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Merchant / Captive Power Post Electricity Act 2003

Merchant / Captive Power Post Electricity Act 2003. By Sh. M.D. Mundhra Malana Power Company Limited LNJ Bhilwara Group 15 th October 2003 CII – PTC Conference on “The Power Market Post Electricity Act 2003: Entities, Business Models and Implications”. LNJ Bhilwara Group in Power.

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Merchant / Captive Power Post Electricity Act 2003

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  1. Merchant / Captive Power Post Electricity Act 2003 By Sh. M.D. Mundhra Malana Power Company Limited LNJ Bhilwara Group 15th October 2003 CII – PTC Conference on “The Power Market Post Electricity Act 2003: Entities, Business Models and Implications”.

  2. LNJ Bhilwara Group in Power • LNJ Bhilwara Group is a Rs. 1700 Cr. diversified Group. The Group has both Captive Power Plants and Merchant Power Plants. Captive Power Capacity • 15 MW Tawa HEP in MP – Captive for HEG. (For Graphite Electrode) • 13 MW WHRS in CG - Captive for HEG. (For Sponge Iron) • 25 MW Coal based in MP – Captive for HEG. (Under development) (Graphite Electrode Expansion) • 33 MW DG Sets in Raj, MP - Captive for Textile Mills

  3. LNJ Bhilwara Group – Pioneers of Merchant Power Plants in India Merchant Power Plants • 86 MW Malana HEP – India’s first and only operating Merchant Power Plant. • Completed in record time of 30 months • At a cost of Rs. 3.8 Crs. / MW. • 192 MW Allain Duhangan HEP • Also being developed as a Merchant Power Plant. • Expected to be on stream by 2007-2008, well ahead of schedule.

  4. Merchant Power Plants – Generation • Except Hydro – other modes of generation delicensed. • For Hydro, CEA approval is required above a certain level. • We suggest this limit to be Rs. 2500 Crores (for 500 MW). • The Act has increased Scope for merchant power plants without long term PPA. • But, allotment of Hydro Projects in any case is required. • Various forms of Competitive bidding based on ‘Royalty’, ‘Upfront Premium’, ‘Rate of Power’ have practically failed. • Unsuitable for Hydro Projects as they are extremely ‘Location Specific’ and have Hydrology and Geologyinherent risks. • As a result, now allotment of Hydro Projects to the Private sector is practically at a standstill.

  5. Suggested procedure for Allotment of Hydro Power Projects (1) • Time is Key in Hydro Powerfor developer, state and Nation. • 1 year of early commissioning of 100 MW Hydro Project means Rs. 12 Crs of additional Royalty for state @12% royalty. • Therefore, ‘Completion Time’ should be the criteria for allotment of Hydro Power Projects to the private sector. • Developers to be shortlisted based on their technical, financial, managerial capability and past track record. • They should be given 1 year for vetting Feasibility Reports (for good projects) or DPRs (if they are available). • They should then Bid for ‘Time for completion of Project’. • Developer with lowest time for completion to be awarded the project with set of incentives / disincentives.

  6. Suggested procedure for Allotment of Hydro Power Projects (2) Scheme of Incentives and Disincentives • Project lease period – 40 years from quoted CoD. • Incentive – 50% royalty waiver for early commissioning. • Disincentive for delay – Penalty of 2.5% of annual design energy @ Rs. 2 per kWh (supported by bank guarantee). • Allow Force Majeure and 1 year grace period. • State to take over for delays > 2 yrs from agreed milestones.

  7. Merchant Power Plants – Selling Options Merchant Power Plants - Sales Directly to Industrial Consumers Subject to payment of surcharge - No Regulator’s approval required. To Discoms w/o surcharge – Needs Regulator’s approval To Traders for further sales to Discoms or consumers

  8. How to encourage Direct Sale to Industrial Consumers? • Indal’s Kochi unit got closed despite offer of Rs. 2.50 / kWh from PTC at Kerala Inter-state Point, due to excessive ‘Surcharge’ (42 paise) and intra-state wheeling charge (35 paise) and Transmission losses charged by KSEB. Therefore • To promote Direct Sale to Industrial Consumers: • Surcharge must be eliminated within 5 years. • Within these 5 yrs. – Surcharge to be capped at 50% of the difference between: • Existing Tariff, • Tariff negotiated between consumers and generators plus all wheeling charges. • Unless the above is implemented, Third Party Sales will not see the ‘Light of the day’. • Without the above, Merchant Power Plants will be difficult proposition.

