Without diligent regulators, it simply won't work
Should the power ministry, as is being talked about, move projects from competitively-bid tariffs to those where regulators determine the tariff each year? Power producers have been asking for this to help rescue around R4 lakh crore worth of stressed power plants—if plants such as the Tata Power UMPP were under Section 62 of the Electricity Act, the higher costs of coal imports resulting from the change in the Indonesian law would have simply been passed on to the consumer. To be sure, giving a one-time exemption is fraught with moral hazard, but if switching to a regulated tariff regime undeer Section 62 of the Electricity Act can help salvage the projects and ensure the banks are repaid, that would be a
much-needed saving of time and resources. Since the move involves several players, whose plants are in trouble for one reason or another—ranging from higher cost of imported coal to an unusually sharp depreciation in the rupee—the government can hardly be accused of favouring any one business group. Even otherwise, the suggestion made by the working group constituted by the finance ministry to resolve the issue of finances of power projects should be considered given the amounts involved.
Indeed, most of these producers have sought compensation from the regulator and while the CERC had awarded a couple of producers—Tata Power and Adani Power—compensatory tariff, the power purchasers have been unwilling to pay a higher tariff and are contesting the matter in court. One way to placate the distribution companies who have to buy the more expensive power could be to reduce the assured post-tax return on equity (RoE) to ensure that the developer doesn’t get away without taking a part of the hit. This is what the CERC did when it allowed a compensatory tariff for projects where the price of imported coal had gone up—it argued that, in both cases where this was done, the final tariff was still below what would be charged by a new plant at current costs.
The problem here, and it remains a knotty one, is of balancing interests. While competitively-bid tariffs provide certainty to buyers and provide an incentive to keep costs low, regulated tariffs do not necessarily provide for this unless regulators are both diligent and firm—and insist power producers deliver on higher productivity norms, for instance, which will lower consumer tariffs. There is, however, little in the behaviour of regulators in the past to suggest this is the case.
The flipside is that most power plants that have competitively bid tariffs are in financial trouble, and given the present bankruptcy laws in India, getting producers out of these projects is easier said than done. Whatever solution is finally chosen, the system is not going to work unless regulators are diligent and firm since final consumer tariffs also depend upon bringing in more competition among suppliers and getting discoms to lower theft levels as well as to make their payments on time.