In the matter of
Rate and other dispensation for purchase of power from Bagasse and Other Non-Fossil Fuel based Non-Qualifying Co-generation Projects

Dr Pramod Deo, Chairman,
Shri A. Velayutham, Member

•   Tariff of Rs. 2.32/kWh or Rs. 2.21/kWh based on the average or minimum rate of purchase,   respectively, for MSEB from the Incidental Co-generation Projects for FY 2003-04.


•   Tariff of Rs. 1.94/kWh based on the Commission's assessed pooled purchase cost of MSEB for   FY 2003-04
  
  Further, it was proposed that the tariff would be escalated at the rate of 2% per annum on compounded basis.
  
  The draft Proposal also stipulated that all other terms and conditions/principles of the Energy Purchase Agreement would be the same as those laid down in the Order dated August 16, 2002 to the extent that they are applicable under EA 2003.

The Commissionerate of Sugar has added that higher rates are essential to give a strong financial incentive to sugar factories to tap a source which has not been utilised in the past. This is necessary in view of the financial crunch in the sugar sector post 2002. Further, if attractive rates are given and a long term policy framed, sugar factories would try to minimise their steam and electricity consumption and try to sell surplus power to the grid, thereby becoming more efficient. The Commissionerate has pointed out that most of the sugar factories in the State are old and have low-pressure boilers and turbines. It is not possible to replace these equipments immediately because of the large capital investment involved. If these sugar factories can generate income from the source available with them, it will be possible for them to replace the boilers and turbines in future for higher generation. This would enable them to achieve the qualifying efficiency criteria eventually.

Further, considering the fact that such sugar factories and co-generation plants are located in rural areas in proximity to users of electricity, transmission losses would be lower and the corresponding delivered cost of power to users would also be cheaper. Moreover, local generation will lead to an improvement in the voltage level thereby improving the working of irrigation pump sets. Hence, burning of motors in irrigation pump sets would be minimised.

Shri S.A. Patil on behalf of MEDA, submitted that incidental co-generation projects are inefficient and consume resources uneconomically. Therefore, it is essential to encourage them to set their system in order. These projects can be motivated to become efficient by offering a tariff higher than the proposed tariff, i.e. Rs 1.94/kWh. Further, capital expenditure needs to be incurred by sugar factories to carry out in-plant measures and/or on grid interfacing. Such capital expenditure needs to be internalised in the proposed tariff. Shri Patil also submitted that the variable cost needs to be determined considering the bagasse prices, which have increased substantially. He added that, in view of these factors, the tariff for incidental co-generation projects should be at least Rs 2.80/kWh instead of the proposed tariff of Rs. 1.94 per kWh. He added that, while giving this premium tariff, the Commission should also fix the time period within which sugar factories should upgrade their systems and meet the qualifying criteria laid down in the Order dated August 16, 2002. However, in case the tariff is not fixed at Rs 2.80 per kWh, the Commission may review the tariff rate and structure at the same time as the review of the same for projects qualifying under the Order dated August 16, 2002. This would also enable a holistic review of the tariff structure.

TPC has submitted that there should be a provision for revising the tariff since the price of bagasse is dependent upon the yield in a particular year. TPC has further suggested that the Commission should stipulate the permissible cost of fossil fuel for operation of the plant during the off-season due to non-availability of non-fossil fuel. TPC has added that it is not advisable to run the non qualifying co-generation plants on fossil fuels unless there is shortage of supply. MSEB Workers Federation has urged the Commission to review the proposed tariff to ensure that higher returns are not being offered to such Qualifying Co-generation Projects.

