High voltage power lines hang from pylons near an electricity sub-station (Photographer: Kerim Okten/Bloomberg)

Government Discovers Higher Tariff Under Auctions To Revive Stressed Power Assets

NHPC Ltd. said the tariff discovered through the latest reverse auction to sell power from stressed units may be too high for distribution companies.

“The tariff discovered in the auctions has been very high this time at Rs 4.41 per kilowatt hour…We will find it difficult to sell this power to discoms at this tariff,” Balraj Joshi, managing director at NHPC Ltd. told BloombergQuint, adding that NHPC’s own projects are selling power at an average price of Rs 3.25 per kwH. “Now discoms will have to bid at how much price they want power. If there are no takers for this tariff, we will have a bit of problem.”

The auction, part of the government’s second pilot to procure aggregate power of 2,500 megawatt for three years, aims to revive demand for electricity generators who don’t have power purchase agreements with discoms.

Sabyasachi Majumdar, senior vice president and group head at ICRA Ratings, said, “From a discom's perspective, the slightly higher tariffs under the second scheme is a negative development.” But he said the tariffs discovered are largely in line with cost of generation for recently commissioned projects which don’t have any power purchase pacts.

“The discoms must improve their operating efficiencies mainly through reduction in distribution loss levels and the regulators along with state governments must enable timely pass-through of the changes in cost structure in the retail tariffs, to achieve a sustainable improvement in their financial profile,” he said.

While NHPC received 16 applications, financial bids of 15 “technically qualified bidders” were opened on April 18. Based on the e-reverse auction, a tariff of Rs 4.41/kwh was discovered.

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The tariff, according to Majumdar, has been discovered through a bidding process, with availability of linkage fuel from domestic sources, prevailing fuel prices and capital cost of the projects being the driving factors for the power generators. “For a coal-based power project with a capital cost of Rs 7.5 crore per MW and having linkage coal for meeting the entire fuel requirement, the average cost of generation excluding return on equity stands at about Rs 4.0-4.1 per unit,” Majumdar said. “This would go up to at least Rs 4.6-4.7 per unit in the absence of fuel linkage and using coal from e-auction or imports.”

Few Buyers

So far, discoms have submitted their willingness for procurement of power of 1,300-1,400 MW (Gujarat- 500 MW, Jammu and Kashmir- 600 MW, Tamil Nadu- 200 MW- 300 MW) under the second pilot scheme, leaving nearly 1,000 MW of excess supply to be absorbed, an NHPC official told BloombergQuint on condition of anonymity.

However, discoms of Rajasthan, Goa, Haryana, Uttar Pradesh, Chhattisgarh, Kerala, Madhya Pradesh, Meghalaya and Odisha have expressed their unwillingness to procure power from pilot scheme-II, he said.

In the first round of the scheme, power producers signed agreements for 1,900 MW capacity against the available capacity of 2,500 MW and the tariff came in at Rs 4.24 per unit.

The second scheme, according to Majumdar, is more favourable for power developers as the tariff quoted by the bidders will have fixed and variable components with linkage to wholesale price index. “The bidding to supply 2.5 gigawatt of power was fully subscribed under the second medium-term power purchase agreement scheme, albeit at a slightly higher tariff.”

The reasons for the discoms willingness or unwillingness to procure would depend on various factors including the demand growth expectations, supply from existing long-term & medium-term sources and their own financial position, he said.

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