Captive Power Policy Issues, Regulations and Concerns Priyank Jain
• Captive power today is significant source of power for the Indian economy, which plays an important role in the present power scenario being characterised by inadequate supply of power, poor and unreliable power quality, and high tariffs resulted due to heavy cross-subsidization. There is paradigm shift in usage pattern of captive power plants from back-up use to baseload use. • Presently the captive power plants capacity accounts for nearly one-fifth of the total installed capacity. With liberalisation of economy and technological developments many options are available for captive structuring.
• The Electricity Act 2003 has legislatively facilitated setting up & operation of captive power plants. Other policies such as the National Electricity Policy 2005, the National Tariff Policy 2006, the Captive Power Policy (draft) and various state policies contains the clauses relevant to encourage the development of captive power plants in India.
• Six states – Gujarat, Orissa, Andhra Pradesh, Madhya Pradesh, Karnataka and Tamil Nadu – account for almost two-thirds of the captive capacity. Other significant contributors include Bihar, Maharashtra and Uttar Pradesh. • For the industries that use energy intensively, the energy is the critical component of the total production cost. • The engineering, chemical and mineral/metal industries account for almost two-thirds of the total instal ed capacity in the captive segment. Other industries include cement, textiles and sugar.
• The captive generator has a number of fuel options today. The choice could be between oil, natural gas, naphtha, bagasse or coal.There are also options like wind and hydro. • Availability of open access is the major issue related to the selling of power to grid by captive power plants. • Other issues are related to the strengthening of intra-state and inter-state transmission network, reasonable tariff and availability of available additional fuel required by the captive power plants.
• Installation of captive power plants in future is likely to grow at a higher rate compared to the current rate of growth. The promise for future growth of captive power plants lies with the renewable sources of energy. Fossil fuels are limited and have adverse environmental impact. Captive demand, therefore, provides an attractive ‘niche’ for renewable energy to be deployed in industry.
Some features: • Captive Power refers to generation from a unit set up by industry for its exclusive consumption. • Captive power plants are essential y non utility power plants. • These power plants are owned by specific industries which consume al the power produced for its production purposes. • The size of these power plants varies. These power plants can be as smal as 0.2 MW or can be as big as 300 MW.
The major factors responsible for the soaring growth of the captive power plants are, as fol ows: – Non-availability of adequate grid supply – Poor quality and reliability of grid supply – High tariff as a result of heavy cross subsidisation
The Advantages – Captive power plant is close to the load centre and hence reduction in the fixed cost of electricity generated due to lesser stranded assets – Reduced transmission and distribution losses – Grid is strengthened at multiple points, even at the tail- ends. – Higher thermal efficiency, due to waste heat recovery by method of cogeneration – Distribution of environmental impact – Shorter gestation period to set up power plants – Captive power plants have modular designs and hence can match the load profile
Concern for state electricity boards on account of fol owing reasons: Captive plants may have adverse impacts on the finances of the utility, such as: – Industrial load is the main source for cross-subsidising revenue flows – Billing and collection is much more efficient for HT consumers – State electricity board’s ability to service escrow accounts for security packages is also reduced – Non-optimal growth of the sector – Problems in grid management especially in case of states with surplus power – Adverse environmental impacts arising from types of fuels used and from higher emissions per unit of production, as compared to large power plants – Reliability of power supply from captive and cogeneration plants as a source of firm power
Concern of the owners of captive power plants stems from: – Non-remunerative tariff structure for surplus power produced by them – No risk sharing in case of non availability of fuel, change in variable cost due to switching of fuel after entering into power purchase agreement (PPA), etc – Inadequacies in wheeling and banking facilities – High contract demand charges – High level of duties and taxes on sale of power – High wheeling losses assumed for power to be sold to grid by captive power plant – Need to devote time and energy to an activity, which is not their core business – Restrictions on the minimum amount of power to be wheeled – If the captive power plant fails, charges for back-up or standby power from the grid are generally twice the normal rate for captive plants
Captive power plant has been defined under the Electricity Act-2003 as • “…a power plant set up by any person to generate electricity primarily for his own use and includes a power plant set up by any co-operative society or association of persons for generating electricity primarily for use of members of such cooperative society or association”.
