governance, political economy, institutional development and economic regulation

Posts tagged ‘electric power’

Grandfather stranded power assets equitably

Coal

Economic reform has few friends. This truism is visible today as the 2003 de-licensing of power generation capacity is being unfairly fingered as the culprit for the Rs 1 trillion bank debt turning delinquent due to pending or actual bankruptcy of the power projects.

De-licensing of power generation delivered what it was supposed to – capacity addition in thermal generation exceeding the planned capacity addition over the period 2012 to 2017 by 30%. Fingers are also being pointed to low coal production or the prohibitive price of imported gas as additional culprits. This is disingenuous.

Drivers of stranded power assets

The primary reason why installed generation capacity remains underutilised is that distribution utilities have failed to develop new markets for electricity and are stuck at unreasonably high levels of operational inefficiency. The CRE/ICRA 6th Annual Rating for Distribution Utilities July 2018, rates just 7 out of 41 distribution utilities with a satisfyingly high performance. But remember that rating standards in India are contextually determined to offer an incentive for improvement. Lowering transmission and commercial loss below 25% accrues incentive points. International standards would be way better.

The average loss in distribution utilities, during FY 2016, after accounting for subsidy received from government, was Rs 0.65 per unit (kWh) sold. Is it any wonder then that distribution utilities have failed to absorb the available supply of electricity. Actual users have to undergo forced power outages till the utilities can generate cash to pay for purchasing electricity from the grid. Constraints on the supply side have been unplugged by reform. The problem lies in stodgy utilities failing to aggregate potential demand.

India night lights

SHAKTI a transparent, effective resource allocation mechanism

Union government steps for reducing financial stress in the power sector date back to 2017. SHAKTI (Scheme for Harnessing and Allocating Koyala (Coal) Transparently in India) skillfully used the auction methodology to allocate up to 80% of the assessed need for coal supply to 11 generators (31 entities applied but only 14 were found to be at a reasonable stage of project completion) . Generators without any coal linkage, bid for coal supply from Coal India Ltd. by agreeing to reduce their approved levelized tariff , thereby sharing the gain with their customers. Bids for reducing tariff by 4 to 1 paise per unit (kWh) were received. This was commercially smart rationing of coal supply to favour the most efficient generators.

RBI shakes complacent defaulting promoters awake with looming insolvency

Debt Recovery

Why has the debate around stressed power assets gained currency today? Election time, which we are clearly into, is a good time to press for benefits. This applies to requests for extending the time period beyond the 180 days allowed to promoters to rectify a loan default. Under the Insolvency and Bankruptcy Code 2016, promoters or their associates, become ineligible to bid for the assets during resolution proceedings. This severe penalty is meant to spur promoters to fulfil their loan repayment obligations and pay banks back on time.

Timely negotiated settlements better than the judicial option 

Draconian penalties are of little use when the default is due to a systemic shock. The Enron private power fiasco 1992-1999 was sparked by spiralling of imported gas price. Negotiations, rather than judicial options, finally resolved matters. In 2005, NTPC, GAIL and MSEB acquired the assets in Dahbol, Maharashtra abandoned by the bankrupt US company.

Enron solution redux- neither desirable nor feasible

Dahbol involved only 2GW of abandoned assets. Today, 10 GW of gas generators are stressed, like Enron. In addition around 12GW of coal fired generators are also stressed after excluding those which have benefited from the SHAKTI initiative. The stranded asset problem is more than 10X of the Enron problem. The bank loans – mostly of Indian banks – at stake are around Rs 1 trillion. Is there a way out causing the least disruption to embedded economic incentives?

Reduce the cost of coal based generation by lowering the implicit and explicit “tax” imposed on it.  

The most direct route would be to end the extortive levies on coal production and transportation by rail. Rahul Tongia and Puneet Kamboj of Brookings India recommend making the railway freight charges cost reflective. This would also make Indian Railways competitive with road transport, to which it has been losing market share.

Currently, coal transport by rail is charged more than the cost of service. This is an implict tax on freight which subsidises passenger traffic. The resultant excess freight cost feeds into the cost of electricity generated. This increases the cost of electricity by Rs 0.21 per unit (kWh) amounting to Rs 108 billion per year.

