abt by abhishek mazumdar

8/14/2019 ABT BY Abhishek Mazumdar

1/74

ABT : Meaning, Implementation and Bottlenecks

PRESENTED BY:-ABHISHEK KUMAR

MBA (POWER MANAGEMENT)


2/74

TABLE OF CONTENT

1. Background

2. Introduction

3. ABT at state level

4. ABT in deregulated market

5. Bottlenecks

6. Recommendation

7. Conclusion


3/74

Background:ABT has been under discussion since 1994 when M/s ECC, an ADB consultant, firstsupported it. GOI constituted a National Task Force in February 1995. It had ten

meetings till end 1998 where all the related issues were discussed. A draft notificationwas prepared for issue by government. With effect from May 15, 1999 the jurisdictionwas vested in the CERC. Papers were sent to the Commission in June 1999 by theMOP. The proceedings were held in the Commission from July 26 to 28, 1999. The ABTorder dated January 4, 2000 of the Commission departs significantly from the draftnotification as also from the prevailing tariff design.

Why ABT?

1. India plans to have an integrated National Grid. This will assist in meeting demandwith the least cost supply. Five Regional grids already exist. Some linkages betweenRegions are also in place.

The five Regional grids work at vastly varying operational parameters today.Frequency level is one such operational parameter. The target frequencyprescribed by the Indian Electricity Rules is 50 Hz.

Integrated grid operations require the normalization of frequency across all fiveRegions. The alternative is to insulate each Regional Grid by Back to BackHVDC links. This is an expensive option. Normalization of frequency requiresproactive load management by beneficiaries and dispatch discipline bygenerators.

There is currently no formal system of financial incentives to promote grid

discipline. The ABT provides this mechanism.

2. Chronic surpluses in the East and shortages in the South, have resulted in sustainedfunctioning of these grids at frequencies which are far beyond even the normal band,liberally defined by the IEGC as frequency variation within 49.5 to 50.3 Hz

Continued functioning at non-standard frequency results in long-term damages toboth generation and end use equipment .This is a hidden cost which is borneby the customer in the long term.

The ABT will induce corrections in the prevailing frequency to bring it within thepermissible band.

3. Frequent fluctuations in frequency caused by short-term variations in the demandsupply gap due to the tripping of load or outage of a generator or a transmission lineimpose substantial costs on generators and consumers.

The ABT will address this problem by inducing grid discipline.

4. Economic efficiency dictates that least cost power should be dispatched in preferenceto more costly power (merit order dispatch). This becomes difficult without a two part


4/74

tariff for all stations. States tend to compare the total cost of central generators with thevariable cost of their own stations, since for them the fixed costs of state level stationsare sunk costs. This results in making central generation appear artificially moreexpensive than state level stations even though on variable cost basis the former maybe cheaper.

The two-part tariff of the ABT by making the payment of fixed cost a fixed liabilityof the states converts it into a sunk cost thereby leveling the playing fieldbetween central generators and state level plants.

5. Currently beneficiaries are not liable for payment of the fixed cost associated with theshare of capacity allocated to them. If a beneficiary decides not to draw any energy hecan escape payment of the fixed charge, which then gets paid by the person drawingenergy. This is unfair since it increases the cost of energy even for those beneficiarieswho may be drawing energy within their entitlements.

The two-part tariff of the ABT assures that each beneficiary will be liable forpayment of the fixed cost associated with its share of allocated generationcapacity.

6. Currently generators have a perverse financial incentive to go on generating evenwhen there may be no demand. This results in high frequency in the grid as is endemicin the East

The ABT will discourage such behavior by pricing generation outside theschedule in relation to the prevailing frequency.

What Is ABT?

It is a performance-based tariff for the supply of electricity by generators ownedand controlled by the central government

It is also a new system of scheduling and dispatch, which requires both

generators and beneficiaries to commit to day-ahead schedules.

It is a system of rewards and penalties seeking to enforce day ahead pre-committed schedules, though variations are permitted if notified One and one halfhours in advance.

The order emphasises prompt payment of dues. Non-payment of prescribed

charges will be liable for appropriate action under sections 44 and 45 of the ERCAct.

It has three parts:

- A fixed charge (FC) payable every month by each beneficiary to the generator formaking capacity available for use. The FC is not the same for each beneficiary. It varieswith the share of a beneficiary in a generators capacity. The FC, payable by eachbeneficiary, will also vary with the level of availability achieved by a generator.

- In the case of thermal stations like those of NLC, where the fixed charge has notalready been defined separately by GOI notification, it will comprise interest on loan,depreciation, O&M expenses, ROE, Income Tax and Interest on working capital.


5/74

- In the case of hydro stations it will be the residual cost after deducting the variable costcalculated as being 90% of the lowest variable cost of thermal stations in a region.

- An energy charge (defined as per the prevailing operational cost norms) per kwh ofenergy supplied as per a pre-committed schedule of supply drawn upon a daily basis.

- A charge for Unscheduled Interchange (UI charge) for the supply and consumption ofenergy in variation from the pre-committed daily schedule. This charge varies inverselywith the system frequency prevailing at the time of supply/consumption. Hence itreflects the marginal value of energy at the time of supply.

How is ABT different from normal proceedings to determine generation tariff?

1. The ABT proceeding has not attempted to consider most of the cost drivers like ROE,Operational Costs, depreciation rate, composition of the Rate Base, capital structureetc. Proceedings to redefine these norms are being held separately. Hence the ABTproceedings have been concerned more with tariff design rather than definition of tariffnorms or determination of tariff levels.

2. It's incidence is a function not only of the behavior of a generator but also of thebehavior of a beneficiary. Disciplined beneficiaries and generators stand to gain.Undisciplined beneficiaries and generators stand to lose.

Broad features of ABT design.

1. It implements the long held view that electricity tariffs should be two-partcomprising of a fixed charge and a separate energy charge.

2. It increases the target availability level at which generators will be able to recovertheir fixed costs and ROE from 62.79% deemed PLF at present to 80% (85%after one year) for all thermal stations, 85% for Hydro in the first year and 77%

(82% after one year) for NLC.

3. Misdeclaration of availability entails severe penalties.

4. It rationalizes the relationship between availability level and recovery of fixedcost.The draft notification provided for recovery of (annual fixed costs minus ROE) at30% availability and recovery of ROE on pro-rata basis between 30% and 70%availability. This order provides for payment of capacity charges between 0% andtarget availability (as indicated in item 2 above) on pro-rata basis.

5. The draft notification had provided for payment of capacity charges for prolonged

outages. This order disallows such payments.6. It delinks the earning of incentive from availability and links it instead to the actual

achievement of generation. Hence incentives will be earned by generators onlywhere there is a genuine demand for additional energy generation unlike theprevailing situation, or the proposed draft received from the GOI, under which it isearned purely because the generator is available.


6/74

7. Draft notification linked incentives to equity. This order preserves the status quoof one paise per KWh per each 1% increase in PLF above target availability.

8. It increases the minimum performance criterion for the earning of an incentivefrom 68.5% deemed PLF at present to 80% (85% after one year) for all thermalstations, 85% for Hydro and 77% (82% after one year) for NLC.

9. It introduces severe financial penalties for grid indiscipline along with significantrewards for behavior, which enforces grid discipline for both generators as wellas beneficiaries.

10.The order permits market pricing for the trading of surplus energy bybeneficiaries and generators.

11. The order urges the GOI to allocate the unallocated capacity a month in advanceso that beneficiaries know their exact share in capacity in advance and can takesteps to trade surplus power.

12.It will be implemented in stages from April 1,2000 starting from the South. The

new norm for incentive will however be applicable from this date for all centralstations. In the case of NPC, GOI to decide applicability of the order.

COMPARISON OF EXISTING TARIFF SYSTEM AND AVAILABILITY BASED TARIFF


7/74

Sl. No. Descriptionof Item

ExistingSystem

Draft ABTProposal

ABT Order

1. Capacity /Fixed Charge

Annual FixedCharge (AFC)include :a).Interest on loanb). Depreciation

c). O&Md). Return onEquitye). Income-Taxf). Interest onWorkingCapital

Fixed chargesexcluding ROEi.e. all other fiveitems of theexisting system.ROE treatedseparately

Capacity charge as perexisting system

2. Basis of recovery

Recovered at62.79% deemedPLF. 50% AFCat 0% PLF andfull recovery at68.49% deemedPLF.

