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FEB 03 2013

Still Not Open Season for Power Buyers

  • Economic Times, ET Bureau / Hyderabad
  • Created: Sun 03rd FEB 2013

Power purchases by consumers directly from the open market instead of relying on local power utilities now account for well over 40% of total power traded on Indias biggest energy exchange.But serious issues remain in providing such open access to industries.

Even by the erratic power supply standards that Indian industry has had to bear with for years,factories in Andhra Pradesh have had an unusually tough 2012.Power shortages in the state had been acute for well over a year and a half,but in August last year,the state government began implementing a power holiday for industrial consumers three days a week.According to K Karunakara Rao,Executive Director of the Kurnool-based Sree Rayalaseema Alkalies and Allied Chemicals,there are now peak hour restrictions in place,between 6 pm and 10 pm,during which power supply is heavily rationed.According to news reports,small and medium industry in the state,reeling from the cuts,has resorted to heavy layoffs to stay afloat.Power supply has been difficult for the last year,but in September it started becoming severe, says Rao.
So at that time,Raos company decided to obtain clearances from its power distribution company (discom),which allowed the company to buy power through open access.Simply put,the company could now buy power from any power plant in the country either directly,or by placing bids on a power exchange,rather than relying on its local discom.The power would be routed to the factory through the existing network of lines and feeders.We buy up to 2 lakh units a day, says Rao.
In the wake of Andhras power crisis,scores of other industries have gone down the open access path.We have seen many customers from Andhra Pradesh join us over the last year or so, says Rajesh Mediratta,director of business development at Indian Energy Exchange (IEX),Indias largest power exchange,which has a 27% share of the market for short-term power.
In Rajasthan,it is a similar story.Open access provides a transparent system of price discovery, says NK Bahedia,senior general manager (commercial) at RSWM,a textile company.Companies can save as much as 50 paise per unit of power,sometimes more,through it.
Open access,a cornerstone of power reforms for almost 10 years,has also remained a largely unfulfilled aspiration across the country.The state electricity boards (SEBs) have for long been painted as the villains of the piece,unwilling to let their most lucrative customers bypass them and buy power from elsewhere,thus condemning factories to endless power cuts,and lost output.The reality,however,is more complex.

Navigating the Middlemen

While the short-term power market is officially used to describe transactions where power is supplied for periods of less than a year,in actual practice the bulk of deals on the IEX is for literally the next day.A power consumer in Andhra will,for instance,bid to buy power for 11 am to 5 pm the following day.That power could be supplied by a plant in Chhattisgarh,and routed through a series of lines in the national grid,and the Andhra state grid,to the consumers doorstep.But its along that path that all the problems and intermediaries lie.
The biggest of them is,of course,the SEBs.Towards the end of last year,the government proposed yet another package of reforms to bail out SEBs,reeling under hundreds of thousands of crores of losses accumulated over the years from selling power below cost,or even free,to domestic consumers and farmers.For an SEB,charging high rates of power to industries is a quick,politically easy way to offset low rates charged to farmers.Allowing those consumers to buy power from elsewhere seems tantamount to economic suicide,even if the SEB gets compensated by charges paid to it,and mandated by the government,to essentially soften the blow.
Only if the problem of losses of SEBs,and of cross subsidies (whereby farmers and retail consumers are effectively subsidised by higher rates charged to industrial consumers) are removed,will open access become a reality, says SK Chatterjee,deputy chief,regulatory affairs,Central Electricity Regulatory Commission (CERC),the apex regulator for the sector.
The issue facing most industries (all consumers with a load of more than 1 megawatt are eligible for open access) was not that they were being charged high rates by their discom,but that the power supply was erratic.To me the issue is not of price but availability, says Rao.The price we pay on power exchanges,when adjusted for all the other charges,is about the same as we pay to the discom.
To speed open access along,the power ministry took a controversial step in November 2011.It issued an interpretation of the law which in effect made it mandatory for all consumers above 1 MW to be declared open access,with such consumers not being regulated by tariffs set by state regulators.Effectively,said the ministry,if you had a load of 1 MW or more,you were by law an open access consumer and had no choice in the matter.Second,you were no longer regulated by the power tariffs set by the state electricity regulator.
That opinion came at the tail end of a long set of differing interpretations,between regulators on the one hand,and the ministry of power and the Planning Commission on the other.Regulators argued that open access was a choice that industries had,and that they couldnt be forced into that status.Further,a state discom had a universal service obligation to industries in that state,and they couldnt cut off power to a consumer simply because they had open access status.Finally,open access consumers should continue to be regulated by tariffs set by the regulator.

