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State power distribution companies (discoms) are staring at a net loss of Rs 8,000 crore in the current fiscal owing to purchase agreements in excess of power demand, according to India Ratings and Research (Ind-Ra).
Ind-Ra’s expectation is based on the assumption that discoms will surrender the power purchase agreements (PPAs) with the highest variable cost by paying the fixed costs based on the agreement, it said in a statement.
According to the statement, 18 out of 36 states/UTs are expected to be power surplus in FY2016-17, as per the Central Electricity Authority’s (CEA) Load Generation Balance Report 2016-17. It said that these discoms are likely to surrender some of the excess power they have tied-up in past five to seven years at a loss, thereby further weakening their financial position.
The discoms in the western and southern regions are expected to be the worst hit due to PPA tie-ups in excess of the power demand in the region. Ind-Ra estimates losses of around Rs 4,000 crore by discoms in the western region and Rs 2,450 crore in the southern region due to the maximum amount of long term PPA with a provision of fixed tariff in the past.
The long-term commitments at a fixed cost in PPAs are preventing some state power distribution companies (discoms) from procuring low cost merchant power traded on the power exchanges. The
Punjab State Electricity Regulatory Commission has recently revealed that the losses due to the surrendering of excess power for FY2016-17 is expected at Rs 2,075 crore. The commission has directed the Punjab State Power Corporation Ltd to look at ways to reduce this fiscal burden by selling surplus power outside the state.
The Karnataka Electricity Regulatory Commission (KERC) also recently ended the earlier rule of the state government that power producers must generate at 100 per cent capacity and supply only within the state. Generators can now apply for a no objection certificate from the KERC to sell their surplus power outside the state, it said.
Many of the long term PPAs have provisioned for Rs 1.25 to Rs 1.75 fixed prices per unit of electricity compared to an all-inclusive cost of around Rs 2.5 per unit (based on actual power rates on power exchanges for FY2015-16).
Ind-Ra estimates that spot power tariffs on the exchanges are unlikely to increase beyond the current range of Rs 2.0 to Rs 2.5 per unit over the medium term, which is in line with the CEA’s projections of 1.1 per cent energy surplus and 2.6 per cent peak load surplus during FY2016-17 across India.
The problem of surplus capacity has been partially caused by heavy cross subsidy charges levied on industrial consumers to subsidise agricultural and domestic consumers, thus incentivising them to set up their own captive units instead of purchasing power from discoms and other power generators.
Ind-Ra said the captive generation capacity increased to 40,726 MW in 2016 from 8,116 MW in 1990, growing at a CAGR of 6.66 per cent. Overall capacity grew at a CAGR of 6.37 per cent during the same period.
Ind-Ra believes that the increasing trend in captive capacity addition will steepen in the near future due to the implementation of the open access regime. Some states like namely Bihar are taking advantage of the situation by paying the mandatory capacity charges for existing long term PPAs and simultaneously buying cheaper power in the spot market.
As per Ind-Ra’s estimates, Bihar purchased on an average 309 million units of power per month for the period January – May 2016 against the monthly shortfall of just 21 million units. This trend is thus expected to continue in the near future, subject to the tariffs on power exchanges remaining low. Reportedly, other states are likely to follow a similar route.
Ind-Ra believes that there will be few invitations for bidding of long term power purchase over the medium term. Since the rationalisation in cross subsidy charges doesn’t seem imminent, the quantum of long term commitment for power purchase is likely to remain muted.
Ind-Ra further believes that the UDAY scheme currently under implementation can improve the situation marginally by increasing the demand for power from discoms.
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