The solar tariff prices have hit a new low of Rs 3.15 per unit in an auction on Wednesday . The previous low in tariff was Rs 3.30 per unit in an auction which took place in the month of February.

 Source: Livemint (Dated: 13 Apr 2017)
In an article by Livemint, Mercom Capital Group has the following observations: This decrease in tariffs is causing the states to rethink and they are demanding a new power purchase agreement (PPA). This is causing the process of tendering and auctioning to slow down. An example of a state where such a thing has happened is Jharkhand. It is yet to sign its PPA for the 1000 MW solar capacity it had auctioned last year. The reason behind this is the subdued demand and poor financial condition of the discoms. The discoms which had signed their PPAs at a higher tariff are now going to find them unpalatable as they would lean towards cheaper tariff. Therefore, projects locked at higher tariffs will face delays in payments or power offtake curtailments. This might not only affect renewable energy power but also have an impact on renewable energy contracts.

Review of UDAY Scheme on completion of one year

The UDAY scheme was launched an year ago, and was then touted as signature Discom reform scheme of the central government. In this article, we have analyzed the impact of UDAY scheme, responsiveness of the states, extent to which the Discom’s have got benefitted and also the reforms which they were supposed to undertake.

To briefly summaries, the UDAY scheme aimed at “financial turnaround of Power Distribution Compa-nies”.
Under the scheme, the state government was re-quired to take over 75% of the existing debt of the Discom and issue State Government bonds in re-turn.

The remaining 25% debt would be issued either as a bond by the Discom (guaranteed by the state gov-ernment) or the terms of the loan would be changed by the banks. In return, the Discom’s were required to undertake a series of reforms.

The key ones were:

  • Reduction of AT&C losses to 15% by 2018-19,
  • Quarterly tariff revision (to partly reduce the burden of large revisions once a year),
  • Reduce the gap between cost and revenue per unit to zero by 2018-19 and
  • Discom’s were to comply with RPO outstanding since April 2012 as per timelines suggested by MoP.

For a more detailed list of the requirements and for a detailed understanding of the scheme, refer our article here, or the scheme document here. After an year from launching, 17 states and UT’s have signed up for the UDAY scheme, while 15 have not. Notable states that have not signed up include Tamil Nadu, West Bengal, Kerala, Orissa, Assam and Telangana.
These states have relatively large Discoms and, espe-cially in the case of Tamil Nadu, significant accumulated losses and bank debt. Another way to look at this is the political affiliation of the state.
Most states that have signed up for UDAY scheme are associated or governed by BJP. Notable exceptions are Uttar Pradesh, Karnataka and Bihar. The only notable exception amongst the states that have not signed is Assam (governed by the BJP).

Bonds issuance:
8 states have issued bonds, aggregating to Rs 149,000 crore. The coupon rate (interest rate) on these ranges from 8.12% to 8.55%. Of the total bonds issued more than 80% are contributed by just 3 states – Rajasthan, UP and Haryana. To understand the impact of the bond issuance, we analyzed the balance sheet of one Discom (the Jaipur Discom). The key points are:

*Coupon rates are as per latest issuance
Total debt of the Jaipur Discom has reduced by Rs 5,722 crore, or 22% of the total. However, this ag-gregate number includes a significantly higher amount of debt that was directly taken by the Discom from the banks. This debt is now replaced with debt owed to the state government. Thus, while the debt burden of the Discom has not changed much, its the banks that have benefited the most – they now own government bonds (which are a very good asset to own), compared to Discom loans. The performance on the actions that the Discom’s were supposed to take is analyzed below.

Note : Additional Bank debt taken over in June 2016 – Rs 7,228 crore.

Tariff increases:
Of the 8 largest Discom’s analyzed, not a single Discom undertook tariff revisions on a quarterly basis. Further, there was a wide difference between tariff increases of different Discoms. Discom’s of UP, Punjab, Bihar, Jharkhand & J&K did not increase tariff at all. While Ra-jasthan increased domestic tariff by 2%, Chhattis-garh increased the same by 21%. It is important to note that while Rajasthan issued bonds of 58,000 crores, Chhattisgarh only issued bonds for Rs 870 crores (the lowest amongst all states).

