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Editorial | August 2010

Free up the captives

Somehow or the other, captive power has been at the centre of attention in recent times. For two years, the power ministry has been expressing an anxiety to utilise all available resources to power up the nation. The incentives or some form of encouragement that were expected for captive power generation—to extend the fiscal incentives of the mega power policy to captive and merchant power plants—both private sector enterprises—didn’t come.

The Central Electricity Authority (CEA) intervened earlier this year and asked the Central Electricity Regulatory Commission (CERC) to amend the regulations to facilitate connectivity of smaller generation stations to the grid—mainly captive and hydro. Interstate transfers would be far better facilitated if that regulation were tweaked in the way CEA has suggested. Currently, under Clause 2 (1) (b) of CERC’s regulations on grant of connectivity, medium and long-term access in interstate transmission, an applicant for grant of connectivity can be a generating station of installed capacity of 250 MW and above.

If the regulation is changed in order to benefit smaller plants including captives, it is almost certain to find great favour among captive power plant owners. After all, year after year over the past three, some majors lost money in their core businesses but made decent change on captive power—even made up much of the losses in the core businesses—in spite of the fact that the cost of producing captive power is often higher. That said, the returns on selling excess captive power at merchant rates have been the real saviour for captive power producers. Captive power not only encourages and reflects more openness of our system to private-to-private transactions, but also scales up the power availability overall.

Less convinced critics will maintain that higher power costs have escalated prices of manufactured goods—whose companies set up the captive plants. In a larger perspective, however, the costs, even if higher at present, will even out in the long run because of better and more competitive availability of merchant power in the market. Indeed, the counter-argument—from many experts—is that because energy deficit and industrial tariff are projected to remain high, captive power generation would be an attractive option for meeting the power needs of the industries. Secondly, some higher pricing of power is surely brewing around the corner anyway as cross-subsidies come down. There is strength in the opinion that hybrid CPPs will remain cost-effective by selling short term merchant power.

In the larger picture, the model that captive power plants have adopted could be the “pilot” for commercial power plants in a more effective implementation of the Electricity Act 2003. As peak and short-term solutions to interim power shortages go, captives—and captive-like business solutions—offer an effective solution. However, although off-grid solutions are more cost-effective for smaller plants in general, some more emphasis on “gridding them up” will help, and the central regulator would do well to heed CEA on this issue.

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