[yt_dropcap type=”square” font=”” size=”14″ color=”#000″ background=”#fff” ] A [/yt_dropcap]dani power limited has set up a power plant at Mundra with a total capacity of 4620MW. It has a power purchase agreement (PPA) with GUVNL (Gujarat Urja Vikas Nigam Limited) and two other Haryana utilities ( UHBVNL and DHBVNL) to provide power at levelised tariff of INR 2.3495 per unit ( INR 1 per unit capacity charge and INR 1.3495 non-escalable energy charges). Similarly Tata power has bagged Mundra UMPP (4000MW) based on imported coal from Indonesia at a very competitive tariff of INR 2.26 per unit. Mundra UMPP has to supply power to 5 states.
In the year 2010, Indonesia promulgated “Regulation of Ministry of Energy and Mineral resources No 17 of 2010” which link the coal prices in Indonesia to international benchmark prices for any sale ( domestic or export). Due to the change in law, the coal prices have invariably increased for Tata Power and Adani power for their power projects in Mundra and adversely affect their revenues. The companies have reported huge under recovery for these projects and knocked the door of Central Electricity Regulatory Commission (CERC) for a price revision under compensatory tariff. They have sought this revision under “force majeure” conditions. CERC after several rounds of discussions and hearing; saw merit in their appeal and approved compensatory tariff under a formula. This ruling was upheld in Appellate Electricity Tribunal (AET) also. The aggravated parties (Distribution companies and several other CSOs and NGOs) took the matter to SC.
In a historical judgment in April 2017, SC (Supreme Court) set aside the order of CERC /AET to allow Adani power and Tata Power to charge compensatory tariff against the increased imported coal cost from Indonesia. While this is a great relief for the consumers and state distribution companies who are parties to the agreement, it raises several other concerns starting from the financial ramifications for the affected generators to business viability of the sector as a whole. Although Adani Power and Tata Power, the parties that were affected badly by the SC would find ways and means to lower down the risk or work out to avoid the adverse consequences, questions are raised against SC intervention on an issue that can be dealt with by the sector regulator under its jurisdiction.
The SC verdict on denying compensatory tariff raises several other concerns which require immediate attention such as its long term consequence on contractual arrangements between parties and flexibility in distribution of risks over a long term period, project promoters’ acceptance of force majeure conditions and its definitions under certain conditions, impact on competitive bidding for other renewable energy project particularly on solar, and its overall impact on competition and market development for the energy sector in India. Any interventions from the Supreme Court on the quasi-judicial bodies like CERC may undermine its authority on the sector.
The Supreme Court Judgment and its repercussions on the stakeholders
The SC took a stand on the “Force Majeure” clause in the contract and declared it null and void for any changes in law and regulation outside the host country of the contract; in this case Indonesia. While bidding companies were well aware that they were bidding under a fixed price contract for a long term and would have to absorb any risks arising in the future, they should not have been come forward for a re-negotiation for a price adjustment for the increase fuel cost whatever the reasons. But in India, it is often a common practice that the project promoters first bid unreasonably to win the contract at first stage and then come back to renegotiate at the later stage citing taking advantage of weak regulations and badly designed contracts.
The recent SC judgment affects every stakeholder in the power sector value chain. For Adani Power and Tata power, it is hard to believe that they did not have any alternative plans for these kinds of eventualities. While the last option is to forego their equity and sell the assets to the investors for further restructuring, they may also go for other coal sourcing options to run the plants.
For distribution companies having PPA with Adani power and Tata power, this comes as a big relief. While they have saved themselves from any additional burden in terms of fuel price pass through, this might trigger another set of troubles for the power sector. Distribution utilities may refrain from signing fresh PPAs and may stick to price discovered without any flexibility in the contracts. This will make project promoters to be very cautious while bidding aggressively for the projects.
While any adverse judgement against the project promoters dents their revenue and overall profitability prospective, there is a fear of power assets going bad. In this situation, servicing debt would be under severe pressure and it directly impacts the funding agencies. Generally 70 to 80% of the project cost is debt financed and any default will result in huge NPA for the banks. As a consequence, they will refrain from any further loans to the sector as is clearly evident for many projects in the power sector now. While the flow of fresh investments dry down owing to bad assets, the whole sector may become unviable.
