FOR Report Targets Clean Energy Cess, Coal, Better Renewable Planning

The Forum of regulators (FOR) is  a body set up under section 166(2) of the Electricity Act, 2003 to ensure better coordination and analysis among power regulators across the country. The Forum consists of Chairperson of Central Electricity Regulatory Commission (CERC) and Chairpersons of State Electricity Regulatory Commissions (SERCs). The Chairperson of CERC is the Chairperson of the Forum. The latest report of the FOR, “Analysis of Factors Impacting Retail tariffs And Measures to Address Them” has been in in the news for the key points it has made. The points, as we will enumerate below, all make eminent sense, and even have a high dose of that rare quality, common sense, but as we shall no doubt discover, implementing common sense ideas in a sector as convoluted as power is not as easy as it seems. Here are the ones we found worth highlighting.

Coal – Price, quality, freight

Right up front, the Forum highlights the key role of coal in final prices. The price of col accounts for 25 percent of final power cost. Add to that freight contribution of 41%, road transport charges of 11 percent, and the clean energy cess of 11 percent, and we have the coal and its linked components accounting for close to  88 percent of final costs. Thus, the FOR makes a case for a strong coal regulator. as also a railways regulator. Because not only have coal prices outpaced inflation by a margin at 28% in the past 4 years, railway freight costs have been even higher, at  40 percent more, during the same period. Seen in another context, not only has coal been made to look more inefficient by higher taxes and cess, but it is also subsidising the railways and government expenses through the clean energy cess!

Clean Energy Cess

It tackles the ‘Clean Energy Cess’, a cess on coal that was initially launched in 2010, with a cess of Rs 50 per tonne. This cess has subsequently been raised 6 times since then, to reach Rs 400 per tonne today. With barely any impact on clean energy. In fact, in 2018, the cess was added to the consolidated fund of India, a bottomless pit that not only absorbs and and all funds thrown at it, but makes it impossible to trace how it was used too. Thus, with any role for clean energy completely taken out of the cess, the FOR has made a case for removing it altogether, considering it contributes 11 percent to eventual power tariffs. The FOR instead makes a case for using the proceeds collected so far to support power generators who are repeatedly falling behind on upgrades. Or sharing the money with states for the ‘fixed cost’ they pay to generators, even when not utilising power produced. Straight up, the idea of removing the cess is good, the options not really workable. Every Rs 50 reduction in the cess can reduce final power costs by 3 paise, reckons the FOR.  The cess, collecting Rs 25,000 crore each year for the past three years, needs to be put to some real use for the sector.

The funds collected for the clean energy cess are also proposed to be used to take care of stranded generation assets, which continue to fester and threaten serious financial problems for lenders too. The FOR proposes a 60:40 cost sharing between the centre and states respectively.

Trading margins

The FOR has also made a case for reduction of trading margins. 7 paise per unit has become the default for the largest players in the business, the central agencies, especially SECI and NTPC, besides others. This has rankled with the regulators, based no doubt on complaints by multiple discoms too. The FOR has gone so far as to propose capping this margin at 2 paise per unit. Ouch!

Renewable Energy   

On renewable energy, where the regulators note an increasingly larger role for it, they make a case for building more hybrid renewable projects, to ensure better utilisation of the transmission network, as well as more consistent supply. Interestingly, they do have not seen it fit to mention batteries too. Perhaps because the focus here is on curtailing costs, while large storage remains net cost accretive for now.

A very sensible suggestion made is to consider more distributed generation projects in the future, especially for the agri sector, as these would reduce the need for investments in extensive transmission networks. We would like to add here that doing this will also enable smaller projects, especially hybrid projects where massive scale of 200 MW plus is not always workable due to geographical, or constraints inked to getting contiguous land. Finally, this could also reduce transmission losses.

Power Purchase Agreements (PPA’s)

The forum has finally started a discussion on reducing the length of PPA’s. The 25 year PPA, used for the past many decades and the bulwark of the generation sector, has possibly outlived its utility, in their view. Discoms tied in to these PPA’s, while buying from coal plants that have outlived their useful life, should be able to get out with advance notice. Shorter duration PPA’s with exit clauses that are not stringent, need to be tried. We have made this suggestion earlier, and we have already seen that shorter PPA’s can work in well regulated systems, as generators hope to recover money from merchant sales after PPA ends. In case of old thermal clunkers,it could actually help hasten the closure of the most polluting plants, by closing the incentive to keep going at the cost of the environment.

Using Market Based Mechanisms:

While the Forum proposed market bidding for all future projects other than some Hydro projects and Nuclear power projects, it has also suggested making SLDC’s (State load Despatch Centre’s) more independent and accountable for Merit Order Dispatch (MOD)of electricity on day ahead and real time basis. A strong power market and trading platforms make this possible today, and it makes sense to use the options available to reduce costs.

While on market based mechanisms, the FOR also proposes more realistic depreciation norms for the sector, proposing an extension to 15 years from 12 years currently. Besides more realistic O&M costs for Hydro projects.

Conclusion: No one who has covered the power sector could possibly have any issues with these suggestions. They make eminent sense, and will go a long way to untangle the logjam of ever higher final retail prices  despite the drop in generation costs we have seen in the past few years. However, much like fuel taxes, where the country is supposed to be going for a transition to electric vehicles, the central government faces a tough choice. Giving up an established, easy source of funds for a more uncertain, albeit better future.

Consider how as per the budget for FY22, the estimates on revenue from ‘Union Excise Duties’ for FY21 was Rs 3.61 lakh crore, as against Rs 2.67 lakh crore collected in FY20. Data published by the Controller General of Accounts (CGA), states that `2.75 lakh crore was collected from these levies in the April-January’21 period. Another Rs 1.20 lakh crore has possibly been garnered in February-March. That takes  the total collections to over Rs 3.9 lakh crore, almost all from the taxes on petrol and diesel. Add to that the Clean energy cess, and the extra profits the railways gouges out from coal transportation as a monopoly, and the net impact on government finances is probably over 15% of total receipts.  

Those are numbers big enough to paralyse all decision making on major changes in a system whose serving motto is to shirk accountability. Tough.