FC excludingROE recoveredat 30%availability onpro-rata basisbetween 0% and30%availability.ROErecovered onpro-rataavailability

between 30%and 70%

Pro-rata recovery ofcapacity charge for:i) NTPC stations: Between0 to 80% availability in thefirst year and 0 to 85%availability in the secondyear. ii) NLC StationsBetween 0 to 77%availability in the first yearand 0 to 82% availability inthe second year. iii) NHPC

Stations Between 0 to 85%availability in the first yearand availability in thesecond year to beannounced by thecommission separately.

3. Incentives Above 68.49%deemed PLF,incentives at 1paise/KWh foreach 1%

increase in PLF.

Incentivebeyond targetavailability of70% is asfollows: 70% to

85% - 0.4% ofequity for each1% increase inavailabilitybeyond 85%.

1 paise/KWh/eachpercentage increase inPLF of 80%/ 85% in thefirst/ second year for NLCand 85% in the first year

for NHPC.

4. Sharing of Based on actual Based on Based on allocated


8/74


9/74

12. Payment of dues togenerators

As peragreements

As peragreements

As per orders of thecommission

13. Applicability All centralgeneratingstations

All centralgeneratingstationsstaggeredregion wise

i). ABT implementation isstaggered region wise. ii)Fixed charge recovery andbasis for incentivepayments revised from 1st

April, 2000.iii) GOI todecide about ABT forautomatic power stations.

14. PLF for incentivesduring interim

period

Not applicable Not specified Till the introduction of ABTin other regions and after1.4.2000, the actual PLF

for incentive purposes forNTPC shall be 80%instead of deemed PLF of68.49%. The PLF in thefirst year for incentivepurposes for NHPC shallbe 85%.


10/74

Introduction:

Power generation and distribution in India started towards the end of the nineteenthcentury. However, it was only after our independence in 1947 that the power sector gotthe required momentum and power generation was identified as a key area for ourdevelopment. With sustained efforts over the decades, the power generation scenario inIndia presents a rich and composite mixture of hydro, nuclear, thermal, wind and solargeneration. Our installed capacity across the nation well exceeds 100,000 MW, a majorshare of which is derived from thermal sources (coal/lignite, gas, diesel). Though richand diverse, the thrust on the power generation sector so far has been on capacityaddition and our power sector has not really kept pace with the emerging technologieson the power management front, especially in leveraging the tremendous potentialunleashed by information technology (IT). Power generation in India has been largely

state owned and like so many other public enterprises donned a traditional outlook andlagged in extracting the benefits offered by digitization and automation owing mainly toa lack of economy centric approach.How well we can manage this vast infrastructureand how close it can keep pace with our increasing energy demands will be a crucialdeciding factor in achieving our dream of an annual double digit growth. And in the wakeof opportunities thrown up by liberalization and deregulations, the state machinerystarted mooting on introducing these effects to the power sector also. ABT (AvailabilityBased Tariff) along with the Electricity Act of 2003 is perhaps the most significant anddefinitive step taken in the Indian power sector so far to bring more efficiency and focusto this vital infrastructure. The fact that the ABT regime was introduced to replace theElectricity Supplies Act of 1948 would perhaps be an indicator of how overdue reforms

were. This document is an attempt to introduce the significant clauses and implicationsof ABT in a concise manner.

Salient clauses of ABT:

ABT concerns itself with the tariff structure for bulk power and is aimed at bringing aboutmore responsibility and accountability in power generation and consumption through ascheme of incentives and disincentives. As per the notification, ABT is applicable to onlycentral generating stations having more than one SEB/State/Union Territory as itsbeneficiary. Through this scheme, the CERC (Central Electricity RegulatoryCommission) looks forward to improve the quality of power and curtail the following

disruptive trends in power sector:

i) Unacceptably rapid and high frequency deviations (from 50 Hz) causingdamage and disruption to large scale industrial consumers.

ii) Frequent grid disturbances resulting in generators tripping, power outagesand power grid disintegration.


11/74

This objective is to be brought about by encouraging generators to produce more duringpeak load hours and curtail generation adequately during off-peak hours on one handand discouraging consumers from overdrawing on the other hand. The new tariff regimeaims at inducing this discipline at the generation and consumption end throughadequate monetary incentives. The most significant aspect of ABT is the splitting of the

existing monolithic energy charge structure into three components viz. capacity charges(fixed), energy charges (variable) and UI(unscheduled interchange) charges. It is thelast component that is expected to bring about the desired grid discipline. Splitting of thetariff into fixed and variable cost components is meant toact as an incentive for power trading which shall (ideally) conclude in a self-regulatingpower market regime. It is also expected to promote the concept of ELD (EconomicLoad Dispatch) among power generators. Let us now look at these tariff components ina bit more detail:

Capacity charges: Fixed charges are payable to the generating station, by theintended beneficiaries of the generation facility (state governments of the region in most

cases). In the present tariff regime, capacity charges are payable against the (deemed)PLF (Plant Load Factor) of the station. Full fixed charges are payable at achieving aPLF of 68.49%, and incentive is payable for each unit of electricity generated above thisPLF. Under the ABT regime, fixed charges are payable against the availability(declaredcapacity) of the generating facility. Fixed charges excluding ROE is payable on aprorated basis for 0-30% availability. Prorated ROE is payable from 30-70% availability.Incentive is payable to the generating station for availability beyond 70%. The incentiveis pegged at 0.4% of equity for each percent increase in availability in the 70-85%range. Thereafter, the incentive falls to 0.3%. This decrease in incentive after 85% isaimed at discouraging the generating facility from overloading the units at the cost ofmaintenance and equipment life. ABT also contains provision for penalizing the

generating utility for over/under declaration of the availability. Fixed charges are payableby the beneficiaries in proportion to the allocated capacity and does not depend on theactual consumption.

Variable charges: Under the present tariff regime, there is no bifurcation between fixedand variable charges. Both are bundled together and payable in proportion to the actualenergy drawn by the consumer. As we have seen already, under ABT fixed charges varywith the allocated capacity and has nothing to do with actual energy consumed. Incontrast, variable charges are to be paid against the actual energy consumed. Thissplitting is expected to promote power trading.

UI charges: In the present regime, there is no penalty for deviation from thegenerating/drawl schedule by an entity. The ABT regime stipulates that UI (UnscheduledInterchange) charges are payable under the following conditions:

a) A generator generates more/less than the schedule causing grid frequency todeviate upwards/downwards


12/74

b) A beneficiary draws more/less than the schedule causing grid frequency todeviate downwards/upwards

The penalty imposed varies with the grid condition at the time of the indiscipline and themagnitude increases with the severity of the frequency deviation caused.Apart from this

tariff structure, ABT provides for -a) Implementation in a phased manner.

b) Generation and drawl schedules to be managed in 15 minute blocks (96blocks per day).

c) Mechanism for communication and co-ordination of the schedules and howrescheduling is to be done in case of a generator/beneficiary being unable tomeet the schedule.

d) Role of regional load dispatch centers (RLDC) in managing and coordinating

the schedule and managing the schedule in the event of grid disturbances.

e) Methodology for calculating the capabilities for different types of powerstations (such as hydro, thermal, nuclear) and for demonstrating the same.

f) Details on metering, accounting, billing and payment of energy charges underthe ABT regime.

g) How disputes arising under ABT shall be resolved.

Benefits professed by ABT:

By ushering in the Availability Based Tariff, the CERC looks to bring forth the followingpositive changes in the Indian power sector:

1. Enhanced grid discipline that will pave the way for higher quality power withmore reliability and availability. Grid disturbances and frequency fluctuations asoccur in our power system today are serious problems and would be consideredunacceptable in any advanced economy. The system of incentives anddisincentives allow for penalization of the party responsible for any disruption.This will serve all participating bodies in a power grid to be self-disciplinedensuring quality power supply for all consumers.

2. A more economically viable power scenario that alleviates some of naggingproblems of the power sector such as outdated technology, poor managementand maintenance, cross subsidization, over staffing, poor accounting practicesetc. In breaking the tariff into fixed and variable components and making the fixedcharges depend on the declared availability of a plant (subject to demonstration),there is a lot of reason for generators to bring in efficiency. The current diktat atmost of the public sector generating station is to produce as much as you can.


13/74

Under the influence of ABT, this will change to produce only as much is neededi.e. supply will need to closely follow the projected demand schedule. Also thereis a lot of reason for the generators to usher in the latest technology to ensurethat the power generation is predicable, controllable and can be monitored easily.At the consumption end also there is scope for technology investment now in

terms of load forecasting and monitoring.