Haryana raised domestic tariff by a respectable 19%Industrial tariff increased also show a similar story – Rajasthan raised tariffs by 1.67%. ,Haryana by 0.98%, while Chhattisgarh by 18%. Other states did not raise tariffs.
Renewable Purchase Obligations:
An important requirement of the UDAY scheme was that Discom’s were to be fully complaint of RPO  from April 1, 2012 onwards. The scheme document says the following with regards to RPO -
“Clause 9 – DISCOM’s opting for the scheme will comply with the Renewable Purchase Obligation (RPO) outstanding since 1st April 2012, within a pe-riod to be decided in consultation with MoP”

However, the MoU entered between the Ministry of Power and the Discom’s is completely silent on the RPO requirement. Prima facie, it appears that this point has been dropped by the Ministry. The only exception is the MoU with UP Discom, which has the following provision.
“Clause 1.3 (f) – In compliance with the Renewable Purchase Obligation (RPO) outstanding since 1.4.2012 to 31.3.2015, Discoms of UP shall fulfill RPO obligation 3 years after the Discom reaches break-even i.e. the Financial year 2019-20”
This clause presents several legal and practical prob-lems that will impact the REC markets significantly. Firstly, it is in direct contravention to the Electricity Act 2003 which obligates RPO on all consumption.

There is no provision for waiver or roll forward of such obligations. In light of this, can the MoP and UP Discom circumvent an act of the parliament and mutually decide a timeline for compliance? Further, the MoU wordings itself leave ample scope for further delay/ waiver when it says – “...3 years after the Discom reaches break-even…”. If the Discom does not reach break-even does that mean it will get further time?
In short, the original intent of the UDAY scheme re-sulting in RPO compliance has been abandoned by the Ministry of Power itself.
Reduction in AT&C losses:
AT&C losses remain very high for most Discom’s in the country. This is due to several reasons – weak distribution infrastructure being one. However, this caption is also a proxy for un-checked theft of power and un-metered supply. Even without the UDAY scheme, AT&C losses have been declining. However, since this data becomes available only at the time of ARR filing by the Discom, it is not possi-ble to verify if the decline has accelerated after the adoption of UDAY.

*Source: Forum of Regulators (FoR) Report
The UDAY scheme has resulted in significant redrawing of the balance sheet of the Discoms. The beneficiaries of the scheme have been the banks, which were sitting on unsustainable levels of debt with loss making enti-ties. This debt has now been replaced with high quality government debt. However, in terms of real reforms and changes on the ground, whether relating to tariff increases or RPO compliance, there seems to be little that is changing. Unless the government follows through with actual op-erational changes, the story is likely to repeat itself over the next 5-10 years, where Discom’s will have again built up unsustainable debt and losses.

Our previous blog on Uday scheme can be accessed here.

Cross-subsidy surcharge continues to rise

A recent article in Business Standard highlighted the disproportionate rise of cross-subsidy surcharge (CSS) in many states. We have been tracking this issue as well and had highlighted the problem in our blog & NL Volume 62.


In the past, CSS has been calculated on the basis of the cost of the marginal 5% (in other words the most expensive 5%) of power procured by the state. This results in a bias towards the highest cost paid, resulting in high CSS. The National tariff policy (NTP) has suggested change in this methodology to a weighted average cost model, and also proposed that CSS be restricted to 20% of the tariff. However, recent increases show that states have largely ignored the provisions of the NTP.


A big reason for the rise in CSS is also the fact that states continue to shy away from raising tariffs for domestic, agricultural and such categories. According to the Business Standard article, States like Chhattisgarh, UP, Uttarakhand and Bihar have already come up with their tariff orders for the financial year 2016-17, but have not raised retail tariffs. Only Gujarat has allowed a retail tariff increase.


With increasing cost of power the burden to foot the bill therefore falls on industrial and commercial consumers. As per the MoP data the below graph depicts change in CSS over the span of 1 year in the major states which varies from 35% to 321%.






