Fixed costs for power a huge burden on states: Report

The FoR has suggested that the Centre and states should split the burden of the stranded generation assets in a 60:40 ratio, “in line with central plan funding”.

Power distribution companies (discoms) in 12 states are cumulatively paying a hefty Rs 17,500 crore a year for the power they don’t use, according to a report by Forum of Regulators (FoR). The amount is paid as fixed costs to recover the cost of building power plants that lie underutilised due to less than anticipated growth of electricity demand.

Among the discoms tracked in the study, the highest annual fixed cost paid for surplus power are by Uttar Pradesh (Rs 4,394 crore) Madhya Pradesh (Rs 4,325 crore), Punjab (Rs 1,880 crore), Haryana (Rs 1,719 crore) and Gujarat (Rs 1,528 crore). The figures pertain to FY21 for 10 states and FY20 for Madhya Pradesh and Punjab.

The amount spent on unused power is equal to 13% of the annual revenue of Madhya Pradesh’s discoms. For Punjab, it is 6% of the revenue and for Uttar Pradesh it is 7%. Cost of unused power is 5% of Haryana discoms’ revenue and 3% of Gujarat discoms’ annual income. Under contractual requirements, discoms have to continue paying fixed cost to thermal power plants to recover the projects’ capital expenditure and cover debt obligations even when they do not procure electricity during periods of low demand.

The FoR has suggested that the Centre and states should split the burden of the stranded generation assets in a 60:40 ratio, “in line with central plan funding”. The FoR, constituted in 2005 under the Electricity Act, 2003, consists of the chairperson of the Central Electricity Regulatory Commission and the heads of all state power regulators.

The study analysed data for 12 states to measure the impact of power purchase cost on retail electricity tariffs. The report said the Centre can utilise the Rs 400 per tonne clean energy cess on coal to share the cost of stranded assets.

The clean energy cess was introduced in 2010 at Rs 50 per tonne of coal, later rising to the current rate in 2016. In 2017, the cess was abolished and the same charges were levied as the GST compensation cess.

If the imposition of this cess is to be continued, “then it is recommended that the proceeds from this cess be ploughed back to the electricity sector to mitigate the incremental cost on account of new environmental norms as per contribution made by each state”, FoR said. Clean energy cess constitutes about 11% of the power purchase cost, and if it is cut by Rs 100 per tonne, it would lead to savings of 3% of the average cost of electricity supply, the report said.

Power purchase cost accounts for about 67% to 78% of the overall revenue requirement for discoms. Apart from the clean energy cess, coal price constitutes 25%, rail freight 41%, and road transportation charges 11% of the total power purchase cost. The report has also recommended regulating railway freight rates and coal prices to limit their impact of power tariffs, adding that the Centre may consider subsidising railway freight for a distance beyond 750 km.