3. Promote competition, efficiency and economy leading to power trading whichshall ultimately pave way (step-by-step) for a self-regulating power market. Thevariable cost component for the energy consumed is the first step for facilitatingtrading of power. Also, since the fixed charges are now payable based ondeclared availability rather than actual power consumed, there is a lot of reasonfor beneficiaries to trade in capacity as well. And this kind of trading willautomatically induce competition and efficiency into the power scenario. In fact itis hoped that ABT will prove to be the first step for Indian power industry towardsa completely market oriented regime which is self-regulating and does not need

the tariffs or other parameters to be regulated externally. Adequate transmissioncapacity (so that there is no bottleneck in terms of purchase or delivery) is themost important infrastructure requirement to support such a market regime.

4. Introduce and encourage MOD (Merit Order Dispatch) in the Indian powerscene. In the current scenario, the generators tend to produce as much as theycan irrespective of the demand side of the power equation. Under ABT,generators will need to ramp up and ramp down generation based on thedeclared generation schedule given by the RLDC (Regional Load DispatchCenter). Thus when the plant (or a cluster of generating stations owned by asingle entity) will need to use the power generation combination that will incur the

least cost for all loads below the maximum load. This exactly is the formulation ofthe MOD, which is an optimization problem. MOD is used by modern powerplants to save millions of dollars in generating cost every year. Thus introductionof MOD is expected to benefit the power industry greatly.

Concerns on ABT:

While ABT is acknowledged to be a welcome measure to tackle the major problems inour power scenario and is expected to be the welcome step towards a self-regulatingmarket, there are a lot of concerns that need to be addressed by this new system. Wewill, in this document, concern ourselves only with issues of a technical nature and not

with those having political or statutory implications (such as whether a particular clauseof ABT is within the jurisdiction of CERC). For information regarding these and detailedinformation on the clauses of ABT, the reader is referred to the full text of the ABTnotification. Some of the important technical concerns to be addressed by ABT are:

a) What happens to the schedule and UI charges in instances of the griddisruption beyond the control of generator or consumer? ABT delegates theresponsibility of resolving such instances to the RLDC. However more clarity


14/74

needs to be brought forth on this issue as this point can potentially cause a lot ofcontention regarding the UI charges.

b) A fundamental concern on ABT is whether it is the right measure to beintroduced. While the spirit and intention of the act is widely appreciated, there is

serious concern that it introduces elaborate and complicated procedures thatshall give rise to a lot of contentions between involved parties on theirinterpretation. Some of these aspects include the declaration and demonstrationof availability by a generating station, computation of variable and UI charges,rescheduling of generation and consumption etc. It may be required to evolve thecurrent proposals to a more simplified and transparent system over a period oftime.

c) Acceptable availability may vary depending on the energy source of thegenerating station. And in some cases, such as hydro and wind stations theavailability may not be accurately predictable except in the very short term. This

will pose problems in calculation of fixed charges based on availability.

d) Plants commissioned in different times tend to use vastly varying technologyand thus tend to differ a lot in efficiency and cost of production. Since revenue forthe generator vary significantly with efficient and controlled operation, old (thoughfully functional) plants may be at a disadvantage. The investment required tobring them to par with their modern counterparts may not be justified by theprofessed returns. On the other hand if CERC relents to discriminate betweenplants based on this factor, it will just add to the opacity of the proposed system.

e) Another significant concern on ABT is the possibility of gaming (deliberate

manipulation of availability, daily demand and capacity schedules etc.) by theinvolved parties to derive undue benefit from the UI charges. ABT systemintroduces clauses meant to discourage gaming through severe penalties.Whether this will prove a sufficient enough deterrent and whether the checks andbalances prove adequate to detect gaming need to be ascertained.

f) Another interesting concern is the CERC diktat that any revision in scheduleby the RLDC will deemed to be effective irrespective of the successfulcommunication of the same to concerned parties. As has already been pointedout, most of the concerned parties being PSUs lagging on the technology frontare yet to have fool-proof or redundant communication infrastructure in place.Thus rescheduling may fail to reach concerned parties in a timely manner and ifsomebody is caught unawares on the wrong side of the UI charges, they are notgoing to be pleased about ABT.

Implications for different industry players:


15/74

Put succinctly ABT requires all the actors in the great power drama to get theirtechnology act right. There is no room for laxity on control or efficiency fronts. Thetechnology dependency is going to be more on the generation side.

Capital cost of the generating facility being redeemable only against declared availability

and successful demonstration of the same will require the generators to really have atight rein on their complete infrastructure. All the generators will now need to set a targetof 85% availability to ensure that complete capital costs, ROE and incentives areavailable to them. And the provision for surprise audit to demonstrate the availability willneed to them to monitor all the equipments and ensure adequate and timelymaintenance of their overall infrastructure. This will usher a modern outlook and calls forthe latest and best technology in performance calculations, efficiency and IT.

Variable costs and UI charges will require the generators to closely match their outputwith the demand curve and the ability to take corrective actions in the shortest possibletime. ABT also calls for elaborate computation of the payable tariffs and close

monitoring of the cost of production. Ushering in of MOD is going to be a positivedevelopment for all generators enabling them to make huge savings on cost. All thesefactors will involve a good amount of technology investment but will set the rightbackground for an efficient power structure and the right launching pad for a marketoriented approach. This will naturally result in higher reliability and increased customerconfidence giving the right impetus for more industrialization and enhancing ourdevelopment process.

At the consumption end also there is going to be the need to forecast demands asaccurately as is possible and to follow the strictest possible grid discipline. This againwill prove vastly beneficial to the power industry as a whole.


16/74

Impact of ABT on different PlayersImpact on generation utilities:

Of the three, power generation utilities will need to adapt most to the ABT regime. Thisbecause most of the changes specified in the ABT, such as computation of capacitycharges, assessment of plant availability, revised tariff structure, UI (unscheduledinterchange) charges etc. will be of direct significance to power generation companies.Initially only those power stations that cater to more than one SEB (state electricityboards) are expected to abide by ABT. However, since the objective of ABT is to usherin more responsibility and accountability and thereby improving the quality power, it isquite likely that all generation companies would soon need to abide by ABT or similaracts. Such abidance and discipline will only increase as ABT slowly paves the way for acompletely deregulated and market driven energy economy.

Under ABT, there is a paradigm shift for generating stations from maximum power tomaximum reliability. Pre-ABT generating stations used to generate to their capacityirrespective of load demand in the network. Under ABT regime, the loads requirementsare given in 15-minute blocks and the generating station needs to closely follow thisdemand curve so that frequency deviation on either side of 50 Hz is a minimum. Someof the technology requirements thrown up by this paradigm shift are:

a) Advanced control and monitoring systems to closely monitor the ex-busoutput of the plant and ensure that it is closely in heel with the 15-minuteschedule provided by the RLDC (regional load dispatch centre). Ex-busoutput information is already available in all power plants. What will berequired of ABT is to integrate this information with the 15-minute loaddemand information so that plant operators have a clear and up-to-dateinformation on what is the requirement and what is being provided. Alarmscan also be incorporated to provide escalation in case of significantdeviation of output from demand.

b) Integrated information and communication system to capture data from allthe components in the power generation cycle starting from the fuel storefor the plan to the ex-bus point. Unscheduled downtime is not veryacceptable in the ABT regime. Plant engineers need to have informationregarding all aspects of the power generation suchmas whether fuel ofsufficient quality and quantity is being made available, are all thecomponents of the system (say, the boiler, reheaters, superheaters,economizers, soot blowers etc. for a fossil fired power plant) working


17/74

without hitches to ensure smooth production. This will require anadvanced data acquisition system and other software solutions suitablyintegrated with each other to provide the most up-to-date information. Andsmooth functioning of such a system will call for the necessarycommunication infrastructure.

c) Production following demand will mean that the plant will not be operatingat peak capacity at all times. This will require for an optimization problembetween different units of a power plant since the cost of generation,ramping, start up and shut down associated with each unit will vary. This iscalled the merit order dispatch (MOD) problem. MOD solutions canpotentially provide huge savings for a power plant and ABT will requiremost plants to accommodate MOD to ensure economic operation.

d) In addition to MOD, performance calculation for each unit of the powerplant and corresponding optimization also needs to be done. Different

parameters that may affect the plant performance such as superheattemperature, reheat temperature, inlet/ outlet temperatures, excess airratio etc. will need to be monitored. It should be possible to suggest to theoperator regarding the effects of varying these parameters. Powered withsuch information the user can attain the optimum plant performanceduring operation.

