On a Transmission Mission Mode

Context: The capital-intensive power sector is an obvious candidate for attracting private capital, including foreign investments.

Challenges in the Power Sector:

• Issues in Tariff Based Competitive Bidding (TBCB):

• Unable to provide inflation hedging: The scalable component (which can be increased to 15% of the non-scalable component) of the tariff is not been utilised per inflation.
• Shifting the higher cost to current generation consumers: The successful bid, even when 40-50% cheaper, results in tariffs that are passed on to the future generations.

•  Reduced attractiveness for secondary buyers of the project:

• The usual compensation of correspondingly extending the life of the projects has a limited financial benefit.
• The economic returns of the tariff in the tail-end years are disproportionately small.

Reforms in the Power Sector

• The transmission vertical within the power sector is ready for a complete shift to competitive bidding.
•  Independent Central Transmission Utility (CTU) and the Central Electricity Regulatory Commission (CERC) for planning and formulating transmission projects and carrying out statutory functions.

Way Forward: Rationalise of Tariff Framework

• Need of inflation-indexed tariff where bidders for transmission projects are required to quote the first-year tariff only.

• • • It would be reset for the succeeding years based on an escalation indexation.
    • It will reduce inflation-related risks to developers.
    • It will ensure access to cheaper debt and a corresponding reduction in tariffs
    • Inflation protection will also help to rationalise the expected returns and rates, currently subsumed in pricing considering worst-case scenarios.

• Examples from other projects:

• The collection of toll fees for Build-Operate-Transfer (BOT) road projects have an annually revised base rate that rose to 40% of the increase in wholesale price index last year.
• This relatively simple escalation index is adequate to continue attracting investment in the NH sector.
• Competitive Bidding Process: Recent decision to have an independent Central Transmission Utility (CTU), for planning and formulating transmission projects and carrying out statutory functions is the first step in facilitating this process.

Conclusion: Rationalisation of the tariff framework will help in increasing the attractiveness of the transmission vertical for consumers, investors and developers.