It Is Time The Power Sector Transitioned To Efficient, Cost Competitive And Flexible Power Procurement

The recent power sector reforms spanning coal, distribution, tariff policy, financial liquidity injection etc announced by the Finance Minister as part of Atmanirbhar Bharat are welcome and a positive step in transitioning the energy sector characterised by greater flexibility and efficiency.    Distribution utilities have now got a fresh lease of life with the INR 90,000 financial injection to help manage financial liquidity, in the wake of CoVID-19 that saw a preventive lockdown, putting its most remunerative source of income from industrial and commercial users, out of reach.  It is clear that the slew of schemes like UDAY, SAUBHAGYA, PRAAPTI amongst others, announced over the last several years to ensure power access and availability in the country, while well-meaning, have left much ground to be covered.

During these preventive lock-down days, the distribution companies would have clearly understood and recognised the value of flexibility and efficiency in power procurement as several distribution utilities ended up paying crores of rupees in the fixed charges to generation contracted under 25-year long-term or 3 year-long medium-term power purchase agreements, even when they scheduled insignificant quantum of energy or did not schedule a unit of energy from the generating stations. Some other distribution utilities have invoked Force Majeure clause to avoid paying fixed charges for the lockdown period wherein they are not in a position to utilize assets tied up under long term due to conditions beyond their control. 

The short-term power market on the other hand and especially the energy exchanges offer much robust value proposition to the distribution utilities to procure electricity in a far more transparent, flexible, cost-competitive and reliable ways to support the utilities optimise their power procurement, accrue savings and build up their sinking financial liquidity which is so important now than ever. Besides, there is no incidence or liability of the fixed charges on the utilities when utilities procure electricity through the Exchange platform. 

So how should the utilities balance and create the most optimum procurement strategy? 

An ideal scenario would perhaps be when the utilities sign bulk agreements only for meeting their baseload demand and rely on energy exchanges for meeting power demand beyond baseload. This will make power procurement far more efficient, competitive, deepen the power markets which presently constitutes only 11-12% of the larger energy market, and reduce the tariff for industries as well as consumers at large. 

For instance, the average market clearing price on IEX for the fiscal year 2020 was at Rs 3 per unit, much lower than the variable cost of several PPAs that exist between generators and the utilities. In the recent months, especially after the preventive lockdown since 25 March 20, the prices discovered on the Exchange have become even more attractive and the average price from 25 March until 15 May is only Rs 2.52 per unit. There price discovered in the most recent medium-term tender in February 2020 at Rs 3.26 per unit at generation bus bar is about Rs 3.80 per unit landed to Discom. This price seems on the higher side when compared to the fiscal year 2020 or the present prices. 

The landed price will further increase and will be upward of Rs 4.50 per unit if the overall offtake by utilities are on the lower side.

A few distribution utilities such as Andhra Pradesh, Maharashtra, Gujarat, Tamil Nadu, Punjab, Telangana have been buying aggressively on exchange leading the way for other distribution utilities to emulate. Some of these Discoms have procured up to 50 MUs per day and saved over Rs 100 Crores per month in power procurement cost in comparison to only Variable cost. 

Empowered by the recent financial injection, all distribution utilities have the opportunity to maximise procurement by leveraging lower prices in the Exchange markets and maintaining good financial liquidity in these times. This offers utilities the means to honour financial commitments to generators, breaking the vicious cycle that creates stress on the system.  

Energy Marketplaces: An Underleveraged Alternative

As India pulls up the economy under CoVID-19, time is most appropriate to counter the rigidity of the structure and commercial agreements, and transition to an efficient, flexible power contracting through energy markets towards building a sustainable energy sector. This will help to usher in a new energy order mandated by India’s economic revival, particularly, after the COVID-19 crisis. 

Over the last decade, the distribution utilities, as well as large commercial and industrial users that require upwards of 1 MW, have been given a choice to select their supplier. Energy marketplaces have enabled these consumers to buy power-on-demand in the most competitive & flexible way. The competitive prices discovered on the Exchange have helped benchmark for the power industry and also for long-term and short-term contracts and for market-linked energy indices for the country. The competitive price discovery mechanism increases the accessibility, efficiency and transparency of the power sector in India. 

The electricity sector must see a complete reboot in order to re-energise and reinvigorate with support from a meaningful and supportive policy framework. Transitioning to power contracting which has greater flexibility, efficiency and competitiveness can bring down the cost of electricity for every Indian.