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Power play: Price vs availability

September 05, 2008

In any open market, the price of a commodity that happens to be in short supply would move up as a signal for producers to increase supply, until a stable equilibrium between demand and supply is established. It should therefore come as no surprise to anyone that the price of power which is in the market to be traded has been going up. It is a scarce commodity, and the high price reflects that scarcity.

This has however caused consternation at the power regulator's office, which has just released a 'staff' paper -- which is a step down from a full-blown consultation paper, and does not necessarily represent the views of the Central Electricity Regulatory Commission, or CERC. The paper proposes measures for restraining the price of such short-term electricity. One of the key proposals mooted in the paper is a price cap of Rs 5 per unit for non-peak power, and Rs 6 per unit for peak power, to attack 'profiteering' by states that have surplus power.

While it is a fact that the price at which power is being traded bears no correlation with the cost of power generation -- a point that is highlighted in the paper -- it is also a fact that it is this price of traded power which is encouraging investments in the power generation sector, especially investments in what are called merchant power plants. A higher price of power in the short term is therefore the route to ensure lower prices of power in the long term, through supply augmentation. Price caps will most certainly choke such investment in generation, and in the process widen the demand-supply gap in the long run.

There has been some concern expressed that state electricity boards, instead of supplying power to their in-state consumers at the existing tariffs, have been choosing to sell even scarce power in the wholesale market in order to maximise revenue. If the price cap is meant to address this issue, it will fail so long as the open market price is higher than the state tariff (which it will be in almost all cases).

Indeed, the price caps may also drive up the average price of power. This is because power developers who have been proposing surprisingly low tariffs in competitively-bid state projects -- tariffs that are lower than even the benchmark Rs 1.196 per unit quoted for the pithead-coal based Sasan 'ultra mega power project' -- are able to do so only by keeping aside a slice of capacity for short-term merchant sales, instead of locking all of it up in long-term (25 years) power purchase agreements.

Currently, the volume of electricity being traded in the short-term market -- bilaterally, through traders, through the power exchange and through the unscheduled interchange mechanism -- is about 7-8 per cent of the total electricity generated in the country.

Price caps would also place a question mark on the future of power exchanges, at least one of which is already operational. Trading within limits defeats some of the purpose of trading. What needs to be recognised and accepted is that the increase in the price of power is not the result of rogue trades or traders, but a function of the demand-supply equation.

There is therefore little merit in the proposed price caps, though if there were to be some out-of-the-box thinking at the Commission, it should look at tapping the increased ability, and willingness, of the consumer to pay a premium for power. The average consumer in Pune is willing to pay a surcharge to get assured 24 x 7 power. That would also be true of many other cities in the country.



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