CERC to cap short term power price: Is it a good idea?

CERC constantly monitors the short term power purchasing price of traders and through exchanges. In its recent notification, it wants to cap the short term power price to be at a maximum level of Rs 11 per unit.

As per CERC, at peak time ( morning 9 to 10 AM and evening 6 to 7 PM) , the traded price of electricity is touching a high of nearly Rs 15 per unit at PXIL and IEX which is not at all desirable.

It finds that the volume cleared at higher price were in the range of 650MWh to 850MWh during August 10 to August 16, 2009.Rather than load shedding, the distribution companies are buying power at a higher rate and also drawing UI power from the grid.

The situation aggravates due to drought like situation in many parts of India , specially northern region. The high temperature in the northern region also drives huge demand for power in urban areas.

The higher price is just a reflection of high demand with supply deficit scenario and is completely unrelated to fuel price as the fuel prices are somehow stable in this period.

The purchase of power at this higher price not only affects the financial health of the distribution companies but also it will directly reflect at the retail tariff paid by the consumers.

Recently there were protests from Mumbai and some parts of Delhi due to unreasonable hike in retail prices for power. People even denied to foot for the power bills and registered cases in grievance redressal forum.

CERC which is custodian to protect consumers’ interest issued draft order to limit the price applying its power under the proviso to clause (a) of sub section (1) of section 62 of electricity act 2003.

It wants to fix the price for 45 days period under trial basis. Though CERC is empowered to cap for a period of 1 year, it chooses 45 days taking traders and exchanges concern.

The commission in its draft says that it is equally conscious of long term interest of investors, future investment plans and mostly reasonable rate of return.

Now the big question is that what is reasonable rate of return? Based on its calculation, CERC finds that the price of power could be at most Rs 10.94 taking naphta as fuel choice for power generation (including fixed charge at 60% availability).

The UI price of power including the additional 40% fine charge, the total price comes out to be Rs 11.03 per unit (includes transmission charge and transmission loss).

Thus, it is of opinion that distribution utilities can buy power at Rs 11 per unit without overdrawing from the grid, jeopardizing the whole transmission grid.

It also takes into consideration of CEA’s load generation balance report while formulating the price cap band. The load generation report forecasts that for 2009-10, the estimated energy shortage in the country would be 8.8% and the peak shortage to be at 18.1%.

Having all permutations and combinations, CERC is planning to have a price band from Rs 0.10 to Rs 11 per unit for 45 days period.

Though it brings cheer to the distribution farms who are buying at such a higher price, the traders are skeptical about this decision. They fear that it will affect the profitability of power selling companies and would be hindrance for proper power market development.

This kind of capping of traded power price gives wrong signal to power developers especially to merchant power developers who bears all the risk to gain in such a deficit scenario.

India is always in trouble as it wants to develop a middle path for power sector and is always critical how to treat power ( service or commodity), unlike in foreign countries where there is a power surplus scenario and customers have a wide choice to decide their power suppliers.

India needs to define and find out what would be the reasonable rate of return to the developers? There is a long queue of companies to enter into power generation segment. This kind of move by CERC may trigger bit of unrest among companies.

Some experts in the field of trading and power exchange believes that by capping the maximum price CERC gives an unwanted ammunition to the power sellers to bid at a higher price and as a result the average power purchase price at the exchanges will rise which would be of more harm than what is prevailing right now. It may possible that more volumes will remain unsold as it will not find any buyers at a higher price.

CERC in the mean time has also given permission to power exchanges to sell the extra power that remain unsold by a mutual negotiable rate between the seller and the purchaser on day ahead basis and it is feared that it may trigger a price rise in the short term power business.

On the other hand, CERC can not wash its hands off the responsibility towards power consumers. Ultimately, it’s the end users who suffer most when distribution utilities buy power at a higher cost.

There is an urgent need to control the spiraling short term power prices so as to safeguard the consumers from this type of situation. India is a country of uncertainty with delayed monsoon, drought like situation, floods, tsunamis and untimely elections etc. Anytime this kind of events crop up, power market behaves abnormally and companies make extra ordinary profits by taking advantage of calamities.

There is a need for self discipline and if it is not possible, there are always other means to make them fall in line. CERC’s controlling of short term power price is a right step taken at the right time.