Gujarat Electricity Regulatory Commission determines Additional Surcharge for Open Access Consumers 2016-17

Gujarat Electricity Regulatory Commission (GERC) in its order dated 1st October 2016 has computed the additional surcharge payable by the Open Access Consumers for the control period of 1st October 2016 to 31st March 2017.

The order has come as per the GERC Open Access Regulation which states, that additional surcharge shall be determined in every 6 months periods.

The GUVNL (Gujarat Urja Vikas Nigam Limited) furnished the data to the commission as per the guidelines defined and proposed an additional surcharge of Rs. 0.44/kWh. The additional surcharge has decreased by Rs. 0.22/kWh from the previous surcharge.

The Additional Surcharge will be applicable to the consumers of MGVCL, UGVCL, PGVCL and DGVCL, who avail power through open access from any source other than their respective DISCOMs and will be applicable for the open access transaction commencing from 1st October, 2016 to 31th March, 2017. The graph below depicts how the addition surcharge has varied over the past:

The regulation can be accessed here.

Ministry of Power sets green energy targets for State Discoms

The Ministry of Power has issued guidelines, for long term growth trajectory for RPO of Non solar as well as for Solar. Though the guidelines have been issued, the final targets will be set by each individual state’s electricity regulatory commission (SERC).

In order to achieve the target of 1, 75,000 MW of renewable capacity by March, 2022, MNRE has notified the RPO uniformly for all States/ UTs initially for three years from 2016-17 to 2018-19 as given in the table below:



State Discoms will have to mandatorily draw at least 2.75% of their total power consumption from solar plants in the current fiscal, according to the renewable purchase obligation (RPO) norms laid down by the power ministry. Considering this proposed regulatory changes and stricter enforcement by states FY2016-17 is expected to bring a good fortune to the REC Market.


The article can be accessed here.

Analysis of Amendments in National Tariff Policy

The government recently amended the National Tariff Policy (NTP). Several reform measures have been announced in this change. NTP 2016 has increased focus on renewable energy, sourcing power through competitive bidding and the need for ‘reasonable rates’ (see box – Word Analysis of the NTP).

Executive Summary:

  • Co-generation from non-RE sources to attract RPO

  • Competitive bidding to be the norm for RE procurement (maximum 35% of installed capacity can be sourced from determined/preferential tariff)

  • Provisions for Renewable Generation Obligations (RGO) announced

  • Long term RPO to be announced by Ministry of Power

  • Vintage and technology multiplier allowed in REC

  • Inter-state transmission charges waived off for RE power

  • Solar RPO to be 8% by 2022 (excluding hydro power)

  • Calculation of Cross-subsidy methodology is suggested to be changed to make it less arbitrary

Detailed analysis:

Before delving into the nitty-gritties of the NTP, it is worthwhile to step back and understand the importance of this document. The NTP says that CERC and SERCs “shall be guided” by the tariff policy. Thus, the NTP is in no way binding. In fact, from previous NTP’s several provisions remain only on paper. For example the NTP 2011 required that tariffs be within +-20% of average cost of supply. States have certainly not followed that.

Renewable Purchase Obligations:

  1. The most significant change made is that the ambiguity on applicability of RPO on co-generation has been removed. The NTP 2016 says:

“Provided that cogeneration from sources other than renewable sources shall not be excluded from the applicability of RPOs.”

This change, once incorporated in the regulations of states, will have a significant impact on RPO applicability. Many CPPs are currently avoiding fulfilling renewable obligations due to the regulatory confusion resulting from orders from ApTel (Lloyds Metal) and Gujarat HC

  1. Solar RPO will increase to 8% by 2022. This is a substantial increase as current solar RPO is below 1% in most states.

    Another major change suggested in this clause is that solar RPO will not apply to power sourced from hydro power plants. The policy document states – “8% of total consumption of electricity, excluding hydro power, shall be from solar energy by March 2022”

    This is a significant deviation from the Electricity Act 2003 (EA2003) and current RPO regulations, which require that RPO be calculated on ‘total consumption’. This change will open up major issues in RPO implementation – for example, can this change be done when it is contrary to the requirement of the EA2003, and why should similar exemption not be extended to non-solar RPO.

