India: Amending The Power Tariff Policy

Last Updated: 12 October 2015
Article by DSK Legal

An overview of the key amendments proposed in the Tariff Policy by the Ministry of Power.

The Ministry of Power is empowered to prepare the tariff policy (Policy), which may be revised from time to time for the general development of the power sector and for the optimal utilization of natural resources. The Ministry of Power has recently proposed certain amendments to the Policy in compliance with the National Electricity Policy which was notified by the Ministry of Power on February 12, 2005 and has invited comments of all stakeholders on the proposed amendments.

The Policy now proposes to enhance the electricity generation capacity and to increase the availability of electricity per capita per year without any cap. Further, the Policy now proposes to set out promotion of renewable generation sources as a key objective of the Policy in addition to ensuring availability of electricity to consumers at reasonable and competitive rates; ensuring financial viability of the sector and attract investments; promoting transparency, consistency and predictability in regulatory approaches across jurisdictions and minimise perceptions of regulatory risks; and promoting competition, efficiency in operations and improvement in quality of supply.

IMPROVING COMPETITION ACROSS CATEGORIES OF POWER PROJECTS:

The amendments to the Policy now propose to make competitive bidding compulsory even for the central public sector projects.

However, coal washery rejects based projects have been exempted from such competitive bidding process until the Government of India decides to introduce competitive bidding process for such projects.

In addition, as per the proposed amendments to the Policy, State Government owned generation and transmission companies shall continue to operate power projects based on 'regulated cost plus tariff regime' as per Section 62 of the Electricity Act, 2003 for sale or transmission of power within that particular state.

The amendments to the Policy also propose that state transmission utilities must endeavour implement larger projects on the basis of competitive bidding.

TARIFF DETERMINATION:

The amendments proposed to the Policy sets out that for determining the rate of return on investments, the State Electricity Regulatory Commission may consider the 'distribution and supply margin' as the basis of allowing returns, while it may also consider 'price cap' regulations after conducting comprehensive studies.

PROMOTION OF RENEWABLE SOURCES OF ENERGY:

Promotion of renewable sources of energy has been expressly provided as an objective of the Policy. Also, the term 'non-conventional energy' has been replaced with 'renewable energy'.

The Renewable Purchase Obligations will be updated on long-term basis by the Ministry of Power, in consultation with the Ministry of New and Renewable Energy (MNRE) and in keeping with the targets provided under the National Action Plan on Climate Change (NAPCC).

The State Electricity Regulatory Commissions will prescribe minimum percentages of purchase of solar energy till generated solar power reaches at least 8% in total energy terms by March 2019. Tariffs will be determined on 'cost plus basis', for the procurement of power from all waste-to-energy plants.

A framework for technology based Renewable Energy Certificates (REC) and a suitable 'REC Multiplier' to differentiate between technologies shall be adopted. A separate bid based tariff framework for generation of renewable energy, imposing progressively heavier charges towards the end of the term, will be introduced.

Generating companies establishing coal/lignite based thermal stations shall be required to establish a renewable energy generating station mandatorily for at least 10% of the generating capacity of such coal/lignite thermal power station.

DIFFERENTIAL TARIFFS

In order to facilitate setting up of generation capacities to meet both 'base load' and 'peak load' requirements, the guidelines regarding competitive bidding provide separate procurement practices specifically catering to such separate requirements.

Due to shortage of coal assured by Coal India Limited, the shortfall may be made up by imported and market based, e-auction coal and as such will be eligible for 'pass through' on a case-by-case basis.

In order to facilitate optimization of the cost of generation at power plants through ranking of various units generated based on cost of production through use of Merit Order Dispatches a two-part tariff structure for long-term and medium-term contracts shall be put in place. Within a period of two years, differential rates of fixed charges for 'peak' and 'off-peak' hours are required to be framed. Also, power generating stations are required to be ready to dispatch power at all times.

To ensure optimal utilization of non-requisitioned generation capacity, a minimum of two days' advance notice has to be provided by the procurer, notwithstanding the provisions of the Power Purchase Agreement.

In case no advance notice is provided, the benefit shall be passed on to the generator for the purposes of incentive.

TRANSMISSION:

The sharing of the transmission charges, tariff determination and conformity with minimum standards of performance shall be as per the National Tariff Policy.

The mechanism for competitive bidding is proposed to be exempt for:

  1. first couple of 1200 kV (kilo-Volt) AC (Alternating Current) transmission lines and associated 1200 kV (kilo-Volt) AC (Alternating Current) sub-stations;
  2. the upgrading of existing lines belonging to Central or State transmission utilities or the Power Grid Corporation of India Limited (PGCIL);
  3. the modification and extension of existing/under-construction lines belonging to utilities and corporations mentioned in clause (ii) above;
  4. expansion of existing/under-construction sub-stations belonging to utilities and corporations mentioned in clause (ii) above;
  5. cross-border lines and associated terminal sub-stations;
  6. transmission projects for power from Nuclear Power Projects;
  7. works required to be done in situations of urgency provided these are implemented in a specified time schedule as decided by the appropriate government on a case-by-case basis;
  8. transmission lines/sub-stations where no bidder comes forward in two successive attempts of bid process.

The Central Electricity Regulatory Commission may introduce the norms and framework for ancillary service for support, security and reliability of the grid and power system, in consultation with the Central Electricity Authority, the Central or State transmission utilities and the Central or State Load Dispatch Centers, which may be adopted accordingly by the State Electricity Regulatory Commission.

DISTRIBUTION:

A clarification has been proposed that declaration of regulatory assets shall only be in very rare situations involving natural calamities and force majeure conditions which are conditions outside the scope of reasonable control or situations which cannot be prevented through exercise of due diligence. The State Electricity Regulatory Commission is also required to ensure that recovery processes are time bound and not exceeding seven years in accordance with its schedule.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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