e) As already mentioned, under the ABT regime unscheduled deviation fromthe power generation schedule incur considerable penalties (termed UIcharges). It is thus in the interest of any generator to ensure that anyunexpected downtime of the power plant does not occur. This requirement

calls for a more pro-active management plan than is being practiced bymost generators now. Equipment condition monitoring is a significant areathat can benefit generators by telling them which components in the cycleare likely to fail and for what reason. This will enable the operator toensure proper and adequate maintenance for such components. Inaddition the generator is encouraged to plan all activities well in advanceand co-ordinate the same between different units in the power plant and toensure optimal use of plant equipment without overloading.

f) The economy of power generation is vastly altered under the ABT regime.Earlier capacity charges were paid against PLF (plant load factor) andpower charges against the power sent out. Under ABT capacity chargesare payable against declared (deemed) availability and a UI (unscheduledinterchange) component is payable as part of the power charges for anygrid indiscipline. UI charges are a system of incentives and disincentivesand depend on the declared demand, declared availability, deviation fromforecasts, grid conditions etc. As a result of this new structure, theparameters influencing the monetary returns from power generation aremuch more complex. Power generation stations would do well to have a


18/74

full-fledged tariff calculation system that can do a detailed computationand optimization of power generation from the revenue angle. This kind ofdigitized linking between power generation and revenue will prove greatlybeneficial during the journey to a full-fledged market system.

Impact on grid operator

Grid operator typically manages the power transmission infra-structure. This willcorrespond to the role of the ISO (independent system operator) in more evolved powermarkets. ISOs are typically no-profit organizations formed by a consortium of allinterested parties in a specific geographic area for a power market. Their goal is toensure smooth operation of the grid and to ensure adequate load-supply balance in thegrid. In India this role of power transmission and coordination is handled by PGCL(Power Grid Corporation of India Limited) which incidentally is the single largest powertransmission utility in the world. PGCL is responsible for operating the national andregional power grids as well as managing the RLDCs (Regional Load Dispatch

Centres). Under ABT regime, the role of balancing the demand and generation side ofpower is vested with the RLDCs. As such some of the system requirements at the gridoperator for the successful implementation of ABT will be:

a) Improved and efficient transmission systems: A unique nature of electricityas a commodity is that it needs to be generated just in time forconsumption. With addition and modernization of different powerresources adding the total generating capacity, transmission is soon goingto present one of the major bottlenecks in the smooth operation of ourpower systems. It will be the responsibility of the grid operator to ensurethat such a scenario is averted. Merely adding of transmission capacity to

the existing infrastructure may prove inadequate. It will be equallyimperative to smoothly and efficiently manage the system with propersimulation tools, load balancing features etc. to ensure that the bottleneckin transmission is removed and that all the available energy is efficientlydelivered to the needy consumers.

b) Better forecasting systems: Presently the RLDCs are vested with the roleof coordination between consumers and generators regarding the demandand generation schedule for each day split into 15-minute intervals. SinceUI charges are payable by the generator or consumer, it may seem thatthe onus of forecasting more lies with these parties (especially

consumers). However to ensure that the spirit and objective of ABT is notthwarted, it would indeed be important for the PGCL to predict asaccurately as is possible the demand in different consuming regions.Variations as a result of climate, festivals and other events also need to betaken into consideration. Only then can they ensure that enoughbandwidth is available across different routes to carry adequate power toeach region.


19/74

c) Better communication and information systems: It is the responsibility ofthe RLDC to communicate the 15 minute generation and consumptionschedule to each party. It is also the role of the RLDC to convey anyunforeseen change in such a schedule. ABT envisages that the UIcharges will get suspended for specific periods in the event of an

unforeseen disruption in the grid for which responsibility cannot be pinneddown on any particular generator or consumer. It is very important that thedisruption and revised schedule is communicated in a timely fashion to allthe concerned partied failing which the credibility of the whole system maysoon get pulled into the question. This aspect requires the grid operator tohave excellent communication and information infrastructure in place.

d) Improved metering and billing system: Under ABT specifications it is theresponsibility of the PGCIL/RLDC to ensure adequate meteringcapabilities for proper implementation of the tariff structure. Under therevised structure, specialized energy meters that can keep track of 15-

minute energy aggregates as well as frequency for each 15 minuteinterval need to be implemented to take care of the normal energycharges and the UI charges. Telemetry capabilities (with associatedhardware and software solutions) also need to be put in place to ensureaccurate and timely completion of the exercise. The alternate of manualreading of meters will prove too much extensive, time consuming andlikely to be error prone and may jeopardize the credibility of the ABTregime.

Impact on consumers:

As already mentioned, the major thrust of ABT is to improve the reliability and quality ofthe power grid. Primary beneficiary of such an enhanced system would be theconsumers. Consumers in the ABT regime consist of SEBs (State Electricity Boards)and other major distribution companies. Most important benefit they can realize from animproved power grid is to pass on these benefits of quality and reliability to theirconsumers in turn, who are typically the end user links in the T&D (transmission anddistribution) chain. While providing these benefits, ABT also confers some responsibilityon the consumers which will require them to fine-tune their process. Some of therequirements ABT will make on consumers are:

a) Enhanced load forecasting system: Under ABT regime, each SEB will

need to provide their load requirements in ninety six 15-minute intervalsfor each day. The consumer is expected to stick to this schedule in theabsence of external grid disturbances and corresponding revisions by theRLDC. Failure to comply with the schedule will attract penalty in the formof UI charges. Thus it becomes very critical for the SEBs to have accurateshort-term load forecasting systems in place. Once the ABT regime movesto further deregulation, long term forecasting will also become critical


20/74

since only on that basis can the SEBs enter into commercial agreementswith the generating utilities.

b) Reliable communication and information infrastructure: Any loadforecasting solution (short term or long term) is highly reliant on historical

data for delivering accuracy. Thisremains true irrespective of the algorithmemployed by the forecasting solution (with thepossible exception ofastrology). Thus it becomes very important for the consumers to havehighly reliable and available information management systems that canmake available historical consumption data. Communication systems arealso called for to ensure smooth coordination with the RLDC andgenerating stations as well as to ensure proper integration with thetelemetry systems.

c) Provision for in-house generation: UI charges can be termed as vagueand distant forerunners of a market aligned price (may be what the

Neanderthals are to homo sapiens). This can be reasoned out as thefollowing: when the grid frequency is low it indicates a situation wheredemand for power is in excess of supply in the grid. If at this time aconsumer needs to draw more power, he needs to pay a heavy penalty interms of UI charges. This can be compared to a consumer paying apremium in the market for additional power than what he has hedged for.The comparison is not fully justified, but was put forward to indicate thatSEBs at some point of time will have to face a make or buy decision interms of power, to avoid customer wrath and UI charges alike in a highdemand situation. And this may manifest in terms of captive power plantsthat are going to be more and more popular during the slow but sure

transition to a decentralized and deregulated power market. And withcaptive power plants need to be integrated with the power grid will come ahost of other technology challenges that are best dealt as a separatepaper.


21/74

ABT at state level (EXAMPLE OF MAHARASTRA IS TAKENINTO ACCOUNT FOR SAKE OF UNDERSTANDING)

KEY CONSIDERATIONS FOR DESIGN OF ABT AT STATE LEVEL

The development of appropriate mechanism for introduction of ABT regime at Statelevel, need to be viewed in the context of objectives laid out hereunder such asimprovement of grid frequency, instilling forecasting and load management disciplineamongst distribution licensees, instilling dispatch discipline amongst generators,encouraging more participation in state level balancing mechanism. Further, ABTmechanism will have to be devised taking into consideration several criteria such ascost of power for Maharashtra power system should not increase, fair and equitable

allocation of risks amongst participants, constraints of system operation and stability,availability of metering and communication infrastructure, promoting long termdevelopment of market etc.

OBJECTIVES FOR INTRODUCTION OF ABT AT STATE LEVEL

The primary objectives which have to be fulfilled by the new system have to be lookedat. The most important objectives are:

To bring in more generation in the system and improve the grid frequency.Currently, Maharashtra is facing acute power shortage with peak demandgrowing at a very high rate. During peak summer months, even Mumbai licensee

faced acute power shortage necessitating initiation of load regulation measures.While the future position of demand-supply will depend on load growth andcapacity additions, tapping of surplus power available today, if any, would assistin improvement of grid frequency and quality of supply.

