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Cover Story | June 2017

Growing trend is switching from long term PPAs to short term contracts

Anish De, partner, infrastructure and government services at KPMG in India.

Do you think UDAY will be able to spur more demand for power from distribution companies (discoms) in a couple of years as the government is hoping for and result in signing PPAs?
We have already seen an increase in appetite for short term power from the utilities following the financial leeway brought about by the debt restructuring. Over the long term, sustained improvement in distribution operations as envisaged under UDAY, could bring significant improvement. The growing trend appears to be shifting away from long term PPAs to medium/short term contracts as the distribution utilities have experienced first-hand the risk of entering into long term commitment contracts.

Due to availability of power on exchanges at a very low rate, there is no compulsion for discoms to enter into long term PPAs. How such low market prices are affecting the power sector as a whole, and generators in particular?
At present, the low spot market power rates are reflective of the distress in the sector caused by a large quantum of under-utilised capacity competing against limited demand and trying to recover their variable cost and generate revenue for debt servicing. Therefore, at present the prices are not reflective of an ideal competitive market but going forward, with improvement in the demand scenario and with the introduction of better tailored market products, it is envisaged that the market prices may provide better signals for future investments by generators.

What are the initiatives the government is taking to alter the situation for the better?
The Government has already taken strong policy initiatives to build a base for performance improvements - UDAY scheme for financial and operational turnaround of discoms, 24x7 Power for All scheme to ensure adequacy of generation, transmission and distribution system, DDUGJY for rural electrification etc.

The Government has also recently announced a scheme for auction and allocation of coal linkages - this provides much needed clarity to many thermal power plants which had been facing sustained uncertainty regarding the future assurance of coal supplies for their plants. We understand that a new hydro power policy is also in the works for improving the viability of hydro projects.

What are the other concrete remedies that may be required for bringing the surplus capacity into supply stream in full?
We need better planning and strategies around the retirement and replacement of old and inefficient units. Inefficient and polluting plants need to be compulsorily retired, and we are seeing that CEA has been actively identifying such units. The states need to incorporate available capacity i.e., central plants as well as capacity available for contracting in other states, while taking decision on capacity expansion or replacement. In case additional capacity is needed, these need to be awarded on the basis of competitive bidding to ensure least cost and high efficiency capacity addition. In addition, there needs to be strict enforcement of standards of performance for ensuring good quality and reliable power supply. Load shedding and supply disruption is still common in both urban and rural areas including towns. Moving towards a mission-based approach for 24X7 reliable power supply to all is critical.

Further, we have to move towards systemic changes in the power markets through introduction of ancillary and balancing markets. This will enable better utilisation of the stranded gas-based plants which are ideally suited, through their fast ramp up/ramp down capabilities, for balancing the grid against the variability and intermittency of renewable energy sources.

What is the stranded capacity that is suffering evacuation problems and what are the generation segments that are affected the most?
While it is difficult to provide direct information on stranded capacity due to evacuation problems as it would require specific studies, there is undoubtedly a need to ensure coordinated planning and development of the transmission system which should be in sync with the upcoming generation capacities. This is particularly important considering the increasing amount of renewable generation capacity being added into the system as such capacity gets on-stream much earlier than the traditional thermal plants, hence requiring corresponding adjustment in the transmission planning process.

What are the broad reasons we can cite for the rise in stranded capacity and how they affect the financial viability of the projects?
There are multiple categories of stranded generation projects currently. On one hand, around 14,000 MW of gas based projects are stranded due to shortage of domestic sources of gas while the remaining 10,000 MW of gas based projects are operating at abysmally low levels of utilisation for the same reason. More than 6,000 MW of hydro projects are currently stalled due to various reasons such as local disputes, lack of funds and low visibility on power offtake.

Coal based plants are generally operating at a level of 60% PLF, thus indicating a significant quantum of under-utilised capacity. The main reason for this has been that growth in capacity in recent times has outpaced the growth in demand. Further, growing generation from renewable sources like solar and wind is replacing some of the thermal power. Apart from this, there are also about 18,000 MW of under-construction thermal projects which are stalled at present due to poor financial condition of the promoters. Such delays with under construction projects results in significant increase in IDC (interest during construction) while commissioned plants operating at sub-optimal levels face cash flow issues as the revenue is often not enough to service their debt obligations.

With the government pushing for nuclear, solar and wind capacities, is there any possibility that the stranded thermal capacity getting reprieve in the near future?
At present, it is too early to predict what the future has in store since the present sector dynamics is evolving. However, a sizeable portion of the existing thermal capacity is either old or inefficient or lacks the space to install modern equipment to control pollution levels, thereby raising the possibility of being phased out. As thermal power will continue to cater to the base demand load of the country, such opportunities may result in some of the stranded capacity coming back on stream in the future.

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