The new draft tariff guidelines for state-owned power utilities,issued by the central power regulator on Tuesday,created a bit of a flutter. The markets reacted by dumping state-owned power stocks in late trade.
The draft guidelines,applicable from April 2014 to March 2019,offer three key takeaways. While the assured return-on-equity (RoE) for generation firms such as NTPC has been retained at 15.5 per cent,the incentives have been pruned,leading to a lower effective returns. Among the incentives,a shift from the plant availability factor (PAF) used currently for calculating incentives to the plant load factor (PLF) has been proposed. The new norms also propose to link recovery of tax by utilities from their consumers on the basis of actual payment of tax.
While the fact that the assured RoE for generation firms has not been changed is a positive,the proposal seeking to tax power utilities as per actual also seems a fair step as any advantage accruing from tax arbitrage should ideally go to the consumer.
The most contentious change perhaps is the proposed shift from PAF to PLF for generation utilities. What needs to be noted is that in the current tariff norms that are applicable till end-March 2014,a conscious decision was made by the regulator that incentive need to be based on the generator ensuring the availability of his plant (with the responsibility of fuel),rather than the actual generation achieved by him.
Prior to the implementation of the current norms,the incentives were based on PLF or actual generation as has been proposed in the latest draft. This had,however,led to gross indiscipline,with instances of utilities such as NTPC pumping power into the eastern region to qualify for incentives despite low demand,forcing the grid frequency to climbing to well over 50 Hz.
More importantly,keeping in view the national target of harnessing large-scale renewables in the times to come and states such as Tamil Nadu,Rajasthan and Gujarat having already set up sizeable renewable portfolios,thermal generation especially coal-based PLF is bound to come down,as has been the international experience. Conventional thermal plants,nevertheless,need to be available as back up,lest the winds should stop or clouds derail solar generation.
If we are to harness more renewable energy,there is actually a case to compensate thermal plant through relaxed operating norms,even when they operate at lower PLF. In this light,the move to shift back from PAF to PLF seems regressive. Also,by crimping the cash flow of utilities such as NTPC and Power Grid Corporation that are on a rapid expansion plan,their capacity to leverage cheaper funds is hit something that could be detrimental to consumers in the long run.
Anil is a senior editor based in New Delhi.