Prices of electricity in short-term market are ruling at high levels!

28 Apr 2009, 0316 hrs IST, KG Narendranath, ET Bureau

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India, with its federal polity, is still in the throes of producing a consensus on how and how fast to reform the electricity sector that needs to expand rapidly to meet the steeply rising energy demands of the fast-growing economy. As an IAS officer, Pramod Deo had handled energy sector for more than 20 years. He has served as electricity regulator for the last nine years, building upon an apt academic background—a post graduate degree in physics, doctoral degree in infrastructure economics and post doctoral research in energy policy. Recent actions of the CERC— especially the revision of regulations on Unscheduled Interchange (UI) and a statement of intent to control the prices of electricity in short-term market— have attracted the attention of sector watchers. Deo spoke about these and other measures of the regulator in an interview with KG Narendranath. Excerpts : The criticism of the CERC's move to impose caps on the prices of short-term sale of electricity is that it would hamper the growth of the sector that anyway doesn't seem to attract investments of the kind being envisaged, that is, some Rs 3 lakh crore in the current Five-year Plan. Short-term prices at which electricity is traded has risen sharply in recent months and are ruling at levels that are quite high. Although majority of the supplies are under long-term contracts, there is clearly a need to control the situation of steep increases in the short-term market prices. Although the commission has the powers to impose price caps on inter-state sale of electricity, the purpose of imposition of price cap cannot be met without addressing the other crucial aspects such as review of the UI mechanism and the absence of a mechanism to regulate sale of 'free power' by state governments. The UI mechanism, meant to ensure grid discipline, is being used by many state power utilities as a trading platform as you have the advantage of not paying trading charges. The movement of actual UI prices do impact the price of electricity being sold in the short-term. With 30% power deficit during peak hours in some states, some state utilities refuse to supply enough power to their own consumers and sell to the consumers in other states who are willing to pay more. That is why we have reviewed the UI regulation in its entirety and come out with revised norms. There is also a need to devise a statutory mechanism for regulation of price of sale of 'free power' from hydro stations by the state governments to the distribution licensees of other states or trading licensees. If we decide to impose any cap on the price of electricity in short-term market, it would after a detailed study. Perhaps, the state regulatory commissions could impose suitable limits on the price at which the state utilities procure short-term power. States can sell the 'free power' they are entitled to get from hydropower projects directly to the trader. Since there is no control on cost of this power and only the trade margin is controlled, this also gives room for short-term sale prices to rise. We have written to the power ministry, urging it to address this issue. What exactly are you aiming at through the revised UI regulations? We intend to send a clear signal to all concerned that UI is not a mechanism for trading of electricity. We hope the new regulations would encourage distribution utilities to meticulously plan procurement and desist from over-drawals from the Grid. Creation of new generation capacities is the solution to the shortage that exists, not excessive use of the UI facility. The restructured UI rate vector penalises utilities that habitually overdraw. Also, the new tighter frequency band would improve the quality of power being supplied. There are 42 power trading licences, yet there are no signs of burgeoning power trading in the country. We have raised the eligibility threshold for players in power trading business, including the existing ones, in order to ensure that only serious players have the licence. Number of categories of licensees has been reduced to 3 from 6 earlier. The revised regulations on inter-state trading of power notified in February 2009 also cover power imported from other countries for resale in the domestic market. The Supreme Court has upheld our ruling that the PTC can't charge more than Rs 4 per kilo-watt hour as trading margin for the power procured from Bhutan. Cross-border electricity sales are also well within the purview of CERC. We have denounced the tendency among some states to block open access. The fundamental reason for the high cost of traded power (which is not conducive for the development of the power market) is the willingness of some buyers to pay high rates in the present deficit situation and therefore, the ultimate solution is to set up enough generation capacities. Isn't there a need to establish separate feeders for major sectors like agriculture and essential services like railways and water supply to avoid load shedding at the hour of need? As demand for power from agriculture sector is seasonal and can soar suddenly, separate feeders would facilitate better load management. States like Rajasthan, Gujarat and Andhra have set up separate feeders for agriculture and are able to control supply of electricity to the sector more effectively. Other states must follow suit.

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Gopinath S
Chief Executive
nRG Consulting Services, Bangalore
http://business.vsnl.com/gopinath
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