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Merchant power plants in India: A supply solution approach to energy crisis

"The focus here is to highlight some of the public policy issues inherent in the development process of the MPP’s.  As a new model of capacity addition it entails a set of legal, regulatory, pricing and other policy issues."

Gopal Krishna Sarangi : October 27, 2007

Power sector is assuming an important role as a key driver for the economic growth of India. Keeping this in mind, Government of India has recently taken a series of initiatives to promote merchant power plants (MPP’s) and ultra mega power projects (UMPP) as additional-generating reserves.  These attempts primarily intend to fulfill the ambitious target of adding more than 78000 mw capacity of power in the 11th plan, which ultimately aims to meet the growing market for power in India reflected in the peak shortage of around 13 percent and energy shortage of 7-8 percent.

These initiatives are not entirely isolated developments rather they are the offshoot of the on-going restructuring programme of the electricity sector characterized by deregulation and technological innovations. The focus here is to highlight some of the public policy issues inherent in the development process of the MPP’s.  As a new model of capacity addition it entails a set of legal, regulatory, pricing and other policy issues.  It is important to highlight some of the existing and potential drawbacks of the MPP’s in order to better construct policy and to develop a more structured energy policy in general.

MPP’s in layman’s language can be put as “one that produces power as a commodity” or more accurately “a generator that has only the market place to assure the long term of income stream”. It is also defined as the plant that sells all of its outputs on the spot market (i.e. operating without having a long term contract with anyone).  The owners of these plants get their revenue through the competitive bidding process as the financing of the plant is assured neither by the government guarantee nor by the regulation. These plants do not tie up for their output to any particular buyer. There may be dedicated buyers, but most of the production is sold on auction basis. It is just like setting up of a business unit in a location with the expectation that the investor would earn a handsome amount of profit in future.

In contrast to traditional power plants, MPP’s compete for customers and exposed to the full market risks. They must respond to market needs. Further, these plants do not need any prior sanction from regulatory commissions to fix electricity tariffs as in the case of mega projects. Tariffs are determined by the forces of supply and demand not through the PPA. So there is a great degree of market elements involved in the entire process of rate fixation.

The proposed merchant plants in India will be of 500-1000 MW capacity. According to the estimates, it is possible that these plants will add the capacity of around 10,000-12,000 MW during 11th Plan period (2007-12). The state-run Power Finance Corporation, which is the nodal agency for the development of ultra mega power projects, would provide necessary assistance to merchant plant developers to accomplish timely implementation.

The power ministry, in consultation with the coal ministry, has identified 15 coal blocks (total coal blocks identified for the power sector is 41) with estimated reserves of about 3.6 billion tonnes for allocation to merchant and captive power plants through the screening committee route. Out of these blocks, coal blocks of aggregate reserves of about 2.4 billion tonnes are expected to be considered for merchant plants. Tata Power is leading in this direction by setting up of the first merchant-power plant in the country at Jojobera.

Despite all its well-intended goals, there exist some serious concerns relating to the development of MPP’s. One of the prime concerns is associated with inadequate transmission capacity for connecting MPP’s to National Grids and unclear transmission pricing mechanism. Overcoming of these problems require huge investments to strengthen the transmission capacity and a structured and balancing pricing approach. Associated environmental problems both at the aggregated level and local level are also a challenge thrown upon by the MPP’s, which are to be tackled. Instruments of incentives and dis-incentives are to be brought in place to restrict environmental effects to its minimum. Another critical problem that may appear over time is the social opposition to this.

It has been experienced in the USA that setting up of these plants have faced intense opposition from the general public due to its commercial attitude and neglect of public concerns. To illustrate this point recently people have formed an expert committee against the 1320 MW private power plant at Thiagavalli area of Cuddalore district of Tamilnadu to look into the environmental issues of the plant. Finally, it is not clear what would be the nature of regulatory vigilance for these kinds of plants. The challenge is to reconcile the stakes of different entities involved in the entire exercise of setting up of MPP’s.

(Author is a Senior Research Scholar in the department of Policy Studies, Centre for Regulatory and Policy Research, TERI University, New Delhi)



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