Merchant / Captive Power
Post Electricity Act 2003
By
Sh. M.D. Mundhra
Malana Power Company Limited
LNJ Bhilwara Group
15th October 2003
CII – PTC Conference on
“The Power Market Post Electricity Act 2003:
Entities, Business Models and Implications”.
LNJ Bhilwara Group in Power
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LNJ Bhilwara Group is a Rs. 1700 Cr. diversified
Group. The Group has both Captive Power Plants and
Merchant Power Plants.
Captive Power Capacity
15 MW Tawa HEP in MP –
Captive for HEG.
(For Graphite Electrode)
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13 MW WHRS in CG -
Captive for HEG.
(For Sponge Iron)
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25 MW Coal based in MP –
(Under development)
Captive for HEG.
(Graphite Electrode
Expansion)
33 MW DG Sets in Raj, MP - Captive for Textile Mills
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LNJ Bhilwara Group –
Pioneers of Merchant Power Plants in India
Merchant Power Plants
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86 MW Malana HEP – India’s first and only operating
Merchant Power Plant.
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Completed in record time of 30 months
At a cost of Rs. 3.8 Crs. / MW.
192 MW Allain Duhangan HEP
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Also being developed as a Merchant Power Plant.
Expected to be on stream by 2007-2008, well ahead of
schedule.
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Merchant Power Plants – Generation
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Except Hydro – other modes of generation delicensed.
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But, allotment of Hydro Projects in any case is required.
Various forms of Competitive bidding based on ‘Royalty’,
‘Upfront Premium’, ‘Rate of Power’ have practically failed.
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For Hydro, CEA approval is required above a certain level.
We suggest this limit to be Rs. 2500 Crores (for 500 MW).
The Act has increased Scope for merchant power plants
without long term PPA.
Unsuitable for Hydro Projects as they are extremely ‘Location
Specific’ and have Hydrology and Geology inherent risks.
As a result, now allotment of Hydro Projects to the Private
sector is practically at a standstill.
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Suggested procedure for
Allotment of Hydro Power Projects (1)
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Time is Key in Hydro Power for developer, state and
Nation.
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1 year of early commissioning of 100 MW Hydro Project means
Rs. 12 Crs of additional Royalty for state @12% royalty.
Therefore, ‘Completion Time’ should be the criteria for
allotment of Hydro Power Projects to the private sector.
Developers to be shortlisted based on their technical,
financial, managerial capability and past track record.
They should be given 1 year for vetting Feasibility Reports
(for good projects) or DPRs (if they are available).
They should then Bid for ‘Time for completion of Project’.
Developer with lowest time for completion to be awarded
the project with set of incentives / disincentives.
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Suggested procedure for
Allotment of Hydro Power Projects (2)
Scheme of Incentives and Disincentives
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Project lease period – 40 years from quoted CoD.
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Incentive – 50% royalty waiver for early commissioning.
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Disincentive for delay – Penalty of 2.5% of annual design
energy @ Rs. 2 per kWh (supported by bank guarantee).
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Allow Force Majeure and 1 year grace period.
State to take over for delays > 2 yrs from agreed
milestones.
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Merchant Power Plants – Selling Options
Merchant Power Plants - Sales
Directly to Industrial
Consumers Subject
to
payment of
surcharge
- No Regulator’s
approval required.
15th October 2003
To Discoms w/o
surcharge –
Needs
Regulator’s
approval
To Traders for
further sales to
Discoms or
consumers
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How to encourage
Direct Sale to Industrial Consumers?
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Indal’s Kochi unit got closed despite offer of Rs. 2.50 / kWh from
PTC at Kerala Inter-state Point, due to excessive ‘Surcharge’ (42
paise) and intra-state wheeling charge (35 paise) and
Transmission losses charged by KSEB.
Therefore
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To promote Direct Sale to Industrial Consumers:
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Surcharge must be eliminated within 5 years.
Within these 5 yrs. – Surcharge to be capped at 50% of the
difference between:
 Existing Tariff,
 Tariff negotiated between consumers and generators plus all
wheeling charges.
Unless the above is implemented, Third Party Sales will
not see the ‘Light of the day’.
Without the above, Merchant Power Plants will be difficult
proposition.
