CERC's tariff regulations: In tandem with electricity sector's trends

Every five years, Central Electricity Regulatory Commission (CERC) comes out with tariff regulations which determine the structure of the cost of generating and transmitting power. Apart from this, these regulations are indicative of prevalent practices, ongoing trends and future course of action for the electricity sector.

The CERC announced the regulations for the 2019-2014 this week. Coal based generation is facing fuel supply issues and deadline of phasing old units. The rampantly growing renewable is struggling with transmission niggles. Lack of a balancing source such as hydro power could potentially harm the grid. At such a juncture, the tariff regulations have tried to balance the power demand growth with efficiency.

Here are the salient features and its potential impact:

Recovery of fixed cost: The fixed cost component of the power tariff which is basically the capital cost is recoverable on a quarterly basis now. It was annual earlier. This would reduce the burden on the state owned power distribution companies (discoms). Fixed cost is payable by the discoms even when not procuring power. Quarterly payment would ease off payment pressure on loss making discoms.

Recovery of coal cost due to quality issues: CERC has made provision for power generators to recover their cost of coal if the gross calorific value (GCV) of coal at the receiving end doesn’t match with the billed/dispatched one. It has proposed an allowance of loss of up to 85kCal/GCV. This step is a huge positive for NTPC which faces under–recovery due to coal quality issues. SBI Caps estimates retrospective recovery for 2014-19 period (if approved by CERC) of Rs 40-45 billion for NTPC.

Incentive for peak power: For power suppliers meeting peak demand, the incentive has been increased to 65 paisa/kwh (+). While off peak hour incentive stands at 50 paisa/kwh. Peak power supply takes care of sudden demand fluctuations. Energy sources such as hydro and gas are preferred as peak power suppliers. Overall incentive for power units has been fixed at 85 per cent plant load factor and above.

Reduction of equity on +25 years plants: Power generators would have to reduce equity in the plants that have completed useful life (for instance 25 years for thermal power) and recovered depreciation in excess of debt repayment till date.

Emission control cost part of tariff: Adhering to new emission norms for thermal power generators, the units which install emission control infrastructure will get to include that cost in their final power tariff. “Any expenditure incurred or projected to be incurred shall form the basis of determination of tariff,’ said the regulations.

Working Capital: Norms for working capital have been tightened with receivables days reduced to 45 days from 60 days earlier. This has been offset by late payment surcharge of 1.25 per cent available from 45 days instead of 60 days.