New rules to lower SEBs procurement costs

The new rules mandating electricity distribution companies purchase short-term power through an e-platform will help lower costs for electricity procurers, notably the state electricity boards (SEBs).

Apart from long-term agreements, the SEBs also purchase electricity through short-term contracts. Many such purchases are made through bilateral contracts priced higher than the exchange traded rates, according to Antique Stock Broking Ltd. Between September 2009 and January this year, prices under bilateral contracts were about one-third higher than the exchange-traded prices, the broking firm pointed out.

Shifting the procurement process online will infuse competition and lower costs for SEBs. As prices inch towards the energy exchange rates, realizations of merchant power producers and intermediaries can be hit.

Merchant power capacities are production facilities not tied-up under long term power purchasing agreements. They depend on short-term contracts for sales. “There is a clear downward trend in power prices which is negative for players like Jindal Steel and Power, Jaiprakash Power and JSW Energy which have exposure to merchant sales. It is slightly negative for traders like PTC India as risk of direct participation by generators will loom,” Antique Stock Broking said in a note.

Once implemented, the new rule will also curb sweetheart electricity procurement deals at the SEBs. Currently, bilateral agreements are reached through limited competition and transparency. “Friendly agreements are 100% possible (now),” an analyst with a broking firm said. Post the new rule, SEBs will be liable to answer why the stipulated process is not followed for such agreements. To be sure, there are reasons why SEBs prefer bilateral trades. They offer certainty in terms of price and delivery, Girishkumar Kadam, vice-president at ICRA Ltd pointed out. But the process is not working in favour of consumers.

Nine of the 13 electricity distribution companies analyzed by ICRA last month indicated their electricity procurement cost will rise in the current fiscal year, some as high as 9-17%. The higher costs will have to be recovered from consumers.

This is at a time when fuel costs have hit record lows and India’s largest utility NTPC Ltd’s average tariff has fallen by 1.5% (in nine months to December 2015). The trends infuse little confidence in SEBs’ ability to procure electricity at truly competitive rates. The new rule may help change that. “The new bidding based rules will certainly infuse competition and make the process more transparent,” Girishkumar of ICRA added.