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Legalese | July 2016

Short Term Power Procurement | Impact on Sector

Distribution networks have been one of the major bottlenecks in the entire value chain of the electricity sector reforms. It is estimated that the power distribution companies (Discoms) have accumulated losses in the range of Rs.3.8 lakh crore and outstanding debt of around Rs.4.3 lakh crore. The Ministry of Power (MoP) had earlier approved Ujwal Discom Assurance Yojana (UDAY) for financial turnaround of discoms, which aims to revive them through operational efficiencies, reduction of cost of power, reduction in interest cost and enforcing financial discipline. The MoP on March 30, 2016, notified Guidelines for Short-Term Procurement of Power by Distribution Licensees through Tariff-based Bidding Process pursuant to Section 63 of the Electricity Act, 2003. These guidelines will enable reduction in cost of power in furtherance of the broader objectives of UDAY, as procurement of short term power constitutes around 10-11 per cent share of the overall mix of procurement of power. Pursuant to these guidelines, e-Bidding and e-Reverse auction portal has been made operational. The portal has been named DEEP (Discovery of Efficient Electricity Price) and is run under the aegis of MSTC Limited, a Government of India (GoI) undertaking. As per the guidelines, it has been made obligatory for all discoms to procure short term power (i.e., for a period of more than one day to one year) entirely by using this e-Bidding portal. Power procured from power exchanges is excluded from the scope of these guidelines.

Discoms of Kerala, Uttrakhand, Gujarat, Bihar and Jharkhand have already conducted auctions for short term power procurement using the e-bidding portal. The results of these auctions show that the average cost of procurement of power has considerably reduced. The prices under these auctions have reduced by 24 per cent to 33 per cent as compared to prices of the short term procurement of power in the previous years by Discoms. For instance, in Kerala, the lowest price has been discovered at 3.14 per unit, while for the corresponding period during the previous year, short term power was procured at the rate of Rs.4.70 per unit. Further, in Uttarakhand, the lowest tariff has been discovered at Rs.2.59 per unit as against 3.41 per unit for the same period in the previous year.

Therefore, the price discovery for power through the reverse e-auction has been quite favourable for the procurers, which may lead to higher demand in the reverse e-auctions in the future. As per analysts, this may lead to reduction in volumes of power which are sold through the power exchanges and may, in future, lower the bilateral trade prices, as the buyers would be aware of the reduced prices operating in the e-auction portal. This may eventually have an impact on the business model(s) of the power producers and would indirectly impact bilateral power purchase agreements (PPAs). Further, the government intends to expand the scope of the portal to include both medium term and long term procurement of power.

The long term impact of procurement of power using DEEP e-bidding portal needs to be seen. However, this is a welcome initiative to introduce uniformity and transparency in procurement of power by Discoms and to promote competition in the electricity sector furthering the key objectives of the Electricity Act, 2003.

Authors: Dibyanshu (Partner) and Prateek Bhandari (Associate), Khaitan & Co., Legal Services

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