Are power purchase agreements useful?
Widespread, unannounced power cuts in the urban and suburban areas, industry closure for days on end and large-scale use of diesel gensets to rear the paddy crop reminded Punjabis of the era of power shortage in the state. For decades, power cuts in summer left domestic consumers, farmers, industrialists and shopkeepers fuming. Something had to be done.
New generation capacity had to be added, quickly. For a financially challenged state like Punjab, rustling up ₹20,000 crore was out of the question. Even financial institutions would demand substantial equity contribution from the promoter/state.
Large private investors had to be roped in. They had one query: Will the state give a commitment to purchase all the power produced? If the state shied away from the sovereign guarantee, the project was dead, ab initio. No bank would lend money to a power generator who did not have a 100% tie-up.
Meeting export commitments at a cost
The maximum demand in the summer months – April to September – was over 13,000 MW. The demand dipped to 3,700 MW from October onwards, when the air-conditioning loads of offices, homes and shops besides the agricultural demand fell.
Was there a hope that industrial demand would pick up? If we examine the immediate flight of industrialists to meet the Uttar Pradesh chief minister, it would stand to reason that Punjab industry is in an expansion mode. If assured power could be supplied at reasonable rates, exporters and other manufacturers would expand capacities and new units would come up, too. To meet export commitments, press reports indicate that factories generated power with diesel gensets at ₹57 a unit when their cost of supply from the Punjab State Power Corporation Limited (PSPCL) was around ₹6 a unit!
Of course, the PSPCL tried to help by procuring power from the electric exchange even at 12.40p per unit. In peak season, prices will be sky high and they will get jacked up further when a large demand of Punjab gets known. On top of that, there was a constraint of transmitting power on the northern grid.
Keeping all such scenarios in mind, the government of the day tendered for new power generating plants on the standard format approved by the central government. Even though I joined the power sector only after retirement in 2016, a check of the Punjab State Electricity Regulatory Commission (PSERC) records showed that the competitive guidelines issued by the Union power ministry were followed by two of the three power plants put up in Punjab. All states and the Centre followed the bidding procedure of this template. Only the plant at Goindwal Sahib was MoU-based, according to the earlier practice in the power sector and its power purchase agreement (PPA) is on a cost plus agreement.
Why it’s the right strategy
Was this the right strategy? Yes, if we look at the generation capacity of thermal stations in Punjab, it becomes evident that PSPCL can produce 3,000MW a day. These plants can produce 3,500 MW a day. From April to June, Nabha Power generated 1,204MW a day at ₹2.91 a unit. The Talwandi Sabo plant produced 746MW at ₹3.61 a unit. GVK produced 161MW at 4.04 per unit. The PSPCL plants at Ropar and Lehra Mohabbat produced 196 units at ₹4.14 per unit.
The state load despatch centre (at Patiala) schedules power based on a (price) merit order and it procured 90% of the power generated in the state from these IPPs at 25% cheaper prices. The benefit of cheaper purchase is naturally passed on to the domestic consumers, industries and farmers (for whom payment is made by the state subsidy).
Can the state buy all its power from the exchange? The maximum import (available transmission capability) from outside Punjab is 6,400 MW; a large component of this is committed to drawing power from National Thermal Power Corporation Limited and other central government projects. Contracts can be made for sourcing power from the exchange and short-term purchases can be made. By carefully juggling the state generation and import of power, exorbitant purchase at over ₹10 a unit can be avoided.
Capacity charges are inescapable
A lot of discussion centres on the capacity charges. It’s not well known that this is the norm in the power sector. Capacity charges are paid for plants set up by the central and state governments. The PSERC tariff order points out that the capacity charges for the Ropar plant are normatively set up at less than 90p and for the Lehra plant at less than 80p, but since they may not be scheduled (being high cost producers), the state would end up paying around ₹2.90 and over ₹2.50 as capacity charges to these plants.
Complaints are often aired that the PPAs are faulty because payment is made for 100% capacity and generation demanded is 80% or 85% only. All machines need overhauling and routine repair and maintenance. Let’s remember that even aircraft and railway engines don’t run 24x7x365 days. It can be safely concluded that capacity charges are inescapable if farmers, industrialists and domestic consumers want assured power at reasonable rates.
State can’t renege on its commitments
Can changes be made now? Yes, they can, with mutual consent. Can the state renege on its commitments and tear up a settled document because of perceived commercial interest? I don’t think it can happen; because any investor would knock the doors of the court. The judiciary may well refuse to go beyond written contracts; if a sovereign were to walk away from a solemn and signed contract, which investor will come to this state for any investment; ever?
Some suggestions have been made that the PPAs can be amended by a “change in law”. If we examine the PPA, we will note that “change in law” refers to an event, which is seven days before the bid deadline. That is evidently over. The agreement provides for termination on the default of the seller if the plant is not commissioned in time; or abandoned by the seller; if the seller assigns the assets; or becomes bankrupt (Article 14.1).
Since none of these conditions exist, the state will be well advised to use the assets created so painstakingly and in a fair and transparent manner, in the interest of power consumers of Punjab. The closest parallel to accepting capacity charges as a way of life is to imagine that you bought 3 ACs for your house with a bank loan and now you will have to pay the instalments of the AC every month, even though your family uses the ACs only in summer. firstname.lastname@example.org
The writer is a retired IAS officer and former chairman of the Punjab State Electricity Regulatory Commission. Views expressed are personal