As far as CERC is concerned, they need to have a balanced approach. A balanced approach would require understanding of the complete scenario and the intention of taking such steps as deemed necessary to run the sector. They have seen merits in this case and due to perceived threat of generators defaulting on PPA contract and overall repercussions to the entire sector. The question still remains whether CERC has taken this stand due to fear perceptions for the generator getting out of the contract as a defaulter or simply favour the generators because of any hidden interest
Consumers are the least consulted but most affected party. They have little voices in any regulatory hearings due to lack of knowledge and interest. They completely depend on the government to represent their case through the utilities. However, organizations like Prayas and CUTS are representing the consumer voices and put forth the consumer’s perspective in several forums. In general, public perception is positive for reverse auction bidding procedure where discovered tariff is on a downward trend owing to intense competition. If such renegotiations occur mid-way or any regulator interventions favoring the project developers, it dents their confidence. The tax payers in such cases make the government responsible which might affect the political economy of the ruling parties in terms of disgruntled consumers not opting to vote them in elections
No doubt, SC ruling in this case affects the economy at large and have long term repercussions for the entire sector. Questions are raised in its intervention on the quasi-judicial bodies like regulators and AET. But SC is the last resort for any justice and its views and opinions are important. The economic consideration arising out of shutting down the power units citing financial concerns and the resultant job losses should have been taken into consideration while pronouncing judgements and a balanced approach could have been worked out for this case by the SC. When assets get stressed, power companies stand to lose credit rating and combined with less equity and higher interest, cost of capital, the chance of defaulting increases.
SC does not always consider the entirety of the case or the business and it restricts itself to the contract provisions under which it has to pass judgements. So in this case while passing judgments, it clearly defines that “force majeure” cannot be evoked for any changes in law in any foreign countries ( in this case Indonesia) and the contract clearly defines that any risk arising in future will have to be borne by the developer. So, even if the case merits for a compensatory tariff on other various grounds, the contracts do not have such a provision and going by the book, it should be disallowed.
The Way Forward
The argument is not that who is right and who is wrong. In this case, there is a clear indication on risk assessment by the bidder and risk distribution which is not set through the bidding contract. Can it be reallocated through regulatory or judiciary interventions? Consequently, the consumer interest cannot be overlooked. SC in its judgement has not commented on the power of regulator under section 79 to fill in the gaps if any; in the bidding process but it has only highlighted that any foreign change in laws and regulations cannot be accepted as force majeure for Indian contracts.
The SC in its judgment clearly highlighted the followings which lays down clear indications for any bids in future in terms of creating informed bidding procedures with specific guidelines for procurement of input materials. The bidders need to be well aware of pricing risks in competitive bidding for long term contracts with imported components if any and SC is in for creating better risk allocation and built in mitigation measures in long term contractual projects.
This is a clear case of responsibilities and priorities set. While government should be allowed to decide on how to allocate resources and projects and what is best for country, regulatory and other institutes should perform their duty strictly on guidelines and procedures set. While government should decide on how to utilize an idle asset and recovery of dues so that NPAs could decline, the institutions should rather function independently to take decisions under its judicial provisions and mandate.
Energy is at the heart of the sustainable development agenda to 2030
Three years ago, all countries of the world adopted 17 ambitious policy goals to end poverty, protect the planet, promote gender equality, or ensure prosperity, as part of the United Nations Sustainable Development Agenda, and vowed to achieve specific targets by 2030.
Energy is at the heart of many of these Sustainable Development Goals – from expanding access to electricity, to improving clean cooking fuels, from reducing wasteful energy subsidies to curbing deadly air pollution that each year prematurely kills millions around the world. One of these goals – commonly known as SDG 7 – aims to ensure access to affordable, reliable, sustainable and modern energy for all by the end of the next decade.
All these topics are fundamental to the work of the International Energy Agency. As the world’s leading energy authority, the IEA has unmatched analytical capabilities based on its unique data collection, technological network, research, and policy recommendations, which we put in the service of understanding the energy system. As I have often said – in the world of energy, data always wins.
The adoption of energy specific sustainable development goals was a milestone in moving the world towards a more sustainable and equitable system. The IEA continues to support this critical goal with unbiased data and projections. This has long been a personal and professional priority for me. Fifteen years ago, we recognized this basic fact when we first compiled data for electricity access and mapped out a scenario for delivering universal electricity access by 2030 in the World Energy Outlook, the IEA’s benchmark publication.
As a result, the IEA has been tracking country-by-country progress on energy access (SDG 7.1) on an annual basis since 2002. As the world’s most authoritative source of energy statistics, the IEA is also the lead custodian agency for reporting progress towards substantially increasing the share of renewables in the global energy mix (SDG 7.2) and doubling the global rate of improvement in energy efficiency (SDG 7.3).
The United Nations will have the first in-depth review of SDG 7 goals at the High-level Political Forum on Sustainable Development organized in New York, in July this year. This will be a good time to assess where we stand with our global energy goals, where existing national policies are taking us, and how to steer the global energy system towards a more sustainable path. To assist this critical process, the IEA has decided to create a new online resource to centralize all of our data and scenario projections in support of the 2030 Agenda.