  1. More clarity has been provided on Renewable Generation Obligation (RGO) provisions.

When RGO provisions were announced earlier, there were concerns of double-counting. However, the current provisions hint that RGO will not be incremental to RPO. The policy says:

  • “The renewable energy produced by each generator may be bundled with its thermal generation for the purpose of sale. In case an obligated entity procures this renewable power, then the SERCs will consider the obligated entity to have met the Renewable Purchase Obligation (RPO) to the extent of power bought from such renewable energy generating stations. 

Thus, RGO merely appears to bring thermal generators into the mix and make it convenient to meet RPO. It will not result in expanding the requirement for RE overall.

  1. Long term RPO to be declared by ministry of power in consultation with MNRE.

  1. Provision for allowing vintage multiplier (to take care of cost changes for RE projects) and technology multiplier (to encourage specific technologies) has been incorporated.

Procurement of power:

The preferential tariff regime for RE power appears to be on its way out. The policy says:

“States shall endeavor to procure power from renewable energy sources through competitive bidding to keep the tariff low.

Further, an overall maximum of 35% of installed capacity only can be procured by the state from SERC determined tariff. This limit includes all generation, not just RE.

Transmission of power:

Inter-State transmission charges and losses for renewable power (solar/wind) have been exempted.

This is a welcome change, as it will encourage inter-state transaction of power. However, it seems that this exemption will apply only to wind and solar projects, and not other renewables like small hydro or biomass. The draft policy had suggested that such an exemption apply to power from all renewable energy sources.

Cross-subsidy and open access:

  1. In calculating the cross-subsidy surcharge (CSS) a change in the methodology is proposed. At present, cross subsidy is calculated by using the cost of marginal power (top 5% power at the margin). Instead, now the weighted average cost of power including transmission and wheeling losses will be used.

Further, it is mandated that CSS cannot be more than 20% of the applicable tariff to the category of consumer seeking open access.

As we have shown in earlier articles, CSS determination is often arbitrary and with a purpose to discourage open access. One hopes that with the revised provisions the subjective aspects of CSS calculations will reduce. However, the policy still gives a wide leeway to SERC on this topic:

“Above formula may not work for all distribution licensees, particularly for those having power deficit, the State Regulatory Commissions, while keeping the overall objectives of the Electricity Act in view, may review and vary the same taking into consideration the different circumstances prevailing in the area of distribution licensee.”

Levy of “additional surcharge” has also been made more difficult as it needs “conclusive demonstration” of stranded capacity.

  1. Most provisions regarding open access remain the same as in the 2011 policy document.

However, a relief has been provided by limiting temporary tariff to 125% of normal tariff category.

Other changes:

Some other important changes are:

  1. Differential duties have been discouraged, particularly when states impose differential duties on captive generation.

  1. Licensees have been given the option to charge lower tariffs than those determined by the SERC if competitive conditions so demand.

  1. Provisions regarding micro-grids and protecting the investments made by micro-grid operators have been incorporated.

  1. Smart meters have been mandated for consumers consuming 500 units by 2017 and 200 units by 2019.

  1. Procurement of power from waste-to-energy plants has been made compulsory.


The changes proposed in the policy are encouraging and can have far-reaching impact, particularly on the RE sector. Provisions regarding RPO on co-gen, higher solar RPO, RGO and competitive bidding can radically change the demand for RE and the way new capacities are set up.

Rational and transparent cross-subsidy calculations can also help in encouraging open access to a large extent.

However, we remain cautious on these changes. The RE related changes will require that states be willing to implement these, and the wide leeway available to SERC on cross-subsidy means that only those states that are anyways in favour of encouraging open access will adopt them. It is unlikely to expand the open access market significantly.

An analysis of the frequency of words used in the NTP 2016 amendment vs the 2011 amendment throws a light on the changing priorities of the government:

The Policy can be accessed here.

Our previous blog on National Tariff Policy can be accessed here.

