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Forum Name : Are price caps on short-term power justified?      Bulletin Board Home

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Are price caps on short-term power justified? 18 September 42785 (09:21 PM)
Many state electricity regulatory agencies have proposed price ceilings on the short-term procurement of power, beyond which the relevant discoms will not be allowed to true-up their tariffs against power purchase expenditures. A case in point is the Karnataka Electricity Regulatory Commission (KERC), which has proposed a price cap in the range of Rs 6/kWh on such transactions.Proponents of such regulatory intervention argue that India is a poor country and all efforts should be made to ensure that access to electricity for the masses should be at the cheapest rates possible. Recognizing that in a nation with such immense power deficits, sellers would have immense market power, such entities argue that buyers, i.e. discoms will have no bargaining chip whatsoever, to the detriment of end-consumers. Thus, a price cap would ensure that power generators are unable to extract obscene rents from discoms, ensuring reasonably priced power to the populace.On the other hand, we have the power ministry's recent push for merchant power plants, which are set up with no long term assurances for the sale of power through power purchase agreements. These plants, in order to be viable, would require prices for power commensurate with the increased revenue risk to their developers, without which they would be unable to obtain financial closure. Thus, a major avenue for capacity addition would be lost to the government. As an alternative to an outright price cap, a differential price cap, based on cost plus principle, with appropriate assumption for Return on Equity, plant capacity utilization and fuel cost may be considered. Such a price cap would be applicable only for portfolio sellers and coal, lignite and hydropower-based plants, and not to any liquid fuel or gas based generation, which uses more expensive fuel and is subject to input price volatlity. --This cap may be applied only to the OTC market, as it is not possible to implement a differential price cap with the price discovery mechanism existing in power exchanges.
Manisha Tripathy, Delhi
23 June 42787 (10:47 PM)
The price caps are justified in the present situation when the country is facing it increasignly difficult to meet the growing demand of power. The Regulators have no choice but to resort to price caps to stop the sellers to take undue advantage of demand of electricity in the market. While doing that, the Regulators also ensure that the power sellers get a reasonable profit margin. Moreover,such caps are imposed only for a short period of time and revised from tine to time. So, whats the point opposing such move?
Namrata, Mumbai
27 June 42787 (08:37 PM)
I am of the view that in a country like India, where electricty is still a privilege for many, such a price cap is neccessary. This will ensure that the discoms do not monopolise the whole business and provide power at cheaper rates so that every citizen can avail the benefits of power. But here again, its the regulators' duty to ensure a balance between price paid by the end users and the price received by discoms. Measures like differential price cap based on cost plus principle as mentioned in the article may be a way out.
Mukul Vaidy, Chennai
28 August 42792 (03:05 PM)
Regulatory agencies are right to propose price ceilings on short-term procurement of power to inhibit traders from making abnormal profits, despite the fact that it might affect fresh investments. This can be a way out until they come up with a better alternative to it. Furthermore, the commission is analyzing various ways of price limit like differential and uniform price caps.
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