In addition, there is an explicit tax on coal via royalties, levies and coal cess. These increased from Rs 200 per tonne in 2011 to Rs 800 per tonne in 2017 pushing up further the cost of coal based power.

Why should electricity consumers pay to subsidise rail passengers?

Quite unfairly, it is the honest electricity user who is indirectly subsidising rail passenger traffic – that too in a poorly targeted non-merit way. Freight charges should become cost reflective and the levies on coal production reduced to Rs 400 per tonne. IR should generate the additional revenue required for keeping passenger fares reasonable, from commercial development of their physical assets.

Subsidise rail passengers explicitly via the budget

There is also a good case to use the revenues from coal cess and other levies for this purpose. Rail transport is more efficient and environmentally less toxic than road transport. Switching to electric rail from road, reduces the import burden imposed by using petro products. A direct subsidy of Rs 150 billion should be allocated to IR specifically for adopting cost based freight charges in the 2019 budget. Lowering the cost of coal based power will improve the finances of distribution utilities and enable them to buy more power, which would feed into the financials of coal based generators.

Spread the pain of low availability of domestic fuel across all thermal power generators

Why not replicate the SHAKTI auction template to allocate a portion – say 50% – of the annual coal demand to all generators (those owned by the Union, state governments or the private sector) whilst retaining the existing allocations for the remaining one half. Electricity prices at the grid would reduce. The principle of price competitiveness (electricity supply) as the door to preferential access to scarce domestic coal will incentivise all generators to become efficient.

competition

Grandfathering existing contracts is the gold standard of contracting norms. But extraordinary circumstances call for innovative options. When the available resources fall short of demand, the principle of efficiency of resource use overrides historical rights in a merit order system. New generators win the efficiency battle, hands down.

Adapted from the authors opinion piece in TOI blogs, August 9, 2018 https://blogs.timesofindia.indiatimes.com/opinion-india/equitable-grandfathering-needed-in-thermal-power/

Gas and Power: shine a light please on “deals”.

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Elections are around the corner. Babus are petrified of taking decisions. But government is burning the midnight oil to grant “relief” to Reliance, Tata and Adanis to compensate for the poor planning and foresight of these companies under the guise of “protecting consumer interest”.

The Central Electricity Regulatory Commission (CERC) decided in April 2013 that Tata and Adani (coal based mega power plants in Gujarat) should be permitted to rupture their agreement with Gujarat and Haryana to supply electric power. The reasoning was that the cost of imported Indonesian coal had increased more than could not have been foreseen. A dissenting order by a member; Mr. Jayaraman points out that nothing in the bidding document compelled these companies to bid a fixed tariff. They could have opted to bid a variable tariff, which would have passed through the changes in fuel cost; both increase and decrease. They choose not to do so and hence forfeit their commercial rights to come back for a tariff revision. Other bidders whom they outbid did opt for variable costs and possibly were outbid on these grounds. We will never know for sure since bid details are not publicly shared on the net which incidentally is bad procurement practice.

The argument of acting in consumer interest is even more farcical. It states that since the bid tariff is no longer commercially viable, sticking to it would force the developers to abandon the project. No mention here of the penalty the developers would have to pay if they were to quit. No mention either that NTPC could happily buy the projects, just as it bought the ENRON project or Delhi Metro took over the Reliance Delhi Airport metro line when it did not make expected profits or that the National Highway Authority may have to take over the Gurgaon Expressway. The CERC argument is that the new developer would in any case have to charge more to consumers so why not just do a deal with the existing developers, since the poor consumer would have to pay more in any case. Sounds familiar to us aam admis and aurats (AAA) a circular argument which suits everyone except us. If a “deal” is to be done non-competitively then let us do it with the public sector. At least the resultant earnings will accrue indirectly to the MOF

Allowing such retro tariff revisions in competitive bidding not only knocks the concept out of the window, it is rich future pickings for CAG, CVC and CBI. To dilute this possibility the favorite ploy of babus has become to kick the problem over to an irreproachable, external entity; in this case Deepak Parekh of HDFC, who is in danger of fast becoming the MMS of Indian Gas and Power. Deepak apparently has headed (we don’t really know since neither the Gujarat nor the Haryana Government websites tell us about this) a committee, mutually agreed between the developers and the procuring state governments, to work out what should be done. This report has been submitted to the CERC in mid-September 2013, but is not on the website of CERC and even worse has not been made available to PRAYAS a NGO specializing in energy and water, which is on the Advisory Board of the CERC. See their plaintive cry for information:  http://www.livemint.com/Industry/9NOJM6JwuwPwAw2i2l0DFP/CERC-suggested-to-hold-public-hearing-on-tariff-issues.html.

