Power Generation in India: Facing the Heat of Power Purchase Agreements

By Kunal Kaistha

Since the enactment of the Electricity Act, 2003 (Act), notification of national tariff policy and electricity policy, competitive bidding guidelines and setting up of power exchanges, a large number of private parties big and small, jumped into the bandwagon of setting up power plants across the country. Today this euphoria seems to have taken a back seat due to shortage of domestic coal and the competitively awarded Power Purchase Agreement’s under Case I or Case II bidding process not providing sufficient avenues for the passing through of coal price risk to the purchaser.

The uncertainty being faced by the power generators on account of fuel shortage, inflexible power purchase agreements and policy vacuum seem to have engulfed the sector in a crisis and it won’t be alarmist to say that the sector is headed towards a collapse if not properly checked. In this article I look into two major developments affecting power generation sector related to power purchase agreement under Ministry of Power’s competitive bidding guidelines and on cost plus basis.

The competitive bidding guidelines of the Ministry of Power specify two methods of procuring power under international competitive bidding route. Case I method where location, technology, or fuel of the generator is not specified and Case II method where the location and/or fuel of the generator is specified.

In one of the Power Purchase Agreement (PPA) executed under Case I method in 2008 between Haryana Distribution Licensees (Haryana Discoms) and PTC India Ltd (PTC) for sale of power from Lanco Amarkantak Power Private Ltd’s (Lanco) power plant in Chhattisgarh, the respondent Lanco, in a petition before Haryana Electricity Regulatory Commission (HERC) regarding extraordinary circumstances making it impossible for PTC and Lanco to supply power to Haryana Discoms unless amendment to tariff is done in the PPA, requested for a tariff hike on the following main grounds:

1.    Change in coal distribution policy by Government of India affecting the price of coal
2.    Force Majeure events of change in visa policy by Government of India and earthquake in China

The principles of Lancos argument before the HERC was that the present domestic coal shortage, as reflected in the New Coal Distribution Policy, 2007 would require procurement of expensive imported coal (3 to 6 times the rate of domestic coal), which would make the tariff in the PPA- presumed on sufficient supply of domestic coal- unviable. Force Majeure events of earthquake in China and change in Visa Policy by Government of India had delayed the supply of Chinese power plant equipment and caused exodus of technical personnel from China respectively, thus delaying the completion of the power project.

On the first issue, the HERC was of the view that fuel price risk has to be absorbed by Lanco as neither the base project cost nor the fuel price was approved by the Commission earlier. On the second issue it opined that the executed PPA does not contain any provision to accommodate tariff change for delays under Force Majeure.

The Act provides very wide powers to the Electricity Regulatory Commission (ERC) in fulfilling its objective under section 79 and 86. The guiding principles on which this power has to be exercised is provided in the National Electricity Policy, 2005 which mentions amongst others financial turnaround/ commercial viability of electricity sector and protection of consumer interest as important measures for the ERC to consider.

The HERC in not allowing change in energy charge due to high price of imported coal and change in capacity charge due to project delay, made a balancing act in enforcing the sacrosanctity of the power sale contract and preserving consumer interest by providing them with power at cheaper rate. It however oversaw the fact that no power plant can run at a loss and in the long term the consumer would suffer the absence of electricity on account of closure of loss making plants.

Though the PPA does not provide any tariff relief on such account, the regulator has the power to amend the tariff under section 86.1.(b) of the Act, which empowers it to regulate the purchase and procurement process of distribution licensees including the price at which electricity is procured from the generating companies or licensees or from other sources through agreements. Such powers are hardly exercised by the ERCs as they are not well disposed towards giving a decision against the government owned entities.

The case of Lanco with Haryana Discoms is not a one off case in the country. In the year 2008, Adani Power Ltd issued notice to Gujarat Urja Vikas Nigam Ltd on termination of PPA under Case I bidding due to non-execution of fuel supply agreement by Gujarat Mineral Development Corporation Ltd. As early as 2011, JSW Energy Ltd moved the Maharashtra Electricity Regulatory Commission for adjudicating dispute with Maharashtra State Electricity Distribution Company Ltd (MSEDCL) under the Case I PPA executed with it in the year 2010.

The issue was passing through of coal price to MSEDCL for the coal procured from alternate sources of supply, due to Force Majuere event of cancellation of license from original coal supplier in Indonesia. All the above companies lost the case before respective ERCs and hence the chance of getting appropriate electricity tariff for adverse circumstances beyond their control.

In spite of the above, the Act under section 62 provides an option to the generator to execute a power sale contract that allows for determination of electricity tariff on actual cost plus return basis. When read with section 86.1.(b) and 79.1.(b) of the Act, the ERC has the power to approve PPAs that determine tariff under cost plus basis. However, in the matter of PPA between North Delhi Power Company Ltd and Maithon Power Ltd, the decision of Delhi Electricity Regulatory Commission, upheld by the Appellate Tribunal for Electricity, in allowing for execution of such PPA under these sections has been challenged by the Government of India before the Supreme Court, thus creating legal uncertainty over execution of such type of PPAs.

A report of CRISIL (Power Sector Lenders: Will the Credit Quality Trip?) in 2011 on the financial status of distribution utilities has brought out startling facts over the sorry state of affairs.  The aggregate losses of 57 distribution companies covered in the study for the FY 2009-10 has been Rs. 2.57 Lakh Crore. If remained unchecked this may rise to a staggering Rs. 6.00 Lakh Crore in the FY 2012-13. Due to such precarious financial position, most discoms are not capable enough to purchase high priced power.

Certain state utilities like Tamil Nadu Generation and Distribution Company and Uttar Pradesh Power Corporation Ltd have not paid outstanding dues to generators for years together. This is a catch 22 like situation for the generator, on one side it has the devil of rigid PPA’s and policy vacuum staring at it while on the other side the deep sea of un-sustainability of the power sector due to mounting financial losses of distribution licensees. The Electricity Regulatory Commissions which were set up with the objective of reforming and resurrecting the electricity sector have failed to do the same. It is now upto the government to step in and save the sector from collapse.

Kunal Kaistha is a professional of the power industry having wide experience of working in electricity regulatory commission, SEZ Projects, power generation and power trading.  He is presently working with GMR Energy and can be reached at kunalkaistha@gmail.com