To instill forecasting and load management discipline in Distribution LicenseesPrior to introduction of ABT at State level, the Distribution licensees did not facethe implications of any inter-state UI earning or payment by the State. Under theintegrated power system operations scenario, however, distribution licenseeswould be required to forecast their requirements accurately. In the marketmechanism being developed, it is envisaged that the UI incident on the State will

have to be passed on to the distribution licensees through appropriatemechanism, so as to incentivize Distribution licensees to accurately forecast theirload requirements and manage the load accordingly.

To instill dispatch discipline in generators. In the current scenario, some stategenerators may deviate from their despatch schedules and not face anycommercial implications for the same. For example, they may generate beyondtheir schedule even when the frequency goes beyond 50 Hz. The payment to


22/74

generators being based on actual generation and not scheduled generation, andthe incentives linked to maintaining a high PLF can be the reasons behind these.Therefore, a mechanism might be required to instill despatch discipline amonggenerators.

To encourage participants within the state in balancing the system. A balancingmechanism tries to match supply and demand on almost real-time basis. Indeveloped markets, the system operator manages the balancing mechanismthrough a system of contracts. In India, at the regional level, this is sought to beachieved through ABT where, through a pre-determined price (UI rate), theparticipants are provided a signal to balance the system. At the state level, theSLDC is expected to play this role. It may do so by using reserves such as hydrocapacity or by instructions to the demand side such as load relief measures. Wemay complement this system by an intra-state ABT mechanism which wouldencourage the involvement of participants in balancing the system.

KEY CONSIDERATIONS FOR DESIGN OF ABT AT STATE LEVEL

Before looking into the various aspects of design of a new mechanism to beimplemented in the state of Maharashtra, a few important principles have to be kept inmind which could act as the essential criteria for evaluation of any new alternatives.Based on these considerations and the objectives already discussed, we need to devisethe system at the state level.

Cost of power in the Maharashtra system as a whole should not increase. Anyincrease in the cost has to be borne by the end consumer and hence, any newmechanism that is implemented should not increase the cost of the system as a

whole. Thus, while introducing intra-state ABT with the objective of tapping moregeneration, we should bear in mind that the extra generation does not come at avery high cost. At the same time, while extending ABT to the state participants,there should not be any significant financial loss to the Distribution Licensees. Inthe recent past, MSEDCL has incurred significant cost on account of UI. Whiledesigning the new system, the intra- state UI mechanism should be such that theutilities do not incur significant UI costs on account of inter-state UI mechanism.

Quality of supply and the efficiency of various entities should improve .One of themost important objectives behind reforms in the electricity sector in the State willhave to be improvement in efficiency of the various entities and improvement inthe quality of supply. The generating stations should dispatched in most efficientmanner taking into account economy of operations and merit order dispatchprinciples for the power system as a whole irrespective of the ownership. Anynew system should promote/incentivize the improvement in efficiency and qualityof supply and exchange of power amongst market participants. Tapping ofexcess generation will improve the frequency profile of the system and thus willlead to improvement in quality of supply.


23/74

The new system should promote the development of market, i.e., encourageparticipation by many buyers and sellers. Another objective behind the reformprocess has been the development of a market in the long term. Therefore, anynew system should be in line with the overall objective of market development.The new system should offer opportunities to many buyers and sellers to take

part in the market and maximize economic gains.

Fair and equitable sharing of risks amongst various State participants Theproposed arrangement should not result in in-equitable allocation of risks andcosts amongst the State participants. The proposed mechanism should take intoconsideration existing contractual arrangements and agreed risk sharingarrangements amongst the State participants. The risk and returns should becommensurate with each other.

System Operations and Stability SLDC has the responsibility to maintain systemsecurity and stability and for that purpose SLDC can exercise control on the

system participants. Before implementing any new mechanism in the State, it isextremely important to examine the impact and implications of the newmechanism on critical system parameters and to ensure that the stability andsecurity of the system is not jeopardized in the new mechanism. The systemparameters which are of critical importance are frequency of the grid, lineloading, voltage profile, transformer loading etc.

GOVERNANCE STRUCTURE

Specific areas covered under this are (a) Objective of Governance under state level

ABT mechanism (b) Constitution of Maharashtra State Power Committee (c) Functionsof Maharashtra State Power Committee (d) Powers of Maharashtra State PowerCommittee

1. OBJECTIVE OF GOVERNANCE UNDER STATE LEVEL ABT

FRAMEWORK

As a part of the proposed ABT mechanism at State level, an institutional mechanismneeds to be created to address commercial issues, which may arise between thetrading partners. A Maharashtra State Power Committee (MSPC) is recommended forthis purpose.

The main objectives of this institutional arrangement shall be to:-(a) Develop and provide a platform for better governance of a market oriented tradingmechanism

(b) Provide a framework for efficient reconciliation and settlement of differencesbetween the trading partners.


24/74

(c) Recording of commercial arrangement and accounting of energy exchange amongstparties.(d) Bring transparency in operation and improve upon the system and procedures ofmarket operation.

Entities involved in Intra-State ABT

Intra-state ABT shall be applicable on suppliers and drawers involved in the State Grid,who are required to give daily schedules to State Load Dispatch Center (SLDC), andhave agreed to pay as per ABT for any deviations from schedule.

(a)Generating Stations:

All generating station except the following shall be covered by intra-state ABT, if:-(i) Covered by inter-state ABT,

(ii) Nuclear, Wind and Solar Power Stations,(iii) Hydro Stations,(iv) Power Plants of capacity below 10 MW and(v) CPPs & Co-Generating Stations.

On account of generation from hydro, wind & solar power stations being dependent onnature and their generation cannot be predicted with certainty, these power stationshave to be excluded from Intra-State ABT. Similarly Nuclear Power Stations because oftheir nature of operating in base load, cannot adjust their generation to load demandand hence they have also been excluded. Renewable sources such as biomass, solidwaste, etc. are controllable and a schedule can be generated day-ahead. However,

given the many benefits for the generation from renewables, and also in view of therelatively very small capacity of units, biomass and other renewables have also to beexempted from ABT. As UI rate applies on deviation of actual generation from thescheduled generation, generating station of capacity up to 10 MW shall not give dailyschedule and as such they cannot be covered by ABT.

(b)Licensee:

A Distribution/trading licensee shall be covered by intra-state ABT, if

(i) it effects drawl from generating stations & licensees governed by interstate and/orintra-state ABT and(ii) Its total drawl during any time block exceeds its drawal from Non-ABT sources i.e.generating, trading licensee & distribution licensees not governed by interstate or intra-state ABT .Provided that the intra-state ABT shall be applicable on bilateral exchangesonly, if for such exchanges, scheduling & payment as per ABT for deviations fromschedule has been agreed.

(c)Open Access Consumer:


25/74

An open access consumer, within the State, shall be governed by intrastate ABT only inrespect of electricity supplied to him by the generating station / licensee governed byinter-state/ intra-state ABT. Intra state ABT shall be applicable to the extent of suchsupply only.

Basic infra structure and other requirements for intra state ABT

a) Metering:

The Forum of Indian Regulators (FOR) sub-committee has rightly pointed out that forimplementation of Intra-State ABT, the activity of installation of special energy meters onthe periphery of all entities would be the critical part. The meters should be capable ofrecording the following parameters in a 15 minute block. Cumulative active energy Cumulative apparent energy (KVAhr)

Cumulative reactive energy under high voltage (> 103 %) Cumulative reactive energy under low voltage (< 97 %) Active energy Average frequency Date & Time Average power factorThe interface points such as interface of IPPs with the grid, CPPs / Co generators withthe grid, open access consumers with the grid, CGS ( NLC1) with the grid etc., will haveto be metered. by the SEB within a certain time frame .

b) Communication facility:

In ABT mechanism, the metering data should be transferred from Special EnergyMeters to ALDC/SLDC on a real time basis. Hence adequate & reliable communicationfacilities should be established by TNEB/STU. In order to provide load forecast to theSLDC on a daily basis, communication facility from the ABT compliant meters at theinterface points to the ALDC of the distribution licensee should also be establishedalong with SLDC.

c) Tariff:

The basic requirement for implementation of ABT is a three-part tariff comprising of fixedcharges, variable charges and UI charges. As discussed earlier, the fixed charge wouldbe linked to availability and variable charges to the scheduled energy. The UI chargesshall be applicable for the deviations from the schedules. A three-part tariff for thecentral generating stations is already in force under the inter-state ABT.

