Indian Railways — the country’s biggest consumer of power — is warming up to the advantages of buying electricity from the market through the open bidding route, having got a resounding response to its latest tender for procuring 585 MW of traction power for three zonal railway units.
The lowest bids (L1) for three regions quote tariff in the range of Rs 3.08-3.48 per unit, around half the average tariff of Rs 6.75 at which it procures power from state utilities currently. The Railways plans to widen the scope of these arrangements as an alternative to the current process of procuring power from distribution utilities, something that could yield savings of an estimated Rs 3,000 crore for the cash-strapped people and goods mover over the next few years. The latest round of bids, coming in the wake of a similar exercise wrapped up in October 2015, marks a decisive step in the Railways’ migration strategy for procuring power directly from the market and signals a departure from its overwhelming reliance on buying electricity through long-term pacts with power generating utilities.
The new path
# In recent months, after having bagged a deemed licensee status, the Railways has moved decisively in favour of switching over to procuring part of its required power directly from the market though the bidding route to pare its electricity bills
# The Railways’ power buys from the electricity market come at a time when there is a clear slowdown in demand in the face of record capacity addition, leading to intensified competition that has brought down spot market prices
Despite being designated as a bulk consumer, the Railways currently shells out extremely high charges for traction power at upwards of Rs 6 per unit. In recent months, after having bagged a deemed licensee status, the Railways has moved decisively in favour of switching over to procuring part of its required power directly from the market though the bidding route (under Case 1 bidding, where developers bidding the lowest delivered tariffs get to supply electricity) to pare its electricity bills.
The Railway power buys from the electricity market come at a time when there is a clear slowdown in demand in the face of record capacity addition, leading to intensified competition that has brought down spot market prices. “The Railways is clearly going whole hog to make use of the opportunity to bring down their operating cost, of which electricity is a vital ingredient. This works to the advantage of power-generation companies, who have been at the receiving end of the fall in demand — spot prices for electricity have dipped and are, at present, far below the long-term purchase agreement prices,” a market analyst said.
Reflecting the crash in demand, electricity prices in the spot power market slid to record lows in 2015. In December 2015, the market clearing price on the Indian Energy Exchange Ltd – India’s largest electricity exchange — averaged at Rs 2.56 per unit (KW hour), down from Rs 2.67 in November and Rs 3.03 in October. For the entire 12 months of 2015, the average price came in at Rs 2.82 per unit, as compared to Rs 3.46 in 2014.
“The price bids in the Railways tender are a clear evidence that the current cost-plus regulated tariff regime — of front-loaded tariff with full return on equity and full recovery of depreciation from day one that is so far enjoyed by PSUs — is no longer tenable. The time has come to let discom (distribution companies), like Railways, reap full benefits of cheap power available in the market,” an official with the Central Electricity Authority, the apex power planning body, said.
Besides, if the Centre were to allow state discoms to exit from expensive power purchase agreements (PPAs) signed in the past with inefficient and old generating plants such as NTPC’s Badarpur thermal power station, it could similarly help them to significantly reduce their operating losses and offers an opportunity for new and efficient private power plants to wriggle out of financial distress caused by the lack of buyers for their power. “The earlier the government decides to stop protecting the perpetual and expensive PPA regime, the better it would be for the consumers, economy and environment,” the analyst quoted earlier said.
The Railway Energy Management Company Limited (REMCL), a unit of the Indian Railways, has been entrusted with the mandate to carry out the bids for buying power. The utility had for the first time, in October last year, on behalf of North Central Railway, invited bids from the market under the Case 1 bidding route. Adani Power emerged as the successful bidder and was awarded the contract for supply of 50 MW power at a landed tariff of Rs 3.69 per unit for a period of three years, a move that was expected to yield an annual saving of about Rs 150 crore in the electricity bill over the more expensive power from NTPC that was being sourced by the Railways earlier.
The Railways, officials said, is working hard to prune its energy bill through an appropriate energy mix, procuring it through bidding and using alternative sources. These steps include solarisation work, for which the ministry is implementing a PPP model to utilise rooftops and vacant land spaces of railway establishments for generation of solar energy.