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Surcharge and Captive Power Plants
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Industries have two options for meeting their
requirements of power:
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To put captive power plant – with no surcharge.
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This would normally not allow economies of scale.
To buy power from Merchant Power Plants at market rates:
But decision to set up a captive power plant or go in for PPA with
Merchant Power Plant, will be difficult without knowing the
amount of Surcharge and definitive time frame for its
elimination and as a result:
 Investments made in haste in captive power plants may go
waste,
 Some states like AP, Karnataka are introducing taxes on
captive generation.
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This would further complicate the decision making process.
In fact in most countries, industries get power at subsidized
rates. So keeping surcharge will make industries uncompetitive.
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Merchant Power Plant –
Sale to Discoms (1)
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Tariff to be approved by Regulators.
Various Discussion Papers floated indicate retaining the
‘Cost-Plus’ Pricing system.
Cost- Plus pricing rewards inefficiency.
To reward efficiency, instead of deciding cost project-wise,
we suggest a band of power prices to be announced
annually by the Regulators:
Minimum Price to be based on optimum costing in a
particular sector.
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Merchant Power Plant –
Sale to Discoms (2)
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Maximum Price to be based on actual cost of projects
completed during last 3 years. This should include:
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RoE during construction period for power projects.
(Otherwise for a typical Hydel Project having 6 years
construction period, 16 % RoE will translate to only 9 %
ROE).
Regulators approval should be required if price does not
fall in this band of prices.
The above will increase availability and subsequently
market forces will take over.This will give boost to
efficient entrepreneurs to put up merchant power plants.
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Merchant Power Plants and Trading
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Merchant power Plants will also get a boost by
promotion of Trading.
For facilitating more Players in the market, we suggest:
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Licensing fee not greater than Rs. 10.00 Lacs per annum.
Single Trading license for the entire country – Trading
licenses not to be restricted to geographical areas.
No Trading license for Generators as they are already
familiar with nuances of Selling / Trading of Power.
This will allow merchant power plants to supply directly
to consumers by meeting their seasonal demands by
Trading.
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Under supply / Over supply of power
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Some mechanism needed to price the over supply/under supply.
ABT in its present form – ineffective as it was originally not
meant to be a rate mechanism, because even at most desirable
Frequency of 50 Hz, rate is Rs. 1.4 / kWh.
This has resulted in conversion of scheduled demand into
unscheduled demand.
Needs revision to ensure proper pricing of unscheduled
generation / consumption.
We propose the following rates for unscheduled power:
Now
Rs. 0.00 / kWh
Rs. 1.40 / kWh
Rs. 4.20 / kWh
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At 50.5 Hz Frequency:
At 50.0 Hz Frequency:
At 49.0 Hz Frequency:
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A Chart is depicted in the following slide.
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15th October 2003
Suggested
Rs. 2.00 / kWh
Rs. 2.75 / kWh
Rs. 6.00 / kWh
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Chart showing present and suggested
rates at different Grid Frequencies
Current Vs. Suggested rates of power at varying grid Frequency levels
7.00
Rates of Pow er (Rs. /kWh)
6.00
6.00
5.00
4.20
4.00
3.00
2.00
4.20
2.80
2.75
2.00
1.40
1.00
0.00
0.00
50.5
50
49.5
49
Frequency levels (Hz)
Current rate of power (Rs./kWh)
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Suggested rate of power (Rs./kWh)
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Merits of the proposed mechanism
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This will make banking easier.
Captive Power stations can supply excess generation
to the grid or draw during shortages.
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This unscheduled interchange can be treated as per the
proposed Frequency based price mechanism.
Traders can also benefit from this mechanism for
shortfall / oversupply of power.
This will also help in continuous supply of power to
consumers.
They can buy their scheduled requirements through
PPAs and for additional requirements, they can use
this mechanism.
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Captive Power – Other Issues
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Captive Power definition is broad and if followed, could be
a key driver of growth.
Possibility of varying interpretation by Legal / Regulatory
Authorities.
National Electricity Policy should remove all ambiguities
in its interpretation.
5% equity investment of a consumer in a generating
company should entitle him for captive benefit.
One IPP can be a Captive for more than one industrial
consumer.
If the above is implemented, this could result in fruitful
joint investments in power sector by IPPs and consumers
to take advantage of Economies of Scale.
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THANK YOU
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