The implication us AAAs will draw is that had Mr. Jayaram not dissented, the CERC would have meekly passed through the additional cost to consumers. My Jayaraman, consequently, whilst not a whistle blower, since there is no allegation of graft, is certainly a rudder for the Rule of Law prevailing over egregious commercial considerations. In September 2013 Ministry of Power amended its tariff guidelines by making fuel cost a pass through. The term “pass through” is intriguing because it seems to undercut the powers of the CERC to determine tariff in a holistic manner. The new guidelines only require the power developer to be prudent while purchasing fuel. Fuel cost can constitute 50 to 70% of the tariff. Well known transfer pricing tricks, especially in imported fuel, militate against relying on a broad test of “prudence”, to protect consumer interest sufficiently.

A similar tactic has been adopted in gas production, where the price at which Reliance will sell its gas has doubled (by the cabinet this time) on the argument that the government administered price is far lower than the prevailing international price for gas. This being true does not explain why Reliance has failed to meet its investment commitments which are the prime reason for a decrease in gas production way below the optimum levels. Even worse, the Ministry of Petroleum’s view is falling on deaf ears that retro advantage of gas price increase should not be given to Reliance on prior production commitments. All this again in the interest of consumers, ofcourse, who in the absence of a deal with Reliance, would have to pay imported prices for gas! Admittedly, Reliance (like Enron) has the disadvantage of its public image working against it. Any babu ruling in Reliance’s favor, is automatically suspect in the eyes of us AAA’s though, mysteriously, very few babus who have the guts to do so, live to regret their decisions.

 As in the case of power, a committee headed by Mr. Kelkar, aided by the hapless and overworked Mr. Parekh is meanwhile looking at the gas pricing regime. Oddly, as in power, the entire exercise is being conducted in the cozy confines of the government, CII, an NGO which ostensibly works on fuel studies and research (but for which not a single paper comes up in a Google search) and the Boston Consulting Group (BCG), a consultancy. Presumably BCG was appointed after a competitive bid. We will never know because such trivia is never shared with us AAA’s. The entire oil exploration and production process is kept tightly under wraps. Exploration, development and production contracts are never made available on the website and “commercial confidentiality” conditions of the developer are routinely cited as a reason.

 The international literature on natural resource management is rife with the need to introduce transparency and citizen participation in this sector. The reason is obvious. Oil and gas contracts involve huge sums paid and received between private developers and government. If AAA’s are not kept informed of what were the obligations of the developer versus actual delivery on the one hand and what was owed to the government and what was actually received, the instant apprehension is potential leakage of government revenue or of motivated bias in favor of the developer. Compare our non-transparent and secret regime for the oil and gas production sector with what even Ghana puts on the web: http://www.gnpcghana.com/_upload/general/saltpondfield_sopcl.pdf. Key details of the contracts and delivery on commitments, including penalties levied for shortfalls in developer obligations. In 2012 the EU made it compulsory for all extractive industries (including oil and gas firms) to share data publiclly on revenue and payments to governments. http://europa.eu/rapid/press-release_MEMO-13-541_en.htm.

The governments of India, Gujarat and Haryana all profess a commitment to “good governance”. The essence of good governance is to expand access to information for the public and to encourage their direct participation in decision making. True AAAs, like me, are clueless on technicalities like a Gas Production Sharing Contract but we sure like to be kept informed and we have technical experts who can work in our interest, independent of governments. Democracy is all about giving people a choice. Give us the information and let us use it the way we want to. Please don’t hide behind the shield of the RTI (which allows notional access to information) and force us AAA’s to seek hard copies of information from the relevant ministries. If the websites of governments have the space to trumpet their many achievements, surely they can also instantly share with us information on what contracts have been signed, with whom and the key obligations therein?

When you light a lamp, it illuminates everything around it. Please light a lamp in Indian power and gas deals. 

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