  9. Surcharge and Captive Power Plants • Industries have two options for meeting their requirements of power: • To put captive power plant – with no surcharge. • This would normally not allow economies of scale. • To buy power from Merchant Power Plants at market rates: • But decision to set up a captive power plant or go in for PPA with Merchant Power Plant, will be difficult without knowing the amount of Surcharge and definitive time frame for its elimination and as a result: • Investments made in haste in captive power plants may go waste, • Some states like AP, Karnataka are introducing taxes on captive generation. • This would further complicate the decision making process. • In fact in most countries, industries get power at subsidized rates. So keeping surcharge will make industries uncompetitive.

  10. Merchant Power Plant – Sale to Discoms (1) • Tariff to be approved by Regulators. • Various Discussion Papers floated indicate retaining the ‘Cost-Plus’ Pricing system. • Cost- Plus pricing rewards inefficiency. • To reward efficiency, instead of deciding cost project-wise, we suggest a band of power prices to be announced annually by the Regulators: • Minimum Price to be based on optimum costing in a particular sector.

  11. Merchant Power Plant – Sale to Discoms (2) • Maximum Price to be based on actual cost of projects completed during last 3 years. This should include: • RoE during construction period for power projects. (Otherwise for a typical Hydel Project having 6 years construction period, 16 % RoE will translate to only 9 % ROE). • Regulators approval should be required if price does not fall in this band of prices. • The above will increase availability and subsequently market forces will take over.This will give boost to efficient entrepreneurs to put up merchant power plants.

  12. Merchant Power Plants and Trading • Merchant power Plants will also get a boost by promotion of Trading. • For facilitating more Players in the market, we suggest: • Licensing fee not greater than Rs. 10.00 Lacs per annum. • Single Trading license for the entire country – Trading licenses not to be restricted to geographical areas. • No Trading license for Generators as they are already familiar with nuances of Selling / Trading of Power. • This will allow merchant power plants to supply directly to consumers by meeting their seasonal demands by Trading.

  13. Under supply / Over supply of power • Some mechanism needed to price the over supply/under supply. • ABT in its present form – ineffective as it was originally not meant to be a rate mechanism, because even at most desirable Frequency of 50 Hz, rate is Rs. 1.4 / kWh. • This has resulted in conversion of scheduled demand into unscheduled demand. • Needs revision to ensure proper pricing of unscheduled generation / consumption. • We propose the following rates for unscheduled power: NowSuggested • At 50.5 Hz Frequency: Rs. 0.00 / kWh Rs. 2.00 / kWh • At 50.0 Hz Frequency: Rs. 1.40 / kWh Rs. 2.75 / kWh • At 49.0 Hz Frequency: Rs. 4.20 / kWh Rs. 6.00 / kWh • A Chart is depicted in the following slide.

  14. Chart showing present and suggested rates at different Grid Frequencies

  15. Merits of the proposed mechanism • This will make banking easier. • Captive Power stations can supply excess generation to the grid or draw during shortages. • This unscheduled interchange can be treated as per the proposed Frequency based price mechanism. • Traders can also benefit from this mechanism for shortfall / oversupply of power. • This will also help in continuous supply of power to consumers. • They can buy their scheduled requirements through PPAs and for additional requirements, they can use this mechanism.

  16. Captive Power – Other Issues • Captive Power definition is broad and if followed, could be a key driver of growth. • Possibility of varying interpretation by Legal / Regulatory Authorities. • National Electricity Policy should remove all ambiguities in its interpretation. • 5% equity investment of a consumer in a generating company should entitle him for captive benefit. • One IPP can be a Captive for more than one industrial consumer. • If the above is implemented, this could result in fruitful joint investments in power sector by IPPs and consumers to take advantage of Economies of Scale.

  17. THANK YOU

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