Power play: the cost of efficiency

One of the little known cost components that make
19 March 2001

One of the little known cost components that make power produced by independent power producers (IPP) costly is the fabulous incentive offered by the state electricity boards (SEB) for exceeding the plant load factor (PLF). The incentive is in addition to the assured rate of return the power producers get.

The fault in this case can be laid squarely on the doorstep of the SEBs'. The IPPs', taking advantage of the abysmally low values of PLF in state-owned plants, have pegged the PLF in their power purchase agreements with the SEBs' at an artificially low rate of 68.5 per cent. While this load factor is understandable in state-owned units with high levels of mismanagement, it is extremely surprising to see so called efficient power producers peg their performance levels at this rate.

So when the SEBs' offer an incentive to these producers to exceed this base rate, which they obviously do, the brunt is borne by the end-user. Thus, besides bleeding already-anemic electricity boards, this also turns domestic industry uncompetitive at the global level.

For instance, Andhra Pradesh-based GVK Industries operates its power plant at a PLF of 94 per cent. While enjoying the 16 per cent return on investment, the company also enjoys the luxury of 1 per cent bonus for every additional percentage increase in the agreed PLF, that is, 68.5 per cent in its case.

This is, indeed, absurd! According to Mr. K. Vasudevan, director of Alsthom, a leading power equipment supplier, and chairman of the energy and power sub-committee of the Confederation of Indian Industry (CII), "Power equipment manufacturers guarantee PLF of not less than 75 per cent in case of new machines. They even guarantee a higher PLF even in respect of renovation
and modernisation of old power plants." So obviously, 68.5 per cent is a glaring loophole and it speaks volumes about the poor negotiating skills of the state electricity boards, not to mention the greed of the IPPs'.

Fortunately, the Central Electricity Regulatory Commission (CERC) insists that IPPs should agree for a higher PLF – say 75 per cent but certainly not 68.5 per cent – to claim the additional incentives.

Earlier addressing the media about CII's initiatives on the power sector, Mr. Vasudevan said, the four southern states suffer a peak demand shortage of 2,279 mw. While Andhra Pradesh tops the list with a shortage of 806 mw, Karnataka, Tamil Nadu and Kerala follow it with a peak power shortage of 735 mw, 573 mw and 165 mw, respectively.