Cement Energy and Environment

A merchant power plant is funded by investors and sells electricity in the competitive wholesale power market. Since a merchant plant is not required to serve any specific retail consumers, the latter are not obligated to pay for the construction, operations or maintenance of the plant. A traditional rate-based power plant, on the other hand, is built and operated by a regulated electric utility specifically to serve that utility's retail customers . In return, the customers are obligated to pay for the plant's construction, operation and maintenance. The merchant power plants are not tied up with long-term power purchase agreements (PPA). Independent power pruducers (IPPs) who opt for this route will have to do so at their own risk. Setting up a merchant plant would necessarily mean balance sheet financing by the developer, as financial institutions/lenders may as a rule, not be comfortable with projects that don't have long– term PPAs. Though this would appear to be a gamble, experts say the risk could be fully taken care of as IPPs develop projects that deliver power at competitive rates. Given considerable demand– supply mismatch, sale of competitively-priced power could pose a problem. Consider that in between April and May 2006, against a demand of 95,583 MW, only 83,094 MW power was available - a peak shortage of 13.1%. This situation is likely to persist. Projections by the Central Electricity Authority show even if the Xth Plan capacity addition target of 32, 084 MW was met; the all– India peak shortage would have been at an average of 16.3% or 18,913 MW. The Ministry of Power intended to add 10,000 MW capacity addition MPPs in the 11 1 h Plan. In its guidelines for the allocation of coal blocks and coal linkages for the power sector, the ministry said , "Merchant power plants fill different niches in the market; some provide steady supplies to a power grid, while others fire up only when demand is highest and meet peak loads. Merchant power plants operating competitively help assure that power is produced with efficier.cy and supplied to locations where it is needed the most". The Government has set the plant size between 500 MW and 1,000 MW. This is not merely because the national tariff policy mandates all new private sector projects to come through the competitive bidding process. There are transmission constraints as well. The transmission system will not be able to support evacuation of power from large-sized merchant plants. To ensure that large volumes of power can be evacuated, dedicated transmission systems would be required. This would mean that customers for power produced by these plants have been tied up. Such projects would require transmission systems that are planned and executed in tandem with the generating plant. So that when the plant begins producing power, the transmission lines are in place to evacuate power from the plant to the consumer. Merchant plants, by definition, do not have pre-qualified customers. This would mean that these plants would have to depend on redundancies in the existing transmission system to evacuate power. The Ministry is working on a viable method where the merchant plant of capacity 500 MW to 1000 MW can be accommodated in the national grid, which would have redundancies . The Ministry believes that a limited number of merchant plants will enable the development of an electricity market. "A few merchant plants of 500 MW to 1000 MW could be easily handled through the transmission system and it is an option for creating a market as it would promote power trading on short-term, medium term and spot– market basis." Key Issues En Route But are we ready for the MPPs? Some of the key issues to be addressed in this regard are: There are acute shortages in the country and we ration out use of electricity. The demand– supply gap is large. The prices are fully regulated and there is no correlation between the cost of generation and the end-price -aid by the consumer. There is a significant level of subsidy to all the consumer groups - in the form of lower-than-cost tariff or lower-than-cost recovery of infrastructure that go with the generation, transmission and distribution of electricity. Theft, pilferage, losses and inefficiencies arising out of transmission and distribution are high. This has resulted in higher-than-normal wheeling charges for transmitting electricity. There is no common charge across the country for 28 f