• Provisions of the Electricity Act 2003 and Electricity Rules 2005 • The Electricity Act 2003 has legislatively facilitated setting up & operation of captive power plants, which mandates the following: • According to Section 2(8) of the Act • “Captive Generating Plant” has been defined as a power plant set up by any person to generate electricity primarily for his use and includes a power plant set up by co-operative society or association of persons for generating electricity primarily for use of members of such co-operative society or association. • Section 9 of the Act Mandates that: • 9. Captive generation. - (1) Notwithstanding anything contained in this Act, a person may construct, maintain or operate a captive generating plant and dedicated transmission lines: • Provided that the supply of electricity from the captive generating plant through the grid shall be regulated in the same manner as the generating station of a generating company. • (2) Every person, who has constructed a captive generating plant and maintains and operates such plant, shall have the right to open access for the purposes of carrying electricity from his captive generating plant to the destination of his use: • Provided that such open access shall be subject to availability of adequate transmission facility and such availability of transmission facility shall be determined by the Central Transmission Utility or the State Transmission Utility, as the case may be: • Provided further that any dispute regarding the availability of transmission facility shall be adjudicated upon by the Appropriate Commission.”
Section 40 of the Act mandates that: • 40. Duties of transmission licensees. - • ……………………………………………….. • Provided also that such surcharge shall not be leviable in case open access is provided to a person who has established a captive generating plant for carrying the electricity to the destination of his own use.
42. Duties of distribution licensee and open access. – • Provided also that such surcharge shal not be leviable in case open access is provided to a person who has established a captive generating plant for carrying the electricity to the destination of his own use. • A CPP connected with the grid acquires the status of a generating company under the provisions of Section 9 of the Act and is thus required to fulfil obligation of the generating company as contained in the Act and rules/regulations framed thereunder. Section 10(2) of the Act states that a generating company may supply electricity to any licensee in accordance with the Act and rules & regulations made thereunder and also to any consumer under open access subject to proviso of Section 42(2) of the Act.
• Section 62 of the Act outlines that an appropriate commission shall determine the tariff of supply affected by a generating company to the distribution licensee. This section applies to such sale by CPP also. Thus, it will also cover the contingency of procurement and purchase of power on day to day basis for meeting short term requirement to meet shortages.
The relevant clause of the Electricity Act 2003 is given as under: • 62. Determination of tariff. - (1) The Appropriate Commission shal determine the tariff in accordance with provisions of this Act for – • (a) Supply of electricity by a generating company to a distribution licensee: • Provided that the Appropriate Commission may, in case of shortage of supply of electricity, fix the minimum and maximum ceiling of tariff for sale or purchase of electricity in pursuance of an agreement, entered into between a generating company and a licensee or between licensees, for a period not exceeding one year to ensure reasonable prices of electricity; • (b) Transmission of electricity; • (c) Wheeling of electricity; • (d) Retail sale of electricity.
Determination of tariff as per Electricity Act contd. • Provided that in case of distribution of electricity in the same area by two or more distribution licensees, the Appropriate Commission may, for promoting competition among distribution licensees, fix only maximum ceiling of tariff for retail sale of electricity.” • The Electricity Act mandates that an appropriate commission in case of shortage of supply of electricity can also fix minimum and maximum ceiling of tariff for sale or purchase of electricity. • It is obligatory on part of a Captive Power Plant to get its tariff determined for its sale of power to distribution licensee and for a distribution licensee to enter in an agreement for power purchases of power at the tariff determined by the Commission. • It has been clarified under Electricity Rules 2005 issued by the Government of India on dated 8.6.2005 that the captive generating plant shall be qualified as such if not less than 26% of the ownership is held by the captive user(s) and not less than 51% of the aggregate electricity generated is consumed for captive use.
• Provisions of the National Electricity Policy • In the National Electricity Policy notified by the Government of India, it has been stated that the liberal provisions for setting up CPPs have been made in order to secure a cost effective quality power thereby generating employment opportunities mandating a speedy and efficient growth of the industry. The appropriate commissions shall determine the tariff of the supply when a licensee takes power from a Captive Power Plant. The relevant para of NEP reads as under: • 5.2.2 The Government of India has initiated several reform measures to create a favorable environment for addition of new generating capacity in the country. The Electricity Act 2003 has put in place a highly liberal framework for generation. There is no requirement of licensing for generation. The requirement of techno-economic clearance of CEA for thermal generation project is no longer there. For hydroelectric generation also, the limit of capital expenditure, above which concurrence of CEA is required, would be raised suitably from the present level. Captive generation has been freed from all controls.
• 5.7.1 (c) Captive generating plants should be permitted to sell electricity to licensees and consumers when they are allowed open access by SERCs under section 42 of the Act. • 5.2.24 The liberal provision in the Electricity Act, 2003 with respect to setting up of captive power plant has been made with a view to not only securing reliable, quality and cost effective power but also to facilitate creation of employment opportunities through speedy and efficient growth of industry.
Provisions of Group Captives as per Electricity Act 2003 • 5.2.25 The provision relating to captive power plants to be set up by group of consumers is primarily aimed at enabling small and medium industries or other consumers that may not individually be in a position to set up plant of optimal size in a cost effective manner. It needs to be noted that efficient expansion of small and medium industries across the country would lead to creation of enormous employment opportunities.
