Rider to old PPA cancellation policy a concern for NTPC

The power ministry’s proposal that electricity discoms can relinquish power purchase agreements (PPAs) of over 25 years with the central generating stations (CGS) lacks clarity on whether these loss-making entities can retain a section of the pacts that makes business sense for them, analysts said.

The proposal is also silent on allocation of coal to power plants once they lose the PPA with discoms, which could be a concern for NTPC with which bulk of the old PPAs are signed, they added.

The current coal policy framework allows access to coal only to those projects that have PPAs. Industry experts believe, the coal access policy needs to be amended to make it easy for central generating stations like NTPC to sell in the market once PPAs are cancelled.

The ministry of power, in its draft proposal, to enable discoms has stated that discoms that have “surplus power” have expressed their willingness to surrender their share from the CGS as the discoms now have other opportunities to optimise their power purchase cost, which is in the interest of the consumer as it helps to bring down the tariff.
There are around 11,000 MW of PPA capacities that are of 25 years and above and almost entirely owned by NTPC.

A senior industry official told FE on condition of anonymity that the discoms may like to retain the pit-head projects compared to a far away plants, which will allow them to use low variable cost power, as their fixed cost is already amortised.

“If the discom is in need of only part of the whole capacity and the generating station is not ready to supply, then the discoms can call for a competitive bid for a particular quantum at a discovered market price. This will help remove the cost plus structure that has given rise to inefficiency in the sector that distorted the competitive power market,” the official said.

When contacted, a senior NTPC official said, most of the regulated PPAs are not an agreement for just 25 years but they are more like perpetual agreements that get renewed for the residual year of the projects. Many of these PPAs are linked to several power stations and cannot be relinquished individually.

“There may be couple of projects that may be costly by virtue of their locations, that is, they are far from the pit-head, and hence have a higher variable cost. But we are confident once the demand improves, the PLFs will improve leading to reduction in tariffs. Barring one or two states like Delhi and Punjab, we do not see any trouble in renewing our contracts since we have also invested in upgrading these plants to meet the environmental norms for FGD and meeting other emission norms,” the official added.

The average cost of NTPC’s thermal power projects put together is in the range of Rs 3.5- 3.6 per kWh, while the lowest bid price for solar has dropped to Rs 2 per kWh. The spot market price on the exchange also averages between Rs 2.50/kWh to Rs 2.70/ kWh, giving options to discoms to rationalise their high cost contracts.

Kameswara Rao, lead, energy at PwC said, “The proposal is in line with the policy intent to move away from life-term contracts to shorter, competitive arrangements that are better able to adjust to the market. It is a good starting point for the government as these assets, with their development costs and debts fully paid up, will reflect the real economic value placed on mature thermal plants.”

Somesh Kumar, partner, E&Y said the enabling of discoms will help bring down their power distribution and dispatch cost. “The government through this draft regulation is planning to bring surplus power liquidity in the market so states with high demand can secure power from states that can provide at lower tariffs. If all the power gets tied up, it will increase the cost for the industry,” Kumar said.
Rupesh Sankhe, vice president at Elara Securities said the inefficient plants with low PLFs would like to discontinue PPAs, while discoms with the pit head plants will renew them to manage their long term base load, given the low fuel cost.