Regarding the third part of the tariff i.e. UI charges, the UI rate determined by the CERCis already in force for inter-state ABT and it has been recommended by various expertsincluding the Forum of Indian Regulators (FOIR) sub-committee to adopt the same UI


26/74

rate for intra-state ABT also. Hence it is appropriate to adopt the same UI rate asdetermined by the CERC for intra-state transactions also.d) Setting up of Area Load Dispatch Center (ALDC):

Each Distribution Licensee should have an Area Load Dispatch Centre to monitor and

control the drawl of power within their jurisdiction. Even though some SEB still remainsas a vertically integrated utility and a deemed Licensee for the present, they have todesign the system for intrastate ABT to suit the future scenario with multiple Licensees.This involves additional investments and may have to be agreed as a pass through inthe future tariff.

e) Up-gradation of SLDC:

In order to handle the increased volume of data under Intra-state ABT and also toperform the functions of monitoring and energy accounting, the state load dispatchcentre needs to be up-graded suitably by providing necessary software, hardware,

human resources and other infrastructure. This again involves additional investmentsand also have to be agreed as a pass through in the future tariff

f) Training and Familiarization:

Under intra-state ABT, energy accounting would be complex and requirescomputerization and trained human resource for efficient data management. Foreffective implementation of intra-state ABT, the staff of SLDC and the Licensee(s) needto be trained extensively. The staffs of SLDC have already gained experience inoperating the inter-state ABT, but they have to be further trained on intra-statetransactions.

Case of Tamilnadu in brief

Present Status in Tamil Nadu

TNEB have reported that presently in the SLDC scheme 34 numbers of generatingstations and 49 numbers of grid stations have been covered with state-of-artcommunication and SCADA system. These are used for ABT based grid operation in theintegrated operation of the southern grid. TNEB has also reported that additionally 8numbers generating stations and 5 numbers grid stations are proposed to be linked withSLDC/SSLDC during the current year. All the new substations to be commissioned are

also being provided with SCADA and proposed to be linked with SLDC. It has initiatedaction to provide ABT compliance meters in its generating stations and in grid feedersduring the current year. It has also been reported that TNEB have already provided thestate of art DCC-SCADA system for Chennai metro area covering 95 Substations andupgrade the existing DCC to accommodate additional 200 substations along withdistribution management system (DMS) facility during the current year. TNEB isunderstood to have proposed to provide SCADA and communication facility to allsubstations, connecting them with circle level area control centre (ACC), which in turn,


27/74

will facilitate open access, energy accounting and auditing. TNEB at present is avertically integrated utility. With the present unbundled structure, the scope ofimplementing the ABT mechanism in Tamil Nadu may appear not to yield any majorbenefits to TNEB / consumers. In fact, it has also been pointed out during thediscussions in a FOR Meeting on 10.11.2006 that unbundling is a necessary precedent

condition for introduction of intra State ABT. However, even under an integrated set up,TNEB have to necessarily move towards establishment of profit centre concepts andunder such a scenario, self discipline, proper accounting and optimum use of its energyresources will be automatic with intrastate ABT. In fact, this cannot be postponedindefinitely and we should not be lagging behind when the situation warrants sucharrangements to be in place at the appropriate time. The intention of the Commission isthat the TNEB should immediately start establishing the left over infra structure andother facilities with a time frame and to the extent possible.

Proposed course of action

Taking into consideration, the necessity for introducing intra state ABT, theadvantageous, the present status of required infra structure, emerging scenarios , alongwith the additional expenditure TNEB have to spend to establish the requirements,which, in turn will have to be allowed as a pass through in the future tariff, Commissionhave decided to invite the public opinion through this consultative paper, conduct apublic hearing and issue a suo motu proceedings to TNEB to initiate a time boundprogram for establishing the infra structure and other requirements for introducing intraState ABT at an appropriate period on a later date after these works are completed.


28/74

ABT to deregulated Power Market

Self-regulating power market

Going by the commonly accepted definition of market, a power market would indicatean entity (or arrangement) where power generators will offer their distribution capacityor actual energy and interested consumers (such as distribution companies) wouldpurchase them. The energy charges payable to the generators will depend on thedemand-supply characteristics of the market. By the term self-regulating we imply thatno external influence (such as directives from a regulating agency) shall be responsiblefor the power tariffs in the market and it will be determined purely on the demand-supplyratio. This is in contrast to the current scene in Indian (and most other) power sectorswhere government regulatory agencies are responsible for setting the rules of the game

and the applicable tariffs. In fact, presently most of the generating companies anddistribution companies are public sector units controlled by the government therebycurtailing the notion of a market system considerably.

However, the economics of a general market cannot be directly imported to the powersector due to the peculiarities of the commodity involved viz. electricity. For one,electricity cannot be stored for consumption and need to be generated synchronouslywith consumption and then transferred over conducting medium. This means that theproduction system needs to be ramped up and down closely in pursuit of the marketdemand. The implication is that your generation capacity needs to exceed theinstantaneous maximum demand and your transmission bandwidth also needs to

support the same. This real time nature makes demand forecasting a messy job as farelectricity is concerned. For example, you may be able to predict that X tons of wheat isrequired for the next month based on past consumption data and other relevantinformation. This prediction will be more or less accurate if you have got your statisticsright. But it is not possible to predict exactly how many tons of wheat will be consumedon a particular day at a particular time. And in the case of wheat, it is not necessary todo so. But in a typical power market, you are required to predict the demand for eachfive minute interval (at least).

Another differentiating fact for electricity is that it is not a stand alone commodity. Alongwith electric power other resources also need to be supplied such as reactive power,

stand-by (spinning and non-spinning reserves) etc. which are commonly termed asancillary services. In general practice terms for ancillary services are negotiatedseparately and in many instances actual power and ancillary services may be providedby different entities. This further complicates the process of modeling the electricitymarket.

A third crucial aspect is the consumer perception of electricity as a commodity. Itrequires extensive infrastructure to deliver electricity to a consumer. As a result, it is not


29/74

possible for a consumer to choose from an array of vendors (for small-mediumconsumers, it is often not possible to have a choice of vendor at all). Further electricityis considered as a near-essential commodity for all and a must-have for criticalinstitutions such as hospital. As a result of this subjecting electricity to a completemarket oriented system susceptible to uncertainties of price and availability is a concern

for most societies.

Due to the points enumerated above a completely free power market is yet to takeshape (or even successfully conceived). What has been implemented in severaladvanced economies is a restricted power market. The restriction is implemented bymeans of a central coordinating agency (called an Independent System Operator ISO)who regulates the market and ensures that the social objectives are met within theparameters of the system. Thus ensuring adequate and reliable supply of electricity toall consumers, preventing undue manipulation of the market by participating entities forprofiteering etc. are the objectives of this entity. To facilitate the meeting of theseobjectives, in many cases all the transmission facilities are managed by this

coordinating entity while it owns no generation or distribution mechanism. Selling andbuying of power happens through bilateral agreements (between a generator-consumerpair) as well as in a power market. In may instances, the power market is run by the ISOwhile it may also be run by a separate independent agency. The ISO typically operatesas a no-profit organization and is run by representatives from a regulating agency. Allthe stakeholders (such as generators and consumers) are also allowed representationin the ISO though mostly without decision making authority and only as recommendingparticipants.

Implications of a power market

Thus it is quite easy to see that power markets are typically engineered markets andnot free markets. Why then is it necessary to have such a market? Unfortunately, thereis no unambiguous answer. Given the physics of power, perhaps the ideal system is asingle generation-transmission-distribution-billing-collection agency. This unification ofroles enables a lot of convenience in terms of managing unit commitment, merit orderdispatch, congestion management, ancillary services etc. The problem is similar to oneof the most debated issues faced by society viz. what is the best form of government?At a purely conceptual level it is quite tempting to accept a benevolent dictatorship or aPlatonic educated-oligarchy as the best form. Why then is democracy preferred? Forthe simple reason that the conceptual level seldom translates into practice. A centralizedsystem consisting chiefly of large generating capacities is posing environmental as wellas reliability issues. And a monopoly nature inherent in such amechanism does not turn out to be fair to all participants and stakeholders. Theavailability and economics of such a vital commodity as power tend to be dictated bypolitical or other nefarious considerations. And at a much more fundamental level, it issometimes quite impossible for a central agency (especially a PSU with its inherenthandicaps) to run a vast and complicated power system efficiently and transparently.Decentralization, thus, needs to be ushered in and thence the market approach.


