Pratyush SinghSenior Associate
Changing landscape of the power sector in India
The recent increase in the share of must-run renewable power and a rise in industrial open access consumption has led distribution licensees (Discoms) to procure power through energy exchanges, spot markets1 and short/medium-term routes rather than getting tied down with long-term arrangements with fossil fuel-based (non-renewable) power generators.2
Despite the government’s efforts to streamline coal acquisition through (i) long term coal linkage at notified rates, and (ii) e-auction with market driven prices, many problems still persist for TPPs without PPAs who do not feature in any revival plans or reform measures for the power sector.
Earlier, the statutory mandate under the Electricity Act, 2003 to promote the establishment of thermal generation capacity in the country, coupled with a mismatch in demand projections, had resulted in Discoms entering into long term power purchase agreements (LT-PPA) with thermal generating companies for a quantum of power that was more than the actual demand.3 This surplus power (in the context of the traditional two-part tariff structure of thermal power plants (TPP), which required payment for fixed costs for the entire term of the PPA), strained the finances of the Discoms, disincentivising them from entering into more such PPAs or renewing existing ones.
The government’s focus has now shifted from incentivising TPPs to promoting renewable energy generation. Various government incentives have increased renewable generation capacity in India by 396% (approx. 174.53 GW) in the last eight and a half years. Additionally, in July 2022, the Ministry of Power mandated all states to procure 25% of their energy requirements from renewable sources. In this background, the situation appears grim for TPPs without PPAs as they do not feature in any revival plans or reform measures for the power sector.
The 37th Report of the Standing Committee on Energy (Report) released in March 2018 highlighted the lack of PPAs as one of the key issues that plague the energy sector, striking at the very viability of TPPs. It also identified 34 private TPPs, with a debt exposure of INR 1,74,468 crore, as stressed thermal projects. Out of this, approximately 54% is untied capacity, i.e., TPPs without PPAs.
Since the future of these TPPs is uncertain, lenders are reluctant to extend further capital. Consequently, many of these projects face the risk of liquidation. Any insolvency proceedings that are undertaken for such TPPs would result in significant haircuts - both for the lenders and the promoters - that could have a cascading effect on the already strained banking sector.
Unreliable coal acquisition – tipping the scales further
One of the issues which afflicts the power sector is the unreliability of coal acquisition, which the government has tried to address through various schemes and by putting in place two processes for coal procurement: (i) through long term coal linkage at notified rates or (ii) through e-auction with market driven prices. Yet many problems still persist, particularly for TPPs without PPAs.
Discriminatory scheme of Shakti Policy
Under the SHAKTI Policy (Scheme to Harness and Allocate Koyla Transparently in India Policy), only TPPs without PPAs with an untied capacity over 50% are eligible to procure coal through auctions. Moreover, they must bid for a premium above the notified price. However, the power generated by these TPPs without PPAs can only be sold in the day-ahead market or on power exchanges. Since TPPs without PPAs are forced to sell power under short-term contracts and on energy exchanges, the resultant price volatility on the exchanges does not provide certainty on the recovery of actual costs, including the cost of coal, which can often widen the gap between the cost of supplying power and the average revenue.
Changed mechanism for allocation of e-auction coal resulting in substantial price increase
A recent change in the mechanism for the allocation of non-linkage coal4 through e-auction has resulted in a substantial decrease in the availability of coal under e-auction while exponentially increasing the landed price of such non-linkage coal. This has resulted in higher generation costs for TPPs without PPAs using e-auction coal.
Inability of thermal power plants without power purchase agreements to sell power equivalent to their generation capacity and resultant short lifting penalties
Due to the increasing demand for and low prices of renewable energy, TPPs without PPAs (which have fuel supply agreements) are unable to sell power corresponding to their potential generation. This affects the Plant Load Factor (i.e., the ratio between the actual power generated by the plant to the maximum possible power that the plant can generate) resulting in lower consumption of coal, in turn attracting penalties for short lifting of coal under the fuel supply agreement of the respective TPP.
The demand for power has been rising rapidly, especially in the summer months. This is when the Discoms procure the most power from the power exchanges, invariably pushing up the price per unit. This presents an opportunity for TPPs without PPAs to recoup investment and recover losses by selling on exchanges. However, the TPPs will need to balance their quantum of coal procurement with the demand on the exchange. This could be addressed by the government through various measures, such as:
- Conducting specific bidding to tie up power from TPPs (without PPAs) under medium-term PPAs (three-five years). These PPAs can be flexible with supply obligations to Discoms only during peak season with single part tariff. This will encourage Discoms to tie up power from these TPPs as it will be more cost-effective than LT-PPAs. In recent years, the price of power on exchanges during the summer and monsoon seasons has been very high, even reaching INR 20 per unit, requiring intervention from the Central Electricity Regulatory Commission to cap the price at INR 12 per unit. Making it easier to utilise power from TPPs without PPAs will help keep surging prices under control as well.
- Formulating an effective and fair transition plan for fading away LT-PPAs and allowing for increased use of power markets and the creation of a liquid market.
- Putting in place a separate mechanism only for TPPs without PPAs, whereby they can procure linkage coal and e-auction coal at competitive prices. This will ensure allocation of sufficient coal for these TPPs, as they will not be competing in the discriminatory structure of the Shakti Policy (where they have to bid for a premium above the notified price) or in the clubbed e-auction with participants from all sectors.
- Providing a separate slot of e-auction of coal for TPPs without PPA to provide a level playing field. Presently, in the single window e-auction, generating companies are not able to compete with the price bid of other non-regulated sectors such as steel companies.
TPPs without PPAs can recoup investment and recover losses by selling on exchanges during the summer months, i.e., when the Discoms procure the most power from the power exchanges, invariably pushing up the price per unit. However, the TPPs will need to balance their quantum of coal procurement with the demand on the exchange.
The International Energy Agency, in its World Energy Outlook 2022 report, stated that the energy demand in India is expected to be the highest globally, growing at more than 3% annually during the current decade. To cater to this demand growth, the focus should not be on adding more thermal capacity, but instead on effectively using existing TPPs without LT-PPAs. In fact, policy focus seems to be shifting away from LT-PPAs with certain States (Chhattisgarh, Gujarat, Maharashtra and Uttar Pradesh) having banned new thermal PPAs5, giving discoms the liberty to procure electricity from exchanges during seasonal peak loads. With this trend continuing and with timely policy intervention, TPPs without PPAs are the perfect candidates for stepping in during periods of high demand and alleviating the stress in the power sector as a whole (generation, transmission and distribution).
 Spot market is a market in which power is bought and sold for immediate or very near-term delivery, usually for a period of 30 days or less. The transaction does not imply a continuing arrangement between the buyer and the seller.
 Contract for period of seven years and above
 CRISIL Report 2018
 Coal India circular dated 1 March 2022
 NITI Aayog Report of August 2021 titled ‘Turning Around the Power Distribution Sector, Learning and Best Practices from Reforms’