UDAY Scheme’s Impact on Renewable Energy Sector

The UDAY scheme was launched by the government in November 2015, and so far as met with a good response from the states (16 states representing more than 90% of DISCOM losses has joined) and from industry observers. These cover most of the large consumption states, but also most of the large RE rich states (see map). Notable exception from the RE rich category are Tamil Nadu and Karnataka.  The problem that the UDAY scheme aims to solve is a huge one.

CLSA (an equity analysis firm), points out that the collective outstanding of DISCOMs to financial institutions is in excess of Rs 5.5 lakh crore. This equivalent to two-and-a-half times the defence budget; roughly six times the amount that will be spent this financial year on building roads; and enough to wipe out India’s fiscal deficit.

The UDAY scheme aims to revive DISCOMs by working on three pillars – achieve operational efficiency (this will primarily be achieved by reducing AT&C losses and smart metering), reducing the cost of power (by reducing the interest cost and coal costs) and financial discipline (tariff increases and constraints on banking). These approaches have several sub-steps like smart metering, billing efficiency, etc.

A major area of reform is financial. The scheme requires that 75% of the existing debt of the DISCOM be taken over by the state. States have some moratorium before the debt is included in their overall fiscal limits. However, this step has two major impacts:

  1. It transfers the problem of DISCOM finances into the hands of its creators – States (and their politicians) are largely responsible for the current situation. Political patronage has kept AT&C losses high due to un metered supply and theft, and tariff increases have lagged costs
  2. It ‘bails out’ the banks – in RBI’s own words – “…UDAY, will essentially be shifting the stress from financial institutions to the state governments, though the initiative would instil financial discipline at the sub-sovereign level, especially in ensuring recovery of user charges.”


Impact on RE Sector

We believe that over the longer term, improvement in DISCOM finances will have a significant positive impact on the RE sector. In many DISCOMs step-motherly treatment to RE continues due to its perception of being costly and infirm power. Easing financial situation will create more openness to RE power.

The immediate impacts are likely to be felt strongly also.

The first one is likely on the REC markets – the scheme document says – “DISCOMs opting for the scheme will comply with RPO outstanding since April 1, 2012 within a period to be decided in consultation with MoP”. The participating states have many large power consuming states, and many have large outstanding RPO obligations (eg. UP, MP). This condition is likely to push RECs trading significantly.

The second impact is likely to be on the mode of power procurement in the near future. Increasingly, fixed preferential tariffs for RE look out of place. The scheme document says – “To reduce power costs, States shall take steps for: prospective power purchase through transparent competitive bidding by DISCOMs.”

The third impact is likely to be the worsening of the payment cycle to RE generators in the immediate term. This is because bank funding will dry up immediately and be severely constrained for working capital requirements. The document says – “Henceforth, Banks/ FIs shall not advance short term debt to DISCOMs for financing losses” and “for working capital, Banks/FIs shall lend to DISCOMs only up to 25% of previous year’s annual revenue, or as per prudential norms”

Improved financial situation of the DISCOMs will help in the long run, but in immediate term, payment cycles to RE producers are likely to get worse.

The fourth impact is likely to be on the off take side. With potential for faster and steeper tariff rise, RE projects are likely to get competitive in more states. It would have been helpful if the scheme document had also required mandatory open access in participating states.



Like any previous DISCOM package, the key risk of failure is political. In the past, while DISCOMs have enjoyed the funding that such packages bring, state politicians have not allowed for tariff increases or long-term changes.

Even the current scheme has political overtones – a look at the map above suggests that mostly BJP ruled states have signed up. RBI has also recognized this, stating the issue is now in the hands of the “sub-sovereign level”.

However, compared to DISCOM packages of the past, this one appears to have more checks and balances through the state being the bond-issuer.



With DISCOMs being shut out of bank financing, the key question is – if they don’t sign up, what alternative do states have? No option sounds less bitter than the UDAY pill.

Therefore, overall, there is ample reason to hope the scheme will bring genuine and lasting changes at DISCOM level. This will be great news for the RE sector.

The Hindu article can be accessed  here.

The RBI report can be accessed  here.

