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
Conclusion:
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.

Andhra Pradesh Electricity Regulatory Commission (Renewable Power Purchase Obligation and its Compliance)

The Ministry of Power (MoP) had recently declared the national RPO trajectory.  The order had enlisted the yearly RPO trajectory for both non-solar and solar power purchase from 2016-17 till 2018-19. Following the steps of MoP RPO trajectory, Chhattisgarh, Himachal Pradesh and now Andhra Pradesh has notified its Renewable Power Purchase Obligation and its Compliance, regulations which will be effective from April 17, 2017.

The regulation will be applicable to:

  • The distribution licensee
  •  Or any person, consuming electricity procured from conventional sources through open access third party sale,
  • Every consumer owning a captive generating plant of installed capacity 1 MW and above and synchronized with the Grid.

 

The table below shows the Minimum Quantum of Purchase in percentage (%) from renewable sources (in terms of energy in kWh) of total consumption:

 

The said obligations will be applicable on total consumption of electricity by an obligated entity, excluding consumption met from hydro electric sources of power.

 

Analysis:

  • RPO to be applied on co-generation power
  • The distribution licensees shall compulsorily procure 100% power produced from all the Waste-to-Energy plants in the State, in the ratio of their procurement of power from all sources.
  • The Consumption from hydro sources to be excluded
  • RPO % is proposed to increase steeply – from 11.50% in 2016-17 to 17% in 2018-19 line with the MoP Trajectory.
  • The graph given below gives a comparison between the MoP recent RPO Trajectory and APERC’s RPO Trajectory

The regulation can be accessed here

Himachal Pradesh Electricity Regulatory Commission (Renewable Power Purchase Obligation and its Compliance) Regulations

The Ministry of Power (MoP) had recently declared the national RPO trajectory.  The order had enlisted the yearly RPO trajectory for both non-solar and solar power purchase from 2016-17 till 2018-19. Following the steps of MoP RPO trajectory, Chhattisgarh and now Himachal Pradesh have notified its third amendment to the Renewable Power Purchase Obligation and its Compliance, regulations.

The regulation will be applicable to:

  • The distribution licensee
  •  Or any person, consuming electricity procured from conventional sources through open access third party sale,
  • Or person who installs Captive Generating Plant, with an installed capacity exceeding 5 MVA, requirements also.

The table below shows the Minimum Quantum of Purchase in percentage (%) from renewable sources (in terms of energy in kWh) of total consumption:

The said obligations will be applicable on total consumption of electricity by an obligated entity, excluding consumption met from hydro electric sources of power.

Analysis:

  • RPO to be applied on co-generation power
  •  Consumption from hydro sources to be excluded
  • RPO % is proposed to increase steeply – from 11.50% in 2016-17 to 17% in 2018-19 line with the MoP Trajectory. However, in effect the overall RPO of the HP will fall as 77% of the power consumed in the state comes from hydro sources.
  • In year 2011, HPERC had come up with a ten year long RPO Trajectory ranging from 10% (including both solar & non solar) in 2011-12 to 19% in 2021- 22. The commission now proposes to increase its RPO target in comparison to its earlier trajectory. However, in 2016-17, RPO % is will be reduced. The graph given below gives a comparison between the MoP recent RPO Trajectory and HPERC’s earlier RPO Trajectory

The graph given below gives a comparison between the MoP recent RPO Trajectory and HPERC’s earlier RPO Trajectory:

 

As the graph indicates HPERC has increased its RPO target by 2.25% to be achieved by 2018-19. Since Himachal Pradesh mostly thrives on the energy produced through Hydro Power, the state could be a beneficiary since RPO is excluded from RPO obligation as per the regulation.

The graph below shows the total and type of energy consumption by the state of Himachal Pradesh. The data has been derived from CEA Report.

 

Almost 3/4th energy of the total consumption comes from the Hydro Power. Its an added advantage for the state that RPO is exempted from the power consumed through Hydro sources, thus this in turn will reduce the cost of power from the state.

The regulation can be accessed here.

The CEA Report could be accessed here

 

Madhya Pradesh Electricity Regulatory Commission (Cogeneration and Generation of Electricity from Renewable Sources of Energy) (Revision-I)

Madhya Pradesh Electricity regulatory Commission (MPERC) recently ordered amendment for its Cogeneration and Generation of Electricity from Renewable Sources of Energy Regulation 2010.

The new amendment has defined the minimum quantum of electricity to be procured by all the Obligated Entities from Co-generation from Renewable Sources of electricity expressed as % of their total annual procurement of Electrical Energy.

The new amendment has excluded consumption met from hydro sources of power during the following Financial Years given as under:-

 

As the Ministry of Power (MoP) declared the national RPO trajectory recently, all the states are expected to declare their RPO trajectory soon.

The MPERC Draft can be accessed here.

National RPO Trajectory Declared

The Ministry of Power (MoP) declared the national RPO trajectory recently. According to the notification, overall RPO % is expected to be 11.5% in 2016-17 (including 2.75% of solar), and rising to 17% in three years (including 6.75% solar).

This trajectory is higher than the current RPO in most states. The onus will now be on the SERCs to amend their RPO regulations to bring it in line with the notification. Infact, Chhattisgarh has already made a beginning with draft regulations published within a week of the notification (the draft regulation is analyzed in the second part of this article).