It is clear that the energy sector must be at the heart of efforts to lead the world on a more sustainable pathway. But our data and analysis show that the current and planned policies fall well short of achieving our critical energy-related sustainable development objectives.
There has been tremendous progress in delivering universal electricity access (SDG 7.1.1) in Asia and parts of sub-Saharan Africa, with the number of people without access declining to 1.1 billion in 2016, from 1.7 billion in 2000. But on the basis of current progress, more than 670 million people are still projected to be without electricity access in 2030. Much work remains to be done in this field.
The picture is even dimmer when it comes to access to clean and modern cooking facilities (SDG 7.1.2). About 2.8 billion people rely on polluting biomass, coal and kerosene to cook their daily meals, a number which has not changed since 2000. Without greater ambition, 2.3 billion will still remain without clean cooking access in 2030, with grave health, environmental and social consequences.
The share of modern renewables in global final energy consumption (SDG 7.2) has been growing steadily in the past decades, reaching nearly 10% in 2015. However, to achieve a truly sustainable energy system, this share needs to more than double to 21% by 2030. But while wind and solar deployment has accelerated, thanks to falling costs and policy support in many parts of the world, this goal is still out of reach under current policies.
Finally, 2015 was an impressive year for energy efficiency (SDG 7.3), with global energy intensity falling by 2.8%, the fastest annual improvement since 1990. However, the average improvement between 2000 and 2015 of 2.2% still falls short of the 2.6% target needed to achieve the SDG target, and the 3.4% annual improvement needed to meet more ambitious long-term climate objectives.
Tracking progress towards these goals is only one aspect of our sustainable development work. Through our new Sustainable Development Scenario, introduced in 2017, we also seek to map an integrated path for achieving critical global goals in the next three decades: delivering universal energy access by 2030, an early peak in carbon emissions (SDG 13), and reducing deadly air pollution (SDG 3). One of the main finding of this new scenario is that these three goals are not incompatible. Indeed, our analysis shows they can successfully be met together.
But there is an urgent need for action on all fronts, especially on renewables and energy efficiency, which are key for delivering on all three goals – energy access, climate mitigation and lower air pollution. The IEA is committed to keep leading this agenda, and stepping up efforts to support the clean energy transition. We will do so with our unparalleled data, unbiased analysis, and our determined policy support to help move the world towards delivering the 2030 Agenda.
Reducing Greenhouse Gas Emissions through Energy Efficiency – and Learning from One’s Peers
China, India, Indonesia, the Philippines, Pakistan, and Vietnam are critical for global climate action. Why? Among other reasons, because three-fourths of all new coal-fired power plants to begin operations before 2020 globally will be in these six Asian countries. Fostering more energy efficiency will be imperative in the countries’ efforts to adopt a low carbon energy path.
One initiative that supports efforts to scale up energy efficiency and clean energy – and lower greenhouse gas emissions – in these six countries is the Energy Transition in Asia program managed by the Energy and Extractives Global Practice.
Comprising of knowledge exchange and capacity building on key issues, the program recently held a workshop in Singapore to share lessons learned on energy efficiency, following last year’s learning forum on solar auctions, also held in the city-state. Participants agree that peer-to-peer learning works. After sharing best practice efforts in China, India, Japan, Korea, Mexico, the United Kingdom, and host country Singapore, team spirit and friendships strengthened, along with confidence, productivity and learning outcomes.
By the end of the three-day workshop, participants from governments not only requested follow-up assistance but also to learn more from their newfound friends about conserving more energy. “We were able to advance country engagement with the clients on energy efficiency,” explained Xiaodong Wang, team leader for the Energy Transition in Asia initiative. “Conducive policies that combine mandatory regulations with financial incentives are essential drivers to create market demand for catalyzing investments in energy efficiency.”
Results are already encouraging. China is a leading example. From 1990 to 2010, more than half of global energy savings took place in China, thanks to the government’s ambitious targets, stringent regulatory policies, generous financial incentives, and effective institutions – all of which reiterate strong commitment to energy efficiency. Reducing energy intensity was made a mandatory target, allocated to each province and 17,000 energy intensive enterprises. Efficiency standards for appliances, buildings, and vehicles were upgraded and complemented with billions of dollars of financial incentives in output-based subsidies, rebates for energy efficient consumer products, and compensation for the phase-out of inefficient stocks. All these efforts were monitored across the country.
India also led by example. Energy savings targets – at least for energy intensive industries – were made mandatory with the Perform, Achieve, and Trade scheme (PAT), which also allows the trade of Energy Savings Certificates to achieve targets in a least-cost way. Non-compliance at the end of the three-year cycle incurs a financial penalty. The results of the first phase surpassed targets. The second phase began in April 2017.
