the discom, which makes power procurement planning difficult for the discom; it can also lead to stranded generation capacity. Such behaviour by large consumers is likely to further harden the resistance to open access by discoms.

When a discom procures power for its consumers, the PPAs it enters into have a fixed and variable cost component. When a large consumer opts for supply from an alternative supplier, some of the fixed costs are no longer fully covered. Section 42(4) of the Electricity Act provides for an additional surcharge to be paid by open access consumers to cover these fixed costs. Recently, as some states have sufficient or excess capacity, discoms have been asking for an additional surcharge on open access consumers and SERCs have been granting it. For example, the Gujarat Electricity Regulatory Commission has allowed a rather modest surcharge of Re 0.42 per kWh in the state. In its recent order, the Maharashtra Electricity Regulatory Commission has allowed a considerably higher additional surcharge of Rs 1.11 per kWh for 2016-17. In a recent order, the Punjab State Electricity Regulatory Commission allowed an additional surcharge of Rs 1.25 per kWh. While this may act as a constraint for open access-based power producer, for a discom, it is justified to impose this charge to cover its expenses. Further, discoms plan their power procurement on the basis of demand forecasts several years into the future in order to minimise the overall costs. The movement of large consumers back and forth between supplies from the discom and the market results in large swings in load for the discom. This creates considerable uncertainty for the discom in predicting the demand for power. To tackle this, the discom may decide to rely more on short-term purchases in order to avoid surpluses or deficits of power. However, short-term power purchases are generally more expensive than long-term contracts.

The way forward

The above arguments imply that the current electricity market structure, which is highly regulated and has cross-subsidisation, is not very conducive to developing a robust open access market as the discoms will always have a disincentive to allow such transactions, especially in a scenario where demand and supply are balanced. For the open access market to grow and attract long-term capital, a robust electricity market mechanism is important, which, coupled with consistency in regulations at the state level, will enable investors to take a longer-term view of the risk/ reward equation in this area.

To conclude, as Singh states in his paper, “Consumer choice is more than open access to the transmission and distribution network. Effective functioning of choice also requires well-defined rules that govern the relationship between the discom and the consumer exercising choice of supplier, defining the rights and responsibilities of each. Because consumer choice is more than simply allowing open access, labelling it as open access has, unfortunately, muddled the discussion.”

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