No rational basis has been provided for the tariff of Rs. 2.80/kWh proposed by some stakeholders. Accordingly, the Commission is not in a position to form a judgement as to whether the proposed rate reflects the cost or not. At the same time, the Commission is of the opinion that the tariff for Non-Qualifying Projects should be fixed at a significant discount as compared to the tariff for Qualifying Projects in order to provide an incentive to the developers to opt for an efficient configuration for the plants. Based on its assessment of 3 Projects considered in the Order dated August 16, 2002, the Commission expects that the rate of Rs. 1.94/kWh in the first year of commercial operation with 2% escalation per annum would provide a sufficient incentive over and above the variable cost of Non-qualifying Co-generation Projects. The Commission expects that the capable Developers would be able to arrange funds for the capital expenditure necessary to further improve operating efficiency based on the savings arising out of efficiency gains.

As regards the linkage of tariff to the prevalent bagasse price, the Commission had evaluated the submissions of various parties in its Order dated August 16, 2002, and had selected the approach of deriving the price of bagasse on equivalent heat content basis. The Commission had considered a price of Rs 559/ tonne in the first year of operation considering that bagasse for the co-generation projects would be available in the nearby vicinity, and considered an escalation of 8% per annum for evaluation of Projects qualifying under the Order dated August 16, 2002. The Commission appreciates that the price of Bagasse is dependent on the yield of sugarcane and corresponding demand supply balance. However, providing a premium above the heat equivalent cost would burden the power sector for usage of Bagasse as a non-conventional source of generation. Hence, the Commission is of the view that the tariff should not be revised based on market price of Bagasse or other non-fossil fuel.

As regards the 'pass through' of the conventional fuel cost, the Commission has noted in its Order dated August 16, 2002 that "The Commission wishes to highlight here that the 'pass through' of conventional fuel cost to MSEB, is certainly not permitted by the Commission, while addressing the need of the co-generation project to use conventional fossil fuel to a limited extent. Thus, the Commission has considered the bagasse as the base fuel to be used by the co-generation project during season as well as during off-season, and determined the current price of bagasse for the purpose of computation of variable cost of generation."

The Commission agrees with the suggestion of comprehensive review of the tariff structure for Non-qualifying Projects along with the qualifying Projects, as stipulated in its Order of August 16, 2002. This would enable an integrated assessment and view.

TPC has submitted that a mechanism to monitor the mode and parameters of operation of the plant i.e. incidental co-generation, topping cycle and bottoming cycle needs to be put in place in view of use of supplementary fossil fuel like coal.

TPC has also submitted that the treatment of projects which may become non-qualifying at a future date and vice-versa due to change in business, and the criteria for such change should be clearly set out. The validity of PPA for such Projects should be linked with their status .

Commission's ruling

The condition of atleast 20% of total energy output being in the form of useful thermal energy is specified as a qualification criteria based on the qualifying requirements specified by Ministry of Power for the Co-generation Facility operating in Topping cycle mode as laid down in the Resolution No. A-40/95-IPC-1 dated November 6, 1996.

As regards the mechanism to monitor mode of operation of the Plant, the Commission has issued a Clarificatory Order dated November 11, 2003 setting out the definition of terms, method of computation, measurement and verification protocol for compliance monitoring and metering methodology to address the ambiguity, deficiencies and/or lack of uniformity on the part of the Licensees and/or the developers in interpreting and computing the qualifying criteria stipulated in the Order dated August 16, 2002. This Clarificatory Order shall be applicable for interpreting, computing and monitoring the qualifying criteria to the extent that it is relevant to Non-Fossil fuel based Non-Qualifying Projects.

If upon energy audit of the co-generation facility during the operation period, any Project fails to meet the qualifying criteria stipulated under the August 16, 2002 but meets the conditions of the present Order, then the tariff determined under this Order will be payable for such period.

Commission's ruling

The transmission loss, wheeling charges, requirement of reactive power supply and charge for shortfall in reactive power supply shall be as per the Order dated August 16, 2002, and any other subsequent dispensation which may follow.