No Choice

The implications of the ministrys view became clear in early 2012 when discoms in Rajasthan went ahead and effectively raised tariffs on large consumers in the state (above 1 MW) by as much as 20% to 50%,without taking regulatory approvals.The hikes were also applicable to large consumers who didnt buy any power from open markets.Industries promptly went to the state power regulator who struck the order down.As of date,regulators on the one side,and the Planning Commission and the ministry of power on the other,have opposing views.Regulators would like open access by firms to be a choice,whereas the ministry and the Planning Commission would like to make it mandatory,with all that this entails.For an executive at a Rajasthan-based firm,the choice is a bit more nuanced.While his company officially campaigned against the tariff hikes of the Rajasthan discoms,he says the move to make 1 MW and above consumers unregulated would be less of an issue if the discoms moved to charging companies a power tariff based solely on variable rates.His company pays about 60 lakh a month to the local discom as fixed charges for power,payable whether or not the company gets any power from them.Instead of forcing me to pay them fixed charges,if they charged me an unregulated tariff based solely on the amount of power I consume from them,that might be more acceptable to us, says the executive.I dont think either industries or SEBs are being entirely transparent, says another senior official at CERC.Even businesses dont want to work in a completely unregulated power tariff system, he adds.He points out that there are businesses that habitually draw more power from their state discom than they are entitled to.Some businesses would like to hide the actual load they draw from the power supplier so as to manage fuel bills, he says.In a situation where they buy power from the open market,this is not possible. Power purchases on the IEX and other exchanges work on a cash-and-carry basis,where buyers pay upfront and only receive power when their payments clear.

Ground Realities

Regardless of the legal debates,open access is moving forward,slowly and unsteadily.Industrial consumers now account for 40-60 % of total demand on the exchange, says IEXs Mediratta.States like Rajasthan,Tamil Nadu and Punjab have already moved in one way or another to allow industrial consumers to buy power from the market.More often than not,whats driving SEBs to make this concession is the worsening power crisis.Like Andhra,Tamil Nadu too has announced power holidays for industries.R Ramachandran,president,marketing,at JR Metal,a steel maker,says his company buys power and keeps plants running in the small hours of the morning when rates on the exchanges are low.At peak hours (6-10 pm),the company shuts down its machines for maintenance,as power rates in the exchange are far too high, he says.
Punjab is another state dogged by erratic power supply.HR Kapoor,general manager,finance,at Nahar Spinning Mills,Ludhiana,says the company was very active in the power exchanges till a year ago,but has scaled back because of the high rates compared with those charged by the state utility.Last year,our savings due to power purchases from open access were about 35%.This year,it is less about 15%, he says.
Kapoors case illustrates another big challenge facing the open access market the actual ability of existing power infrastructure,physical and economic,to handle a big potential influx of demand from industrial consumers.Further,industries buy all their open access power in the short-term market,exposing company budgets to the vagaries of short-term fluctuations.
Open access would receive a boost if industries could strike longer-term contracts directly with sellers,rather than rely on short-term day-ahead markets to buy power;something which exposes company budgets to the real uncertainties of the shortterm power market.But as an industry official says: We allow coal to be supplied by Coal India only to power companies which have long-term power purchase agreements with discoms, he says.This doesnt help when it comes to creating a long-term or even medium-term open access market.
Even if some states are being gradually forced to give way on open access,the problems are unlikely to end.





Industries are the most lucrative power consumers few states want to give up this captive market


State grids are weak even if industries get to purchase power from anywhere in the country,the infrastructure may not be equipped to cope with the heavy flows of power


Even industries themselves may not be ready some consumers are reluctant to rely substantially on open access because they will be made to pay full price for power


Different arms of the government have different views on how fast open access should proceed



Rajasthan Punjab India Energy Exchange Ltd. Andhra Pradesh Tamil Nadu India Energy Exchange RSWM Ltd (LNG Bhilwara Group) Regulators Carbon Emission Reduction Central Electricity Regulatory Commission Coal Energy Electricity Regulatory Commission State Electricity Board Indus Planning Commission site news Power feeder IEX Power shortage power market Electricity India

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