Surplus Power of Captives • 5.2.26 A large number of captive and standby generating stations in India have surplus capacity that could be supplied to the grid continuously or during certain time periods. These plants offer a sizeable and potential y competitive capacity that could be harnessed for meeting demand for power. Under the Act, captive generators have access to licensees and would get access to consumers who are al owed open access. Grid inter- connections for captive generators shal be facilitated as per section 30 of the Act. This should be done on priority basis to enable captive generation to become available as distributed generation along the grid.
Role of Non-Conventional Energy Sources • Towards this end, non-conventional energy sources including co-generation could also play a role. Appropriate commercial arrangements would need to be instituted between licensees and the captive generators for harnessing of spare capacity energy from captive power plants. • The appropriate Regulatory Commission shal exercise regulatory oversight on such commercial arrangements between captive generators and licensees and determine tariffs when a licensee is the off-taker of power from captive plant.
• Provisions of the National Tariff Policy: • In pursuance to section 3 of the Act, the Central Government has notified on 6.01.06 the tariff policy, which among others has also emphasized the need for harnessing the Captive generation. The salient features of which are as under: • 5.4 While it is recognized that the State Governments have the right to impose duties, taxes, cess on sale or consumption of electricity, these could potential y distort competition and optimal use of resources especial y if such levies are used selectively and on a non- uniform basis.
• In some cases, the duties etc. on consumption of electricity is linked to sources of generation (like captive generation) and the level of duties levied is much higher as compared to that being levied on the same category of consumers who draw power from grid. Such a distinction is invidious and inappropriate. • The sole purpose of freely al owing captive generation is to enable industries to access reliable, quality and cost effective power. Particularly, the provisions relating to captive power plants which can be set up by group of consumers has been brought in recognition of the fact that efficient expansion of smal and medium industries across the country wil lead to faster economic growth and creation of larger employment opportunities.
• For realizing the goal of making available electricity to consumers at reasonable and competitive prices, it is necessary that such duties are kept at reasonable level.
Tariff structuring and associated issues • (1) A two-part tariff structure should be adopted for all long term contracts to facilitate Merit Order dispatch. • According to National Electricity Policy, the Availability Based Tariff (ABT) is to be introduced at State level by April 2006. This framework would be extended to generating stations (including grid connected captive plants of capacities as determined by the SERC). The Appropriate Commission may also introduce differential rates of fixed charges for peak and off peak hours for better management of load.
LIMITATIONS – Transaction of power between CPP and grid depends on availability of open access. Thus the issues related to open access are » The State Regulatory Commissions which have not issued the regulations for open access may have to expedite the process. » The State Regulators may be urged to develop progressive and encouraging policies for CPP (like one issued by MERC) » No electricity duty should be imposed on self consumption of electricity generated by Captive Power Plants of a industry. Reasonable duty may be imposed for sale of power.
Limitations » Reduction in contract demand of a CPP holder with distribution licensee may be allowed without any penalty. » CPPs which are parallel with the grid, standby demand charges should be reasonable. However, if the CPP exceeds the Contract standby Demand then reasonable penal rate should be applicable on excess drawl. » High wheeling charges & losses make open access unviable.As captive surplus would be sold within a limited area, wheeling charges / losses should be applied for the particular area rather than average grid charge / losses. » Wheeling charges for transfer of surplus power may not exceed 7% of the generation cost within the state.
Limitations » The cross subsidy surcharge applicable on HT consumers opting to purchase surplus power from CPPs must be reasonable. This may be fixed in accordance with avoided cost method suggested by FOIR (Forum of Indian Regulators). » For the purpose of recovery of T&D losses in OA charges, the losses should be benchmarked to reflect technical losses, gradual y reduced and equitably distributed. Gradually recovery of commercial losses needs to be reduced » Parallel Operation Charges (POC) imposed by state utility is very high. Aligning of POC with ABT regime would encourage connectivity to grid for facilitating transfer of surplus power to the licensee.
Limitations » Banking of energy may be allowed by the distribution licensee and shall be regulated by the energy banking agreement. » For Continuous Process Industry round the clock banking should be permitted with a rider that energy banked at night should be drawn during the night hours only. » For the present, 0. 5 class metering arrangement may be allowed. 0.2 class accuracy metering arrangement as required as metering regulations may be installed in phases. » Imposition of cess on captive power generation. – Strengthening of intra-state and inter-state transmission network. – Fixation of reasonable tariff by State Regulatory Commission for the surplus power available from the CPPs. • To make available additional fuel required by the CPPs.