Workshop participants from India reminded, however, that these are early years. Following a visit to the district cooling system under Marina Bay Sands – the world’s largest underground facility and its most efficient – S.P. Garnaik, Chief General Manager of India’s Energy Efficiency Services Ltd. (EESL), a joint venture under the Ministry of Power, envisioned replicating such a system in India. But while a policy framework is being prepared to support the use of district cooling systems in rapidly urbanizing India, Garnaik admits that substantial results may take time, as “these are very new concepts.”
In addition to the mandatory output-based target approach in China and India, participants also noted Singapore’s green mark program, which combines mandatory building codes with financial incentives from the government for auditing and investment costs, as a model to emulate.
Indeed, the knowledge gap between participating countries is large. Yet even countries in the ‘nascent’ phase are eager to make progress.
Energy intensity in Asia is highest in Vietnam, with energy consumption by industry accounting for almost half of the country’s total energy use. Current efforts towards energy efficiency are encouraging. Labeling schemes have been established and energy management systems now require energy managers and auditors in large energy users. Indonesia is implementing a similar system.
Learning from one’s peers can be galvanizing. As Trinh Quoc Vu of Vietnam’s Energy Efficiency and Sustainable Development Department at the Ministry of Industry and Trade explains, Vietnam is eager to learn from China’s and India’s shift to a mandatory target approach. Indonesia’s delegates were inspired by their peers’ experience in expanding pilot programs. The Bank is providing advisory services to both Indonesia and Vietnam in their efforts to scale up energy efficiency.
The workshop also highlighted the critical role of strong government support in developing the ESCO business. ESCOS are energy service companies which design and implement energy savings projects. Energized by his peers, Trinh is now intent on exploring mechanisms for promoting and incentivizing the ESCO business in Vietnam.
The World Bank Group supports many energy efficiency financing mechanisms worldwide, including through credit lines, risk sharing facilities, dedicated funds, program-for-results (PforR), and development policy loans. Critical to success is a strong pipeline for deal flows, as well as technical assistance.
In India, the Partial Risk Sharing Facility for Energy Efficiency initiative, financed by the Clean Technology Fund (CTF) and Global Environment Facility (GEF) resources, is supporting private sector ESCO-implemented energy efficiency projects through partial credit guarantees. The proposed new US$300 million India Energy Efficiency Scale Up Operation with EESL is expected to leverage over $1.5 billion of demand side energy efficiency investments across residential and public sectors. Similarly, the China Energy Efficiency Financing Project has leveraged the original World Bank financing eight times over, with a total investment of US$2.6 billion. The project has led to an annual reduction of 11 million tons of CO2 emissions.
Such figures may seem ambitious, but workshop participants were unfazed. Many are confident they will accomplish similar achievements. When learning from one’s peers, who all face challenges in their respective development journey, anything can seem possible.
The Sustainable Energy Forum for East Africa 2018
The Sustainable Energy Forum for East Africa, a key event for promoting access to renewable energy sources in the region, will take place between 19 and 21 March 2018 in Kigali, Rwanda.
Leaders from governments, businesses, civil society and international organizations are expected to attend the Forum and exchange ideas on how to improve access to clean energy sources in East Africa. The event comes at a crucial moment when the international community is focused on improving progress on Sustainable Development Goal 7 and the goals set by the Paris Climate Agreement.
Off-grid renewables, clean cooking fuels, and energy financing and policies are among the many issues that will be discussed in the plenaries. The Forum will also feature sessions on sustainable cities, East Africa’s geothermal projects and future potential, and gender mainstreaming in energy access.
Speakers attending the Forum include: Rachel Kyte, CEO of Sustainable Energy for All; Ambassador Libérat Mfumukeko, Secretary General, East African Community (EAC); Tareq Emtairah, Director of Energy, United Nations Industrial Development Organization (UNIDO); Robert Zeiner, Director International Cooperation, Austrian Development Agency; Upendra Tripathi, Director General, International Solar Alliance (ISA); and Sakari Oksanen, Deputy Director General, International Renewable Energy Agency (IRENA); Monojeet Pal, Manager, African Development Bank (AfDB).
This year’s Forum will take place in Kigali, Rwanda. The city is a very special location since it hosted one of the most successful international treaties in human history, the Kigali Amendment to the Montreal Protocol.
The Sustainable Energy Forum for East Africa 2018 is organized by the East African Centre for Renewable Energy and Energy Efficiency (EACREEE) in collaboration with the United Nations Industrial Development Organization (UNIDO), the EAC Secretariat, the Austrian Development Agency (ADA), Sustainable Energy For All (SEforALL), and the Ministry of Infrastructure of the Republic of Rwanda (MININFRA), and is hosted by the government of Rwanda.
The organizers welcome participants from the public and private sectors, including sub-national entities, development finance institutions, domestic and international enterprises, international organizations, industry associations, and experts from academia.
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