TNERC Amends RPO Regulations And Key Changes To Pooled Cost Of Power Purchase

Posted On - 4 September, 2024 • By - King Stubb & Kasiva

Introduction

The Tamil Nadu Electricity Regulatory Commission (TNERC) has recently introduced a series of amendments to the Renewable Energy Purchase Obligation (RPO) Regulations, 2023.[1] These amendments, outlined in Notification No. TNERC/RPO/1-1/2023, dated 12th August 2024, address key concerns related to the financial dynamics of power purchase in Tamil Nadu, particularly concerning the Pooled Cost of Power Purchase (APPC). The changes are designed to reflect the current realities of energy costs, especially in light of the increasing expenses associated with conventional fuels. The amendments also seek to align the state’s regulatory framework with judicial precedents and ensure that renewable energy promotion does not compromise the financial stability of distribution licensees.

Explanation

Key Amendments to the Definition of Pooled Cost of Power Purchase

The definition of “Pooled Cost of Power Purchase” has been significantly revised under the recent amendments. Previously, the APPC included all long-term energy purchases made by distribution licensees, including those from renewable energy sources. However, the new definition narrows the scope by excluding electricity sourced from liquid fuels, traders, short-term purchases, and renewable energy sources from the calculation.

Why This Change Matters:

  • Increased Accuracy: By excluding these specific categories, the revised APPC now more accurately reflects the true cost of conventional power purchases. This allows for a more precise and fair assessment of the costs incurred by distribution companies like TANGEDCO (Tamil Nadu Generation and Distribution Corporation).
  • Impact on Renewable Energy: The exclusion of renewable energy from the APPC calculation underscores the Commission’s intent to treat conventional and renewable energy sources separately, recognizing the unique pricing structures and subsidies associated with renewable energy.

Introduction of a Cap on APPC Payments

A crucial addition to the regulations is the introduction of a cap on payments related to the APPC. According to the amendment, if the APPC exceeds the preferential tariff rate set by the TNERC for any specific category or sub-category of renewable energy generators in a given year, the distribution licensee will only be required to pay 75% of the preferential tariff rate to the generators.

Rationale Behind the Cap:

  • Preventing Financial Strain: This cap is primarily designed to protect distribution companies from financial difficulties arising from sharp increases in conventional energy costs. As conventional fuel prices escalate, the APPC can surpass the preferential tariffs fixed for renewable energy, which could otherwise lead to unsustainable financial obligations for distribution licensees.
  • Ensuring Fair Compensation: While the cap limits the payments to renewable energy generators, it also ensures that they continue to receive a fair rate for their contributions to the grid, albeit at a reduced rate. This balance is crucial to maintain the momentum of renewable energy adoption without compromising the financial health of the power distribution sector.

Judicial and Regulatory Background

The amendments are not only a regulatory update but also a reflection of key judicial rulings that have shaped the energy landscape in Tamil Nadu.

  • Madras High Court Ruling: The Hon’ble High Court of Madras, in its judgment in W.P.No. 22097 of 2013, upheld the necessity of implementing a cap on the APPC when it surpasses the preferential tariff. The court recognized that without such a cap, renewable energy generators could potentially exploit high conventional power costs, leading to excessive profits at the expense of the broader energy market.
  • APTEL’s Directive: Further reinforcing this view, the Appellate Tribunal for Electricity (APTEL) in its order dated 31st May 2019 (Appeal No. 232 of 2017) directed that the cap of 75% should be applied in years where the APPC exceeds the preferential tariff. APTEL’s directive was later challenged by TANGEDCO in the Supreme Court, but the absence of a stay order meant that the directive remained enforceable.

TNERC’s Compliance and Implementation:

  • The TNERC has adhered to these judicial directives by incorporating them into its regulatory framework. The amendments now formally recognize the need for a cap on APPC payments, ensuring that the principles laid down by the courts are fully integrated into the state’s energy regulations.
  • The Commission has also acknowledged the dynamic nature of the APPC, which can fluctuate annually. As such, the regulation requires the TNERC to reassess the APPC and preferential tariff rates each year, applying the 75% cap only when necessary.

Practical Implications

The practical implications of these amendments are far-reaching for both the distribution companies and renewable energy generators in Tamil Nadu.

For Distribution Companies:

  • Financial Stability: The introduction of the cap on APPC payments ensures that distribution licensees are protected from the financial volatility associated with rising conventional fuel costs. This stability is crucial for the continued reliable delivery of electricity across the state.
  • Regulatory Compliance: Distribution companies are now required to closely monitor the APPC and preferential tariff rates to ensure compliance with the new regulations. This will involve more detailed financial planning and reporting to the TNERC.

For Renewable Energy Generators:

  • Guaranteed but Capped Earnings: Renewable energy generators are assured of continued payments from distribution companies, albeit at a reduced rate in certain years. This might affect the financial models and projections of some renewable energy projects, especially those heavily reliant on higher preferential tariffs.
  • Market Dynamics: The amendment may influence the investment climate for renewable energy in Tamil Nadu, as potential investors will need to consider the implications of the APPC cap on their expected returns.

Conclusion

The TNERC’s amendments to the Renewable Energy Purchase Obligation Regulations of 2023 are a strategic move to balance the promotion of renewable energy with the financial sustainability of the state’s power distribution companies. By redefining the Pooled Cost of Power Purchase and introducing a cap on payments when the APPC exceeds preferential tariffs, the TNERC is addressing the economic realities of a dynamic energy market. These changes, rooted in judicial precedent, ensure that the regulatory framework in Tamil Nadu remains robust, fair, and conducive to both renewable energy growth and financial stability in the energy sector. As the state continues to navigate the complexities of energy regulation, these amendments provide a clear pathway for maintaining a sustainable and equitable energy market.


[1] http://www.tnerc.gov.in/Regulation/files/Reg-120820240331Eng.pdf