Power Secretary Says Tariffs To Rise In Staggered Manner Over Five Years
People stand under a light powered by energy from a solar power microgrid at night in the village of Dharnai in Jehanabad, Bihar, India. (Photographer: Prashanth Vishwanathan/Bloomberg)

Power Secretary Says Tariffs To Rise In Staggered Manner Over Five Years

Electricity tariffs will be increased in a staggered manner in the next five years as power producers upgrade plants to comply with stricter emission standards, Power Secretary Ajay Kumar Bhalla said.

That’s after Power Minister RK Singh said yesterday that tariffs are expected to rise by 62 to 93 paise per kilowatt-hour once coal-fired power producers retrofit plants to make them environment-friendly. The plants missed the December deadline to cut emissions and the Power Ministry wants to roll out the new standards in a phased manner.

Bhalla said a proposal has been presented to modify plants with four components:

  • Desulphurisation of plants for controlling sulphur oxide emissions.
  • Regulating suspended particulate matter emissions.
  • Nitrogen oxide control.
  • Conversion of the open cycle to closed cycle in plants for water flow.

All the plants may not require all the components and might have one or all of them pre-installed, he said. Which means, the tariff hike estimate will vary for 400 units based on the actual cost incurred by individual plants, he said. Tariffs will return to normalcy as demand increases, which going by the current revival in the industry should stabilise soon, he said.

As for the stressed power assets facing insolvency, Bhalla said state-owned NTPC Ltd. is still in the fray to buy some of those.

Watch the full conversation here:

Here are edited excerpts from the conversation:

RK Singh informed the Parliament that tariffs are expected to increase between 62 paise to 93 paise on account of retrofitting plants to lower their emissions and become more environment friendly. When do you expect this activity to take place and the tariff hikes to happen?

This tariff increase that has been computed from 62 paise to 93 paise is for implementing four components in plants.One is desulphurisation for controlling sulphur oxide emissions, then for regulating suspended particulate matter emissions, third is for nitrogen oxide control and lastly for conversion of open cycle into closed cycle for water flow. All plants have to be retrofitted with regards to these four components, and the tariff hike is our estimate for the Central Electrification Authority. But all plants may not need all these things. Some of the plants may already have closed cycle water system, or have SPM under control due to which the estimate per plant per unit will vary depending on requirement of activities. We had put all the four components together for plant retrofitting and informed that it will have an impact of around 62 paise to 93 paise.

When do you expect the bulk of these tariff hikes to be passed on to consumers?

There are more than 400 units which will be impacted, as per our assessment. For these, we have submitted a phasing plan to the Ministry of Environment and Forest where retrofitting will take place up to December 2022. All the units cannot be shut down, except for FGD installation which requires units to be shut for some months. We have submitted a phased plan for detailed working in consultation with all plants. Central Pollution Control Board has issued notices to these plants accordingly to comply with the phased plan submitted by the Ministry of Power. So, it is spread out over a period of five years. Since December 2022 is date, some capacity will be made compliant in 2018 itself and the remaining will be done in a staggered manner till 2022.

Are you expecting the tariff increase to be in place over five years?

It will vary from plant to plant. If for instance, an NTPC Ltd. plant gets retrofitted in 2018, then the impact will come for those 2-3 units belonging to the plant.

Is there any way we can gauge when these will get passed on to consumers? Or what it means in terms of the out of pocket expenses of power cost?

Simple fuel-gas desulfurisation installation may have an impact of around 30 paise. This is an estimate based on the Central Electricity Authority’s assessment. When individual units go for tendering and looking for technology, due to the huge volume involved, there is a grave chance for the prices to come down. So, this estimated tariff will depend on the actual cost incurred by units individually and accordingly it will be made a pass-through for plants where a cost plus model is in place. In plants, where the bidding tariff is involved, the regulator will have to look at it as a change in law and convert it into a pass-through. But it will vary from unit to unit and based on the tendering and type of technology. We expect prices to come down when there is robust demand in the country.

What is the general sense on the kind of offtake on the electricity side?

There is 5-6 percent growth in the sector currently. Over the next five years, the estimated growth is around 6-7 percent. November in general is a low demand month due to winters, but December onwards, the demand starts picking up.

In the near term, have you seen a pick-up in growth suggesting that the industrial revival activity is rising from its previous low levels?

It has, there is a 5 percent growth in electricity this year, up to November.

Is there any worry of discoms being unable to pick up power?

Not as of now. We are not falling short of any peak-rated capacity on the generation side. If the demand picks up in the coming months as the core sector grows, we expect industrial activity in steel, aluminum, cement sectors to grow as well. Further, downstream industries will also pick up. Exports are also growing. So, we expect power demand to increase. In recent times, the plant load factor on an average has gone up and it has been on an upward trajectory since the last two months.

What is the plant load factor average since the last two years and what number do you expect it to move towards?