30/74

Most power markets operate along three lines: long term (year ahead, month ahead,week ahead), mid term (day ahead, hour ahead) and short term (intra hour market).Participants in the market such as generators and distributors typically take part in allthree markets to ensure purchase/ selling of their power in the most economical fashion.There is a non-profit ISO which coordinates the power system and ensures reliability by

responsibly managing the transmission system. The power market may or may not berun by this ISO. Of the three, short term power market is the most significant. Thisbecause long and mid term power purchase quite often happens through bilateralagreements. In such cases the price and other terms are part of a private contract andmay not be made public. Long term contracts may also be made available by the ISO ina transparent manner paving way for market dynamics. The short term arrangementsare typically handled in a pure market fashion. Ancillary services are typically boughtand arranged by the ISO which then charges all the participants in an equitable fashionfor the same.

Power price is typically set in the market through supply side bids. This means that each

power supplier (generator) will submit bids into the market indicating their prices andramp rates. (For example, a generator may quote Rs.1300/- per MWh at an output rateless than 200MW, Rs.1600/- per MWh when the output is between 200MW and 420MWand Rs.2500/- when the generation capacity required is between 420MW and 500MW).Such bids will reflect the operating costs for the generator associated with differentunits. Demand side is typically not considered in determining the price of power in mostmarkets. Market price of power is typically considered as the price paid against thehighest successful bid. How each of the suppliers are paid for power supplied variesfrom market to market: in some, all will be paid the same price (which would be themarket clearing price denoted above). In other markets, there may exist a pay-as-bidmechanism where different suppliers may get paid differently. Sometimes the long term

and mid term power prices are set against the short term (or real time power price).Ancillary services (especially spinning and non-spinning reserves) may be pricedagainst the real time prices.

Irrespective of the pricing model, it follows that price is normally set depending onapplicable regulations of the market. And such regulations invariable allow the playersto exploit loopholes gain undue benefit from the market. For example, a supplier ofancillary services has a lot of incentive to fix the real time price since he is going to getpaid on the basis of that. Again where the real-time prices are fixed based on MCP(Market Clearing Price), suppliers can manipulate availability or demand to unethicallybloat the MCP (this has actually happened in several markets). Where bilateral contractprices are also dependent on the real-time price, this incentive goes up much more. Inpay-as-bid systems also such manipulations are possible by participants to gain undueadvantage. In fact, in any of the four common auction methods (ascending bid auction,descending bid auction, highest price sealed price auction, Vickrey auction), given therestricted nature of power market, it is possible to manipulate the auction for participantsto gain undue advantage. It is the crucial responsibility of the market coordinator to finetune the market structure to discourage users from such manipulations. How successfulsuch an attempt is what determines how efficient and beneficial the market is. And in


31/74

most cases where power markets have failed, it was caused due to some unfair conductby the participants exploiting vagueness or loopholes in the market regulations.There are other implications to a power market as well. Along with power, trade will beencouraged in other commodities as well. One of the important components here canbe emission rights. Environmental norms are becoming more stringent every day and

power generation (especially in fossil-fired power plants) is a pollution-intensiveexercise. Under such international contracts as the Kyoto protocol, capacity for differentemissions can be traded. For example an entity (an organization, body or even a nation)that has the rights to emit 1000 tons of NOx per year can trade part or whole of thiscapacity to another entity for monetary or other considerations. Such trades are alreadyunderway in European markets. Another important result of a power market is that endcustomer expectation regarding quality and availability will go up than when it ismanaged by public sector organizations. This customer expectation will also provebeneficial to the industry by compelling participants to set higher benchmarks forthemselves.

Successive milestones

Energy being an essential commodity, a power market based on demand-supplydynamics will fail to take off in the absence of surplus generation capacity. So havingadequate generation capacity is going to be the first step in moving towards a marketregime. It may not be possible to account for this surplus capacity from large centrallyoperated power plants alone. Captive power plants will play a crucial role in meeting thisobjective. Thus the next important step is the successful integration of captive powerplants to the national grid. A lot of positive measures in this direction are alreadyprovided in the Electricity Act of 2003. However the transmission infrastructure availableacross the country as well as with our neighbors needs to be enhanced to ensure that

there are no transmission bottlenecks in this integration. Further, a market with scopefor multiple generators to participate will materialize only in the presence of redundanttransmission capacity.

Next step is to provide adequate economic incentives for different players to participatein power trading. Again such measures are already allowed for in the ABT andElectricity act. This includes incentives captive generators as well as removing a lot ofregulatory hurdles for private and cooperative bodies in setting up power generationfacilities. Once these steps are covered, we can have an atmosphere conducive for aself-regulating power market.

From here, the crucial step is setting up the market itself. As our earlier discussionindicates, there is no perfect model available to import even when we do not take intoaccount factors unique to India. A completely successful and satisfactory power marketis yet to emerge anywhere across the world. So it will more be a question of learningfrom others mistakes. We will also need to adapt their good practices. The role of acentral coordinating agency will be crucial in ensuring smooth operation of the marketwithout failing any of the social and national objectives. One possibility is for thegovernment to disinvest the generation capacity of PSUs and then for the PTC (Power


32/74

Trading Corporation of India) with its Load Dispatch Centers to act as the centralcoordinating agency. This is however likely to raise a lot of opposition, not all of whichwill be invalid.

Bottlenecks

Thus after providing the conducive ambience for a power market, setting up of theactual market is going to be a major challenge. This challenge will first involve how toset the rules of the game and how to define the roles and responsibilities for the nodalcoordinating agency. The onus is then on this agency to ensure the smooth operation ofthe market balancing the interests of different stakeholders. This agency will then alsoneed to appropriately tone down its influence so that the market becomes more andmore self-regulatory. The government (of India) will however need to divest all itsgeneration facilities before setting up such a body to ensure that there is no conflict ofinterest in operating the market. If this is not done conclusively and transparently, it willact as a major deterrent for many players in entering the market. As already mentioned

such a disinvestment itself is going to be a major concern with opposition to beanticipated from multiple quarters. Compared to others, divesting nuclear power plantsmay cause additional worries taking into account environmental as well proliferationproblems.

Another problem that needs to be solved is the disparity between different types ofgenerators that take part in the market. ABT (as the first step in this direction) itself isfaced with this problem and is not able to address it completely satisfactory. For amarket scenario, in the absence of external regulations such disparities can seriouslyhamper the success of the market since different generation facilities (like hydro,thermal, nuclear, non-polluting) will be bound by vastly different physical constraints in

participating in the market. Many of the other issues enumerated by ABT (such asadequate metering infrastructure) will also manifest themselves as serious hurdles inthe progress to a self-regulating market.

Conclusion

Thus we conclude that the path from ABT to a self-regulating power market is anarduous one. What is called for is a lot of perseverance and professionalism. It is quiteeasy to run into a crisis situation in this journey, as has quite often happened in othermarkets. So it is very critical for the regulatory authorities to have a clear vision of thegoal and the will to see the path to its logical conclusion. If technology (say, studies onsuper conductivity making it possible to bring down transmission losses to negligiblelevels in real life situations) emerges to seriously alter the physics of power generation-transmission-distribution, such a journey will be fraught with interesting consequences.


33/74

Bottlenecks

Issues 1: Applicability of ABT to Nuclear Stations:A. A question has arisen regarding the applicability of ABT to nuclear stations

though owned by the Central Government. The basis for the query is theprovision contained in section 49 of the ERC Act which makes theprovisions of this Act ineffective in so far as they are inconsistent with theAtomic Energy Act, 1962. Thus though the commission has jurisdiction toregulate the tariff of centrally owned generating companies, since theAtomic Energy Act 1962 in section 22(b) states that the Centralgovernment shall have the authority of fix rates for and regulate supply ofelectricity from atomic power stations the Commission faces a constraint.This constraint did not exist when it was the central government that was

seized of the matter.B. During the NTF proceeding the general consensus was to include the

nuclear stations under the regime of ABT. However, in view of the specialconstraints involved in operation of nuclear stations, it was considerednecessary to discuss the with NPC before taking a final division.Subsequently after discussion with NPC it was decided to include nuclearstations under the regime of availability based tariff.