CSERC’s order on non compliance of RPO by Discoms for the year 2011-12 & 2012-13

Chhattisgarh State Electricity Regulatory Commission (CSERC) passed an order on 15th October 2014 on non compliance of RPO by DISCOM’s of Chhattisgarh for the year 2011-12 and 2012-13.  In the order CSERC said that they will close this matter of non compliance of RPO by DISCOMs. The questions arises in the order is how, as CSERC has not mentioned about any action to be taken or any penalty to be imposed on the discoms for their non compliance. CSERC in its order have concluded that

“Our attention has been drawn towards the fact that in CSPDCL’s tariff determination, final true up for FY 2011-12 has been completed. Therefore, in our opinion, it would not be appropriate to force them for compliance of RPO for FY 2011-12 at this stage. We are also of the view, that penalizing the other respondents/DISCOM for non fulfillment of their RE obligation for year 2011-12 is unjustified”

Similar order was also given for FY 2012-13. The commission has only asked the Discoms to be more vigilant on fulfillment of RPO in the coming years.

The order can be accessed here ( FY 2011-12) and here ( FY 2012-13).


MPERC imposes penalty for non compliance of RPO

In an order dated 20th October 2014, Madhya Pradesh Electricity Regulatory Commission (MPERC) has imposed a token penalty of Rs. 25,000 for non compliance of RPO.  The order is the outcome of the petition filed by M/S Green Energy Association in the matter of non compliance of solar RPO by the obligated entities for the period of FY 2011-12 to FY 2013-14. The respondent Madhya Pradesh Power Management Co Ltd (MPPMCL) plea was that they could not fulfill the RPO in the past years through purchase of RECs due to poor financial condition of Discoms. On hearing both the parties the commission  found the plea of MPPMCL to be illogical at this stage as RECs are available in the market and the retail tariff order for FY 2014-15 includes the amount to procure energy from renewable sources to meet RPO.  Therefore, now non compliance of RPO cannot be neglected and go unpunished.

The order states that

“ The Commission, therefore, imposes a token penalty of Rs. 25,000.00 on the respondent towards non-compliance of the solar RPO target as per the provisions of MPERC (Co-generation and Generation of Electricity from Renewable Sources of Energy) Regulations, 2010, which is to be deposited with the Commission within 30 days of the issue of this order. It may be emphasized that the penalty is a token and does not redeem the failure of the respondent in the matter. The Commission would like to warn the respondent that future non-compliance in this regard would be dealt with severely. “

This order will be appreciated by the RE generators who have a large inventory of RECs lying with them. Similar orders from SERC of Uttarakhand and Union Territories were made in the past. This is a welcome step and we expect other SERCs to come up with similar orders and take strict action against non compliance of RPO.

The order can be accessed here.

APERC unveils wheeling, transmission & SLDC charges for FY15

The state regulator of AP has determined open access charges namely – wheeling, transmission and SLDC charges for 3rd control period (i.e. from FY15 to FY19).

Wheeling Charges:

The wheeling charges determined by APERC are different for all discoms. The wheeling charges will be effective 17th May 2014. The table below shows the applicable wheeling tariff for subsequent years starting FY15.

Wheeling charges to be levied by CPDCL -

A conventional generator using distribution network of CPDCL and drawing energy at 33 kV will now have to pay Rs. 0.01 per unit. For 11 kV the same will be approx. Rs. 0.195 per unit in FY15.

Wheeling charges to be levied by EPDCL -

Wheeling charges to be levied by NPDCL -

Wheeling charges to be levied by SPDCL -

Note – As per Govt. of AP policy there will be no wheeling charges applicable on non-conventional energy generators (Wind, Solar and Mini-Hydel). 

The order on wheeling tariff can be accessed here.

Transmission Charges:

The APTRANSCO will levy the following transmission charges starting from FY15.

Note – RE generators will continue to be exempted from paying the above transmission tariffs as per Govt. of AP policy directives. 

Transmission tariff order can be read in detail by clicking here.

SLDC Charges:

The following SLDC charges (Annual Fee & Operating Charges) shall be paid by Generating Companies (including Captive Generating Plants), Distribution Licensees and Trading Licensees using the intra-State Transmission Network.

Detailed order is available here.

Go to top