It has started going beyond 57-58 percent touching 59 percent, on an average basis. NTPC’s average is over 79 percent.

When do you expect us to move to higher PLF levels? Some of the power assets are in insolvency process. What’s your view and what will it mean for the sector?

For pithead plants, the PLF factor is much higher than that in the other plants. NTPC pithead plants’ PLF will be much more, considering their average is 79-80 percent. So, the overall PLF is going up and it also varies from state to state. Some of the older plant capacities have retired, as 7000 megawatt power has retired, with 3000 megawatt capacity in the pipeline. Accordingly, new capacities will be getting market demand. As far as the stressed assets are concerned, the matter has revived. Each plant has a different treatment to be given. In some, the bankers are looking at change in ownership. Somewhere they are restructuring the debts. Where nothing has come on ground, the bankers have gone to NCLT. So, different attempts are being made to revive some of these assets in the best possible manner.

Last year, there was a plan being discussed that there would be a central role in these power assets, with either a special purpose vehicle getting created or NTPC taking over operation of some of these plants. Nothing came out. Has that been put on hold?

Each asset is on a different footing. Some are commissioned plants, some are not, some have a coal problem. In the Shakti auction, about 6-7 plants have availed that benefit. Those will definitely get into pipeline and start generating by February end or so, once the coal starts flowing.

Some of them that do not have power purchase agreements, are working on a model that will aggregate some power. NTPC has brought out Notices Inviting Tenders asking for any plant on an asset-based model to be taken over at a certain basic price like Rs 3-4 crore per megawatt. So, they have not received the response although many have downloaded the document. We are looking at whether plants will be interested in selling their assets to NTPC.

A brokerage assessment says that overall PLF has declined by 400 basis points to 48 odd percent. Is that correct?

We look at the Central Electricity Authority data. So, I am going by that percentage, and that doesn’t hint at a decline.

Renewable tariffs have been coming off. What’s your assessment of how the next few months could look like?

The new guidelines have been published for wind and solar. So, we expect some stability in tariffs and we expect much more bidding now as the government is planning to achieve the target of 175 gigawatt by 2022.

Are we falling short of that renewable target?

The Ministry of New and Renewable Energy is bringing out bids through one of their PSU secretaries where they are expecting that we will achieve more than 30 gigawatt of capacity within a year. Our minister has also already stated in the parliament the proposed trajectory of capacity addition for both solar and wind. For wind, further offshore capacities are also being explored now.

What is your view on whether there will be a likely shake out in the industry as result of continually declining tariffs in renewal front?

It is declining in that sense, but it is because of scale economies and a lot of other things. Clarity in guidelines has come on how the tariff will be dealt with, what are the changes in the law which will be made a pass through. Once those clarifications have come, for investors, it will become relatively clearer as to what would be their investment and the returns. So, that’s why tariffs have come down. But it will stabilise at a some point and will go ahead henceforth.

Is the central government keeping track of the kind of improvement seen in the transmission and distribution losses on the state discoms?

We are definitely on track because they had a trajectory of three years to reduce the losses and break-even. The losses in the first year have come down, and we are now looking at the audited figures once these are available for discoms to announce the results on 2017. Present figures show that the losses have come down, though losses still persist, and we don’t expect those losses to go away overnight. The national average has come down substantially, but losses are still there. Two more years are available to us. By the end of fiscal 2018, we will come out with figures which show better results. When we look at individual states, many of them have done very well. Billing efficiency has gone up. The energy build quantum has gone up. There is a growth of 9 percent in energy build. If we consider 5-5.5 percent as normal growth, there is still an additional billing which is taking place which means the losses would be coming down and have come down in many states.

Secondly, the tariff revision systems have been very regular. We have been continuously monitoring that the tariff petitions are filed on time and regulator disposes off these tariff petitions timely. Most of the UDAY states have filed tariff petitions and have got some tariff hikes too. Recently, Uttar Pradesh has got tariff hike. So, those things are already being monitored very regularly. At my level we do a monthly meeting, our ministers also review progress regularly. So, by the end of 2018-19, we are expecting to bring audited figure results to show that it is working well.

In January and March, 15,000 megawatt auction is slated to take place. Is that on track?

It is on track after the guidelines have been published. But I am not aware of the exact time frame.

Can you give a sense of what will be the key targets for the ministry in this calendar year?

As far as the generation and transmission are concerned, we are well on target. We have commissioned hydro capacities this year in two places and three more projects are going to get commissioned by March 2018. So, we are definitely looking for an addition to hydropower capacity.

We are looking at 100 percent electrification of 18,452 villages, among which over 1000 villages are yet to be covered. Then we have the Saubhagya scheme under which each unconnected household will be provided connectivity. By March 2019, we expect that to be able to to connect all these households. We are launching a big mission of bringing in smart meters and pre-paid meters which will be used for checking losses and reduce interface of manpower with the consumers and save the pilferage. These are some of the important things besides capacity addition on the transmission and generation sides.

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