Excess Long Term Power Tie-ups to Result in Fixed Cost of INR80bn for Discoms

The situation of surplus power will result in a fixed cost outgo of around INR80bn for state power distribution companies (discoms), on a conservative basis, in FY17, estimates India Ratings and Research (Ind-Ra). Ind-Ra's calculation is based on the study of Central Electricity Authority's data on supply and demand of electricity as per the Load Generation Balance report for FY17. These discoms are unlikely to schedule some of the excess power they have tied up in the past five to seven years, at a loss, thereby further weakening their financial position. Simultaneously, by taking advantage of lower prevailing spot prices, the discoms could reduce the extent of losses for not scheduling the long term tied up power.

The discoms in the western and southern regions are expected to be the worst hit, due to power purchase agreement (PPA) tie ups in excess of the power demand in the region. Ind-Ra estimates losses of around INR40bn by discoms in the western region and INR24.5bn by discoms 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 commitment at a fixed costs, in the form of power purchasing agreements are preventing some discoms from procuring low cost merchant power traded on the power exchanges.

The Punjab State Electricity Regulatory Commission recently revealed that the losses due to the surrendering of excess tied up of power for FY17 is expected at INR20.75bn. The commission has directed the Punjab State Power Corporation Limited to look at ways to reduce this fiscal burden by selling surplus power outside the state. The Karnataka Electricity Regulatory Commission also recently ended the earlier rule of the state government that power producers must generate at 100% capacity and supply only within the state. Generators can now apply for a no objection certificate from the Karnataka Electricity Regulatory Commission to sell their surplus power outside the state.

Many of the long term PPAs have provisioned for INR1.25 to INR1.75 fixed prices per unit of electricity compared to an all-inclusive cost of around INR2.5 per unit (based on actual power rates on power exchanges for FY16). Ind-Ra estimates that spot power tariffs on the exchanges are unlikely to increase beyond the current range of INR2.0 to INR2.5 per unit over the medium term, which is in line with the Central Electricity Authority's projections of 1.1% energy surplus and 2.6% peak load surplus during FY17, across India. The problem of surplus capacity has been partially caused by the 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 the discoms and other power generators. Captive generation capacity increased to 40726MW in 2016 from 8116 MW in 1990, growing at a CAGR of 6.66% (Figure 1) compared to 6.37% CAGR in overall capacity addition 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.

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