Power Deals Rigged Against the Public: Unveiling the Structural Overpricing Issue
The National Review Committee on Power and Energy Sector has uncovered a troubling pattern in the industry's pricing structure. The committee's findings reveal that power purchase agreements (PPAs) often include provisions that shift financial risks and costs onto the public sector while ensuring stable returns for private producers.
One of the key issues identified is the presence of capacity payments and take-or-pay clauses. These clauses, according to the committee, create fiscal liabilities even when electricity generation is not required. For instance, PPAs may guarantee capacity payments regardless of actual electricity production, and take-or-pay obligations may apply even when power is not needed.
The committee's report further highlights that these deals encompass various risks, including fuel costs, exchange-rate fluctuations, foreign-currency indexation, and sovereign guarantees. As a result, the public sector bears the burden of these risks while private producers enjoy stable returns.
In its final report, the committee stated, "These provisions, embedded in 20-25-year contracts, effectively transformed excess costs into long-term fiscal liabilities for the public sector." This revelation is particularly concerning, as it suggests a systemic issue rather than isolated incidents.
The committee's findings also shed light on Adani's power import contract, which had the highest tariff among comparable Indian contracts at the time. Interestingly, this contract's costs escalated faster than its peers, indicating that high costs were not an inherent part of cross-border trade but rather a consequence of specific contractual choices.
To address this issue, the committee proposed a comprehensive reform agenda. It recommended focusing on governance improvements rather than solely expanding capacity. The committee called for full transparency by publishing all PPAs, amendments, and payment data. They also advocated for the restoration of competitive procurement as the standard approach for new projects, ensuring effective and transparent processes.
Furthermore, the committee suggested rebalancing risk allocation in future contracts and canceling agreements with evidence of corruption. They recommended continuing corruption investigations to gather more evidence and pursuing renegotiation of the most fiscally damaging legacy PPAs in good faith.
Lastly, the committee proposed establishing an Independent Energy Oversight Commission, reporting directly to Parliament, to enhance oversight and accountability in the energy sector.
