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 changes in CSS and its impact on Open Access market

Cross-subsidy regime used as a tool to influence the open access market

In this financial year (FY 2015-16), Andhra Pradesh, Telangana and MP suddenly raised cross-subsidy surcharge (CSS) applicable on industrial units significantly. In the case of AP and Telangana last years’ cross-subsidy was nil, but this year its Rs 2.23 and Rs 1.42 respectively. In the case of MP, the cross subsidy increased from Rs 0.48 to Rs 2.16 (an increase of 350%).

An analysis of several states suggests that cross-subsidy is often increased suddenly and substantially. In each of the above cases, the immediate impact will be that third-party transitions will come to a halt, as they will no longer be viable. For example, in MP the revised CSS is 46% (vs 12% last year) of the applicable tariff. In AP and Telangana, its 40% and 25% respectively.

These three states accounted for approximately 20% of the volume on power exchanges as per the market monitoring report from CERC for February (the most recent available). This volume is likely to dip to insignificance thanks to the steep rise in CSS.

Another good example is the case of Haryana. In FY 2013-14, the applicable CSS was Rs 0.53. Next year it was raised to Rs 2.02 (a four-fold increase). As a result, the traded volume between February 2014 and February 2015 has fallen by half (160 MUs and 86 MUs respectively). One must keep in mind that the above volume includes purchase from Discom’s, if any, on which CSS is not applicable. Thus, the actual fall in volume from open access consumer is must larger.

Changes on the horizon

It is clear from the above examples that cross-subsidy is varied by states to influence the open access market.

However, some fundamental changes are on the horizon. The first one pertains to applicability of CSS on renewable energy. One of the amendments proposed to the Electricity Act, 2003 seeks to remove CSS applicability from renewable energy transactions. This will have a significant impact as it will make RE transactions very attractive. One hopes that states will adopt this in its true spirit.

The second change pertains to the way CSS is calculated by the States. The existing National Tariff Policy (NTP) suggests that CSS be calculated as the difference between the top 5% of the incremental power procured by the Discom (this is often proxy for the most expensive power procured) and the applicable tariff. However, this is a very opaque measure – for example, between 2013-14 and 2015-15, the cost of top 5% of the power in MP fell from Rs 5.47 to Rs 4.59 (a fall of 20%), despite increase in overall costs and tariffs.

The amendments to NTP will require the calculations to be done by taking the overall costs (including the cost of regulatory assets, ie losses incurred by the Discom).

 

 

Further, the proposed NTP seeks to limit the CSS to 15% of the applicable tariff in the category. It is noteworthy that till now, NTP has been more recommendatory in nature. For example, it requires that CSS should be brought down progressively to bring it to 20% of the opening level by 2010-11. However, the significant changes done recently clearly indicate that this objective of the policy has not been achieved.

Team REConnect Energy

 

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.

 

Go to top