States seeking power at concessional rates from private developers as a condition for support on linkage, land acquisition and eco clearance

In what may put upward pressure on electricity tariff in the country and pose regulatory challenges, states are increasingly demanding power at concessional rates from private developers as a condition for support on fuel linkage, land acquisition, water supply tie-up and environmental clearance.The Central Electricity Regulatory Commission (CERC) has recently written to the central government, drawing its attention to the issue.

Implications of Chhattisgarh and Orissa (which are rich in coal) and Arunachal Pradesh (which accounts for a significant chunk of the country's hydropower generation potential) seeking concessional power are quite serious, given the quantum of their generation potential.These states have already tied up much more power than their projected demand. Chhattisgarh has applied for long-term open access for sale of 6,300 mw cheaper power tied up as home state share from private projects coming up there. Similar is the case with Orissa.

Meanwhile, Arunachal Pradesh is not satisfied with the provision for 13% free power from hydel projects as home state share and is demanding additional free power to allocate projects.These states are likely to sell surplus power to traders within their borders, who will sell it in the open market. Since such transactions amount to intra-state sale of power, they fall outside the jurisdiction of the central electricity regulatory commission (CERC).The CERC's concern is that this could lead to domination of power market by resource-rich states, making the job of regulating power market almost impossible.

"We have advised the central government that this issue (states putting condition of electricity sale at variable cost of generation to them for lending support to private projects) needs to be addressed," CERC chairman Pramod Deo told FE. Resource-poor states like Uttar Pradesh and Pubjab too have started putting up similar conditions.

The state electricity regulatory commissions are required to comply with the Electricity Act, 2003 and policies and regulations that might be issued under the Act. Since concessional sale of electricity to home states is not allowed under the Act, state regulators might face a serious dilemma while fixing tariffs for such power projects.The Electricity Act had envisaged switchover to mandatory bidding for procuring power by distribution companies from January 2006. However, the Centre extended the deadline to January 6, 2011 following a CERC recommendation. But now, there is little possibility of extending it further, with the CERC favouring adherence to the schedule.

A CERC study suggests that electricity tariff for power projects implemented through competitive tariff bidding route is lower compared to those developed under a cost-plus system. That means consumers would benefit in case tariff bidding regime is made mandatory. But the issue of tariff determination for these projects might pose a serious challenge in implementing the competitive regime.