To allay power companies’ worries about fuel price volatility, the power ministry has proposed that fuel charge be a pass-through, subject to appropriate safeguards.
Pass-through of fuel charge offers full protection to the concessionaire against potential losses due to price rise, according to the model power purchase agreement (PPA). This means, the concessionaire can’t retain the benefit of reduced or concessional fuel prices.
A power ministry official told Business Standard, “The model PPA has been released to seek objections and suggestions from the stakeholders, especially of the 12th Plan estimates capacity addition of 80,000 Mw. This was decided at a recent meeting between power minister Veerappa Moily and power producers.”
The official clarified that the model PPA would be applicable for future projects.
The model PPA says: “Fuel charge cannot be a profit centre for the concessionaire and the principle of determination of fuel charge must ensure that costs are recovered on the basis of actuals, assuring that the concessionaire would function with the efficiency expected of a prudent and diligent operator.”
The framework contained in the PPA provides formulations for determination of fuel costs, depending on the source, and price of fuel supplies. While supply from Coal India will carry a regulated price, other supplies would have to be procured either from captive mines or from the open market, says the PPA.
For imported fuel, coal indices that are widely used in international coal supplies will be considered. But this will be subject to the actual cost incurred by the concessionaire, the PPA notes.
However, if bids are invited from producers having captive mines abroad, a ceiling equivalent to about 70 per cent of the prevailing price could be prescribed with appropriate indexation over the concession period. In all cases of imported fuel, the foreign exchange risk will have to be borne by the utility as the concessionaire will have no means to hedge such risk on a long-term basis, says the PPA.
The power minister has already clarified that the ministry will not approach the Central Electricity Regulatory Commission under section 79 of the Electricity Act, 2003 to seek relief for power projects. Power producers have demanded an increase in tariffs following changes in fuel supply agreements (FSA) by suppliers. The ministry wants the producers to independently approach CERC or the respective state electricity regulatory commissions. Ashok Khurana, director general, Association of Power Producers (APP) said: "In the present form, the model PPA is neither bankable nor workable on technical considerations. It is more suitable for tolling plant."
The concession period for a generation project would be fixed for 30 years keeping in view the expected life of the generation plant, with an option to extend it for another 10 years. The fixed charge determined for each accounting year will be revised annually to reflect 30 per cent of the variation in the wholesale price index. An annual reduction of 3 per cent in fixed charge was stipulated so that the benefit of a depreciated asset was passed on to consumers.
According to the model PPA, the FSA will assure the utility of supply of enough fuel to generate a determined quantum of electricity. In the event of inadequate fuel supply, the concessionaire will have to identify additional sources to meet shortage. The concessionaire will declare the availability of the power station at frequent intervals and the utility can direct the concessionaire to produce and dispatch electricity, it said.
Moreover, 80 per cent of the installed capacity of power stations (85 per cent in case fuel is procured from captive mines) will at all times be dedicated for production and supply of electricity to the utility and it will be used according to the utility’s instructions.
If the capacity is not used due to fuel shortage, the concessionaire can procure fuel from the market and sell the electricity to third parties and recover the fixed charge. If a dedicated capacity remains idle, the utility will pay the concessionaire 70 per cent of the fixed charge.