Commission's ruling

The technical standards relating to connectivity with the grid as may be specified by the Central Electricity Authority under the provisions of Section 73(b) of EA 2003 and as applicable for Generating Stations or Captive Generating Plants shall be applicable to Non-Qualifying Co-generation Projects. The Commission would consider the applicability of and requirements in respect of a market balancing mechanism at an appropriate stage as and when it is formulated.

Commission's ruling

Such Projects are included in the dispensation for obligatory purchase of power in terms of the Commission's Order on Determination of Renewable Purchase Obligation for Distribution Licensees in Maharashtra dated September 3, 2004.

This Order covers those Co-generation Projects which do not qualify under the Order dated August 16, 2002 but meet the qualifying requirements on the following criteria:

•   Mode of Co-generation
•   Fuel for the Non-Qualifying Co-generation Project
•   Efficiency for the Non-Qualifying Co-generation Project
•   Minimum Purchase Criteria from Non-Qualifying Co-generation Project

•   Incidental Co-generation
•   Topping cycle mode of Co-generation with efficiency level below 45% during the season
  

Conditions for the Non-Qualifying Co-generation Project: Non fossil fuel based Non-Qualifying Co-generation Projects are required to meet the following minimum criteria specified under the MoP Guidelines for qualifying under this Order:

•   For typical topping cycle (without supplementary firing), the Co-generation Project must fulfil   the following condition during seasonal operation

•   For topping cycle with supplementary firing facility, the useful heat to be utilised in the industrial activities should be more than the heat to be supplied to the system through the supplementary firing by at least 20%.

For any other existing Non-qualifying Co-generation Project, which would qualify under this Order, the tariff specified herein shall be applicable for a maximum period of 13 years from the Commercial Operation Date (COD) of the Project.

The principles adopted by the Commission in determining the Tariff for the Non-Qualifying Co-generation Projects covered under this Order are:

•   Implementation based on spirit of EA 2003 and the relevant provisions
•   Consistency in tariff principles and their application
•   Minimise uncertainty and regulatory intervention
•   Fair and equitable treatment to all stakeholders
•   Forward looking and implementable
•   Incentives to Co-generation for efficient utilisation of Non-Fossil Fuels
•   Transparency

Accordingly, the Commission had determined the tariff structure for the Co-generation Projects using non-fossil fuel (such as bagasse, bio-mass, bio-gas, agricultural waste, etc.) qualifying under the Order dated August 16, 2002 for sale of electricity to the MSEB and other Licensees as follows:

"The Tariff for the purchase of electricity by the MSEB from the co-generation project based on any non-fossil fuel (such as bagasse, biomass, biogas, agriculture waste such as rice husk, groundnut shells etc.) shall be Rs.3.05 (Rupees three and paise five only) per kWh for the first year of operation of the Co-generation project and the tariff shall be escalated at the rate of 2% per annum on compounded basis."

Further, the Commission had stipulated that the "the 'Tariff Structure' for the sale of electricity to the MSEB as approved by the Commission by this Order is firm and the same will not be modified on account of exchange rate variation, conventional/additional fuel cost etc. In addition, the Tariff will not be modified on account of change in law, change in tax without the prior approval of the Commission. The Commission may consider revision in the Tariff, in case specific petition is filed in this regard."

•   Tariff in accordance with MNES guidelines
•   Tariff based on average (pool) power purchase cost
•   Marginal Cost Approach
•   Avoided cost of generation or power purchase
•   Cost Plus Approach
•   Fixing Tariff using the Standards/Benchmark Mechanism
•   Competitive Bidding Route
•   Tariff linked to average realisation rate or prevailing HT Industrial Tariff
•   Tariff linked to Unscheduled Interchange (UI) charges under the principles of Availability Based   Tariff
•   Tariff at a discount to the tariff offered to Non Fossil Fuel based Co-generation Projects   qualifying under the Order dated August 16, 2002

In its Order dated August 16, 2002, though the easiest path for the Commission would have been to accept the MNES guidelines in totality and determine the purchase rate correspondingly, the Commission instead undertook a comprehensive review, adopting a public process for determining the tariff as well as the principles for the EPA, to obtain an overall perspective concerning the promotion of Co-generation Projects and for evaluating their impact on MSEB/other Licensees and their consumers on the one hand, and the project developers on the other.