The notification mentions two other important aspects of calculating RPO:

  •  RPO to be applied on co-generation power
  •  Consumption from hydro sources to be excluded

Conclusion:

Announcing the national RPO trajectory is a welcome step. The entire objective of the RPO and REC regulations was to have a uniform consumption of RE power across the country even though the RE resources differ widely across states. However, this objective was lost along the way. The National RPO trajectory can go a long way is having uniform RPO% across the country. However, there are some issues with the RPO trajectory notification:

  • “Are SERCs obligated to follow? This question remain unanswered. The notification itself says…”
  • SERCs may consider to notify RPO for their respective states in line with the aforesaid uniform RPO trajectory.
  • The RPO trajectory itself has been declared for 3 years only. It would have been good to see a longer trajectory.
  • The exclusion of hydro will need amendments in state RPO regulations
  • Similarly, including co-generation power in RPO calculations will require some states like Rajasthan and MP to amend their regulations

Chhattisgarh Draft RPO regulations – Analysis
Immediately after the notification of the national RPO trajectory, Chhattisgarh announced draft RPO regulations. Key points on the draft regulations are:

  • The RPO % is proposed to increase steeply – from 7.25% in 2015-16 to 20% in 2020-21.
  •  The regulation proposes to apply RPO on co-generation power
  •  Both these changes will have significant impact on Chhattisgarh. It is a state with large captive generation capacity, a large portion of which is from co-generation.

 

 

* Draft regulation

** In Karnataka RPO differs slightly for each Discoms

 

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.

Conclusion:

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.

Analysis of Amendments Proposed in the National Tariff Policy

The Ministry of Power has proposed several changes to the National Tariff Policy. Some changes are significant, like the proposal to substantially increase solar RPO (from 3% by 2022 to 8% by 2019), to remove inter-state transmission charges on RE power and curtailing cross-subsidy to 15% of applicable tariff.

Key points in the amendments to the National Tariff Policy:

  • The SERCs and CERC shall necessarily be guided by the National Tariff Policy
  • Promotion of renewable energy has been added as an objective of the policy
  • In the tariff policy, the word ‘Non-conventional’ is sought to be replaced with Renewable energy
  • For RPO, long term trajectory to be provided by Ministry of Power (MoP), in consultation with MNRE and keeping in view the objectives of NAPCC
  • Solar RPO targets to be ramped up more aggressively – the exisiting policy provids for reaching 3% by 2022, the proposals to increase this to 8% by 2022.
  • The policy envisages a REC multiplier to differentiate between technologies, and to accommodate changes in price (through a ‘vintage multiplier’)
  • The tariff policy envisages that procurement of renewable energy, as far as possible, will be done on a competitive bidding basis. Further, “an appropriate bid-based tariff framework for renewable energy, allowing the tariff to be increased progressively in a back-loaded manner over the life cycle of such a generating plant” is planned. The back-loaded manner could imply costs are kept low at present so as to minimize cost burden on the Discom’s, to be increased over the life of the project.
  • For a new coal/ lignite based plant, RE capacity to the extent of 10% of thermal generation capacity will have to build. This will be allowed to be bundled with the conventional power.
  • No inter-state transmission charges for RE power
  • Time differentiated tariff to be implemented for large consumers (>1MW) within one year, and for all consumers within 5 years
  • 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 the weighted average cost of power including transmission and wheeling losses and charges, and the cost of carrying regulatory assets is proposed to be used.
  • Further, the provision requiring gradual reduction of cross-subsidy to a maximum of 20% of its opening level is proposed to be deleted.
  • A new provision limited the CSS to 15% of the applicable tariff category has been proposed.

Conclusion –

The changes proposed in the Tariff Policy are welcome, and in line with the government’s objective to promote RE power. However, the effectiveness of the same remains a question mark. Several provisions in the existing policy (of January 2006) remain only on paper. A good example of this is the requirement that “Availability Based Tariff (ABT) is to be introduced at State level by April 2006”. In several states this still remains a distant dream 9 years after the deadline.

Similarly, the ability of reaching 8% solar RPO remains doubtful when several states did not even follow the minimum requirement of 0.25% as per the existing policy. Also, the intent and conduct of SERCs in enforcing RPO regulations has been a big question mark.

It is noteworthy that the Electricity Act 2003 says that the Appropriate Commissions ‘shall be guided’ by the Tariff Policy in tariff determination. The proposed amendment to the EA says the provisions of Tariff Policy shall be followed by the Appropriate Commission for the purpose of Tariff determination.”

The link to the main document is here.

 

Govt. pushes for stronger RPO enforcements

The Ministry of New & Renewable Energy (MNRE) has written to Ministry of Power (MoP) to include stronger enforcement provisions in the Electricity Act itself, which at present is absent.

An article in Business Standard, quoted Joint Secretary of MNRE saying the following, at an event:

“What we have requested is that the Electricity Act itself should mention about RPO… Or there (should) be some other alternative, so that it becomes binding. Also the enforcement provision should be more stronger,”.

He also called for greater investments in renewable energy sector of India.

REC markets have been performing poorly. In January 2014 also, which was 1st month of last quarter of FY14, the volumes remained far from encouraging and resulted in continued clearing of RECs at floor price. More insights can be learnt by clicking here – REC Trade Report – January 2014.

According to recent details made public by Hon’ble MNRE, as on 31st January 2014, the total grid connected renewable capacity of the country has touched 30 GW. However, the achievements highlighted are only around 50 % of the target for the year. The details can be accessed here – MNRE – Physical Progress (Achievements).

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