C. In the proceedings before us, both on the grid code and on the ABT, NPCtook an active part and filed replies to the proposals. The jurisdiction ofthe commission has not been challenged in these proceedings. We have

also made special provisions for nuclear stations in our order on the gridcode. Under the ABT regime, NPC has expressed willingness to submitits stations to the regime subject to certain special considerations in viewof the peculiar nature of their operations. We are also of the view that inthe interest of better grid discipline and merit order dispatch nuclearstations should also be included in the system. In fact, even other entitieslike DVC and BBMB which do not fall within our jurisdiction though theyare engaged in inter state transmission, would like to be covered by theABT system. The practical solution for this problem lies in making use ofthe alternative under section 22(b) of the Atomic Energy Act, 1962 whichcontemplates of the central government authorizing any authority

established by the Government to do rate fixation and regulation of supplyof supply of atomic stations. As such, it is only required of the Centralgovernment through the department of Atomic Energy to authorize thecommission in this regard. We have already suggested to the NuclearPower Corporation to initiate appropriate steps for the Government toauthorize the Commission.

D. We have also pointed out this inadequacy in the present legislation toGOI, under Section 60 of the ERC Act of 1998 vide letter No. L-7/7(1)/99-


34/74

CERC dated September 21, 1999 which is pending with the Government.In view of the above, the provisions of this order shall apply to atomicstations subject to the governments response to these references.

Issues 2: Do the Norms Need Revision?A. A number of replies from the utilities indicate that the norms for

determination of the fixed charges, variable charges and incentives needmodification and cannot be accepted on the basis of existing norms. Onthe one hand, NTPC has claimed additional payment for every startup andpartial loading, as also an additional compensation for gas stations formaking available the liquid fuel. Some of the beneficiaries like KEB, APTRANSCO, TNEB, DVC and RSEB have sought revision of theoperational norms as well as in respect of ROE, debt equity ratio,incentives etc.

B. We are in agreement that the norms in respect of tariffs which were fixedas early as in 1992, need to be re-examined and revised. We havealready initiated the process through a consultation paper on bulkelectricity tariffs which addresses these issues, among others. We havealso initiated certain studies by experts to help us in determining a rationalbasis for the revision of the norms. This process is bound to take a fewmore months. In the meanwhile, in the interest of grid discipline and meritorder dispatch, we are convinced that the ABT merits implementation. Weare conscious of the implications of its introduction without revising thenorms. However, the time gap between the introduction of ABT and theevaluation of new norms may not be long.

C. We understand that during the discussion in the task force meetings, itwas advocated that the introduction of ABT should not adversely affect therevenues of the generating companies. It was canvassed before us alsothat this so-called revenue neutrality should be maintained. In fact onbehalf of the Union of India, it was submitted before us that the guidingprinciple of revenue neutrality was kept in view while detailing on the tariffparameters of ABT for existing stations. Accordingly, parameters such asreturn on equity, rate of depreciation, operation and maintenance charges,norms for fuel consumption and norms for consumption etc., have beentaken to be the same as in the existing tariff.

On a perusal of the Minutes of the national task force, it is found that at its

9th meeting held on 25th March, 1998, there were some discussion to theeffect that the intention behind the draft Notification is not to put thegenerating companies to loss in the process of implementing availabilitytariff. This discussion was in the background of a 12% rate of return forNTPC at that point of time. On behalf of the State Electricity Boards,protection was sought so that they should not be required to pay more. Asalready stated by us, keeping in view the objective of the commissions topromote economy and efficiency, it may not be appropriate to proceed with


35/74

a pre-determined conclusion that the existing revenues should beprotected in the interests of revenue neutrality. We have to takecognizance of the improvement in operations during the seven years sincethe norms were introduced in 1992. At the same time, incentives for stillfurther improvement in performance have to be thought of a balance to be

kept between adequate return for the generator towards encouraginginvestment, and the possible exploitation of dominant position ingeneration. As such, in reviewing the norms, we shall not proceed withapriority assumption, but approach the task in an unbiased fashion.

D. The commission is anxious to introduce the ABT system on account of itsmerits, without further loss of time. As an immediate step, and in a broadsense, the present norms, etc. will continue to be used in the ABT system.Within the short time available, the commission however, has consideredsome of the parameters which are dealt within this order. The followingare the topics that we shall leave untouched until our studies mentionedabove are completed in some months:

i) Financial Structure

ii) Return on Equity and Income Tax Liability

iii) Method of Reckoning Incentives

iv) Depreciation

v) Operation & Maintenance Expenditures

vi) Station heat rate

vii) Auxiliary power consumption

viii) Specific fuel oil consumption

ix) Admissibility of start up charges for thermal plants

The remaining topics listed below are dealt with in this Order:

a) Target availability

b) Criteria for Incentives

c) Procedure for prevention of gaming

d) Prolonged outages

e) UI charges and frequency variation in different regions

f) Settlement of UI accountg) Treatment of unallocated capacities


36/74

Issue 3: Rate of Return and Incentives

A. A number of beneficiary states have repeatedly questioned the increase inthe ROE from 12% to 16% for existing stations. No convincing justificationhas been advanced by generating companies in this regard excepting to

state that public sector companies should be placed on par with the IPPs.From the perusal of correspondence in the files made available to us, CEAappears to have taken a firm stand that the ROE and incentives should beconsidered as a total package and connot be isolated and dealt withseparately. In fact, the correspondence shows that CEA was not in favourof increasing the rate of return from 12% to 16% as it would add a burdenof over Rs. 400 crores to the states. When the take force was debating onthe scheme of incentives as a percentage of return on equity beyondtarget availability, the ROE under consideration was 12%. However,without changing the scheme for incentives, the government of Indiaraised the ROE from 12 to 16% which the beneficiary states considered asexorbitant and is a heavy burden on them. We have come across in theNTF files a communication from the Ministry of Power to CEA enable it togenerate adequate necessary resources for its capacity expansionprogramme during the 9th and 10th plans. In another communication onrecord from the Government of India, Ministry of Power to TNEB it isstated: This point has been reiterated along with a reference to theobservations of the disinvestments commission to the effect that the tariffof NTPC is low due to poor rate of return. Adjusting the Rate of Return inorder to finance further expansion plans is a debatable issue. Further,even admitting the same, the extent to which this can be factored-in isalso debatable.

B. The system of incentives based on actual PLF + certification of backingdown (called as Deemed PLF) came into vogue based on therecommendations of the KP Rao Committee. The criterion of givingincentives to the generator, linked to PLF had a remarkable effect inimproving the PLF of generating stations. This remedy was essential atthat time to augment the actual generation of existing capacities. Over aperiod of time, however, it has been found that this system has becomecounter productive and costly in as much as incentive was payable evenfor backing down. This is the cry from the Eastern Region and beforemore cries come from other quarters, it is better to remedy this situation.

C. It is true that the ECC has discussed about both the disincentive and the

incentive for better performance. The disincentive is in the form of targetavailability for full reimbursement of fixed charges. Any availability belowthe target availability would result in reduced fixed charges. The ECC didcontemplate a basic incentive credit which is defined as that amount whichreplaces the BAC (Basic Availability Credit) in the capacity paymentcalculations after the target availability is attained. The BIC is a smallervalue than the BAC since it only provides for incremental cost of operationplus an incentive payment to the generators for operation beyond normal


37/74

availability. (para 5.2.3 of the Report). It is evident from this concept thatthe ECC meant payment of incentives for operations beyond normalavailability after the target availability is attained for which a cost ofoperation is also involved. Thus it appears that the ECC did notcontemplate an incentive payment on mere availability. However, the draft

notification gives incentives on mere availability.A generator cannot be rewarded for merely putting up a generating unit. Itis necessary for him to make it available for the beneficiaries to areasonable extent so that the latter could draw upon that capacity. Anyshortfall in available capacity needs to be commercially punished with thedenial of fixed cost. Incentive however, stands on a different footing. Inregulated tariffs, it is necessary to keep a provision to reward betterperformance in order to promote efficiency and economy through costreduction. Such a reward linked to a demonstrably efficient performancelevel, should be as challenging as possible. Mere availability does notreflect efficiency. At the same time, in order to keep the machine available

without break down, the disincentive of denial of fixed charges is adequateenough. What is also required is that the available capacity should alsobe efficiently use. For this purpose, the entrepreneur generator shoulddemonstrate that his product is competitive enough both in terms of costand reliability of service so that additional demand would get generatedand he will be able to improve his plant load factor. Any improvement inplant load factor (up to sustainable level) indicates efficient performance,for which reward in the form of incentive is appropriate. Mere availabilityof the plant without demand cannot justify incentive payment. Thisconclusion is inevitable from studying the situation in the eastern region.

There though, the generator is available, due to lack of demand, he has toback down. In this process, the generator could claim incentive based onmere availability, which is patently unfair t

abt by abhishek mazumdar

Documents