The Commission has considered and evaluated the above approaches under its earlier Orders, including Order dated August 16, 2002. During the Public Hearing held in respect of the Order dated August 16, 2002, it was highlighted that the uniform tariff system is simple, transparent and easy to implement, and that around 3500 MW of capacity addition from non-conventional energy has taken place in India till date without any litigation. The Commission clarified in the Order dated August 16, 2002 that its intention was not to scrutinise and approve project parameters of each and every Co-generation Project. Instead, it was in favour of a normative approach that would yield uniform tariffs as against a 'case-to-case' approach.

In keeping with the above, the Commission has adopted the same approach for determining the Tariff for the purchase of power by Licensees from Non-Qualifying Co-generation Projects covered under this Order. The Commission's views on the various tariff alternatives have already been elaborated in great detail in previous Orders. In the paragraphs below, the Commission briefly sets out the reasons why these other approaches are inappropriate in the current case.

The two most widely discussed cost concepts based on the application of economic principles take into account avoided costs, and marginal costing. The latter has two variants, Short Run Marginal Costing (SRMC) and Long Run Marginal Costing (LRMC). Tariffs based on either avoided costs or SRMC would discourage private investments in these technologies by not allowing full recovery of costs along with returns. Under the constrained supply scenario, such as that prevalent currently in the State, the LRMC is a more appropriate basis for determining tariffs for a Licensee's procurement of power from Co-generation Projects, at least for the next few years. However, the information required to enable computation of LRMC is not available in the required detail at this stage.

Linking the rate of purchase with average realisation would mean that there will not be any linkage with either the cost parameters or the efficiency of operation of Co-generation Projects. Linking the Non-Qualifying Co-generation tariff to the industrial tariff would also mean that the tariff will progressively reduce, without any reduction in their input costs.

The long-term purchase contracts for Non-Qualifying Co-generation Projects should not be determined based on linkage with Unscheduled Interchange (UI) Charges payable by MSEB/Licensees under the principles of Availability Based Tariff. The Commission is guided by the principle of promotion of Co-generation and generation from renewables. Since non-fossil fuel based generation helps in saving usage of fossil fuel and avoids the associated effects, the Commission's intention is to maximise non-fossil fuel based generation not only during peak hours but also throughout the day as well as year to the extent possible, and considering the availability of non-fossil fuel.

The Commission has been guided by the principle of efficiency and economic use of resources, and has to ensure that projects which utilise resources economically receive a premium as against others. The Commission is also guided by the factors that would encourage competition, good performance and optimum investments and the principles rewarding efficiency in performance. After considering all these factors, the Commission is of the view that the tariff for the Non-qualifying Co-generation Projects should be fixed at a discount to the tariff available to the Co-generation Projects qualifying under the Order dated August 16, 2002.

However, it is also essential that the pricing structure at least meet the variable cost of generation for sale of electric power to the grid so that there is no penalty on the projects qualifying under this Order. Further, a margin over the variable cost of generation will provide an incentive to the existing Plants to offer electricity to the grid.

In its Order dated August 16, 2002, the Commission had evaluated the cost of generation for the Globe, Vaidyanath and Pravara Power Co-generation Projects. Based on the schedule of cost of generation for these three project cases, the Commission had noted that the variable cost of generation from these Plants ranges between Rs 0.46/unit and Rs 0.96/unit for the first year of operation, while the fixed cost of the Plants ranges between Rs 1.77/unit and Rs 2.52/unit.

The Commission recognises that the variable cost of the Non-qualifying Co-generation Projects would be higher than that of Qualifying Co-generation Projects, which needs to be compensated for. Since the main purpose of incidental Co-generation Projects is to meet the captive requirement of power and steam for the parent plant, it would be fair to allow only a part recovery of the fixed cost as an incentive over and above the variable cost of the Plant.

While promoting the renewable and non-conventional sources of energy, the Commission is also required to ensure that the MSEB/Licensees and the end consumers are not burdened with unduly high tariff. The MSEB/Licensee would normally be indifferent to the source of purchase in case the cost of procurement is less than or equal to its average cost of power purchase.

While prescribing single part tariff for purchase of power from Non-qualifying Co-generation Projects, it is necessary to compare the same with the total cost of power purchase, including fixed and variable components of cost. In FY 2003-04, the Commission had assessed the average power purchase cost for MSEB at Rs. 1.94/kWh.

The average power purchase rate effectively provides recovery of prudent fixed as well as variable costs and reasonable return to the conventional Generating Plants. The average cost of generation of Non-qualifying Co-generation Projects would be higher than the conventional Generating Plants. However, such Non-qualifying projects would typically be developed to meet the requirement of the parent plant. Hence, a tariff higher than the variable cost of generation of such Projects would provide an incentive to such Projects to offer electricity to the grid. The Commission has noted that the variable cost of generation ranged between Rs 0.46/kWh and Rs 0.96/kWh for the Projects meeting the efficiency criteria specified under the Order dated August 16, 2002. The Commission expects that the tariff of Rs 1.94/kWh for purchase of power from Non-qualifying Projects would provide an incentive over the variable cost of generation even after accounting for their relative inefficiency.

Accordingly, the tariff for purchase of electricity by the MSEB/ Licensees from Non-qualifying Co-generation Projects for the first year of operation of the Co-generation Project shall be Rs. 1.94/kWh.

The Commission has observed in its Order dated August 16, 2002 that the compounded annual growth rate (CAGR) of the cost of generation over the period of thirteen years under the three assessed project cases ranged between 1.9% per annum to 3.7% per annum. The Commission also noted that the variable cost component linked to bagasse price escalation rate had varied at the rate of 8% p.a., while O&M expenses linked to rate of inflation varied at the rate of 5% p.a., and one of the major components of fixed cost, viz., debt service obligations, would reduce over the period of debt service. The aggregate impact of the varying rate of escalation in various cost components would result in a lower escalation in the total cost of generation. Accordingly, the tariff shall be escalated at the rate of 2% per annum on compounded basis. The Tariff rate is linked to the year of operation of the Non-Qualifying Co-generation Project and not to the fiscal year.

The above rate is uniform for all Non-fossil fuel based Non-Qualifying Co-generation Projects covered under this Order, without linkage to the efficiency levels. Less efficient projects would automatically have a higher variable cost as compared to relatively efficient projects. Uniform rate of tariff would ensure that the effective incentive available to the Project would reduce depending on its efficiency and variable cost, which in turn will encourage the establishment of more efficient projects .

The Commission wishes to encourage projects, which use resources economically and are efficient. Co-generation Projects which desire to earn higher returns should design the plant in line with the qualification criteria specified under the Order dated August 16, 2002 in order to become eligible for a tariff of Rs. 3.05 per kWh for the first year of Commercial Operation.

In its Order dated August 16, 2002, the Commission had noted that, in the context of the non-fossil fuel based Co-generation Projects under consideration, there is no firm energy supply commitment . Accordingly, the Commission has not determined different Tariffs for firm/infirm power.

The Licensee is required to separately maintain these details for Non-Qualifying Co-generation, including incidental generation. The Licensees shall submit the half yearly progress report on the capacity addition, purchase of energy and other relevant details in respect of non-fossil fuel based Non-Qualifying Co-generation Projects to the Commission and post the same on their website.

All other terms and conditions/principles of the Energy Purchase Agreement shall be the same as those laid down in the Order dated August 16, 2002 to the extent that they are applicable under EA 2003.