Explainer: Why Kerala Electricity Board didn’t need to buy Rs 8,785 Crore worth energy from Adani

Entering into a 25-year-long agreement isn’t a strategic decision for Kerala, which is knee-deep in debt, as well as considering how market disruptions could make the deal seem a financial liability
Explainer: Why Kerala Electricity Board didn’t need to buy Rs 8,785 Crore worth energy from Adani

During the last leg of election campaigns in Kerala, the state LDF government is embroiled in yet another allegation of corruption and this time it is in the energy sector. Leader of Opposition Ramesh Chennithala alleged that the Kerala government had purchased 300MW long-term wind power — through Solar Energy Corporation of India (SECI), which is a nodal agency of the Ministry of Renewal Energy — from the Adani group for 25 years costing Rs 8,785 Crore.

According to the contract with the SECI, the units of power have been purchased at the cost of Rs 2.9 and Rs 2.82, but AICC general secretary Randeep Singh Surjewala said that had Kerala purchased the Renewable Energy Certificate (REC), which costs only Rs 1 per unit, then the state could have saved a lot. According to sources, experts in the Kerala State Electricity Board also had the same opinion.

On the other hand, KSEB chairman NS Pillai claimed that Kerala couldn’t obtain REC as the state faces a shortage of 200-300 Megawatt power. However, according to reports, the state had a 623 MW surplus of power between April-September (2018-2019), and from October to March (2018-19) it was 975 MW surplus units. In 2019-2020, the state had a surplus power of 1,925 MW and in the next year, the state sold above 1,000 MW of surplus energy, and for 2021-22, the state has already sold around 600 MW of surplus energy. “If Kerala is already a power surplus state, then why buy expensive energy and push an unnecessary financial burden on the exchequer,” asked Randeep

Now, on the other hand, there is a slight issue here. Our surplus doesn’t mean anything in regards to our power purchase obligation. We have to buy a certain percentage of electricity from solar and non-solar renewable sources at a particular percentage of our consumption. In 2019-20, it was 8% for non-solar and 4% for solar; in 2020-21 it was 9% and 5.25% respectively, and in this year, it is 10.25% and 6.75% for non-solar and solar power purchase obligation. KSEB acquired 300MW energy (200MW and 100MW inked in June 2019 and September 2019 respectively) through the Solar Energy Corporation of India the necessary quota for wind energy.

However, here is where things begin to unravel. Kerala is a power surplus state, and so it doesn’t require extra energy. To solve our Renewable Purchase Obligations, we could instead opt for REC. The latter means that we are paying a fine instead of buying the electricity, and while purchasing REC we do not receive energy in return for it. That is all right since we do not face a shortage. This is mainly because of two reasons.

When renewable power cost keeps lowering yearly, then Discoms [electric distribution companies] feel hard done that they are now stuck in these agreements. This is a big conundrum, a big issue and it’s creating tension in the segment. However, if you don’t have long-term commitments then you can get any investments
Secretary, Union Ministry of Power

The Long-Term Conundrum

Firstly, any power purchase agreement regarding renewable energy will be made out for 20-25 years, considering the infrastructural costs involved. This means that regardless of disruptions in the market, KSEB will continue to pay the same price, even if the market rates decrease. A long-term agreement is not a feasible option, especially mentioned in a report filed by the Standing Committee on Energy — working under the Ministry of Power. The report — submitted in March 2020 — noted that the price is set for the entire duration of the agreement right at the start.

“Now there is escalation, as there is a new technology that comes into the market causing a disruption. When renewable power cost keeps lowering yearly, then Discoms [electric distribution companies] feel hard done that they are now stuck in these agreements. This is a big conundrum, a big issue and it’s creating tension in the segment. However, if you don’t have long-term commitments then you can get any investments,” the Secretary with the Ministry of Power said following the report.

The main issue here is the long duration of the deal, meaning that the buyer cannot go back on the deal even if they could obtain it at lesser costs. It means that the state is stuck at the same price for an extremely long duration despite market variations. To give a perspective, the first wind farm in India was set up in 1986 as part of experimental purposes using 55kW Vesta turbines. After almost 30 years, we produced 28,604 million Kwh by 2015-16. We are in the top five countries with installed wind power capacity, and this is despite the heavily dynamic nature of wind flow in the country.

On the other hand, KSEB could have preferred to get REC instead as it would have cost only Rs 1 per unit, and wait it out until a policy change — at least for a year. This would have given us enough time to strategically find another solution

The Financial Burden

Secondly, entering into a long-term plan is not exactly a smart move for the state exchequer. We are knee-deep in public debt and according to the Comptroller Auditor General report in 2018-19, the state’s total burden of debt and interest stands at Rs 2.41 Lakh Crore. Considering this, Rs 8,785 Crore is not looking too well at this moment. However, officials claim that there was nothing else to do. On the other hand, KSEB could have preferred to get REC instead as it would have cost only Rs 1 per unit, and wait it out until a policy change — at least for a year. This would have given us enough time to strategically find another solution considering our debilitating financial situation as of now.

It works the same way as well. Instead of buying power at a fixed cost for a quarter of a century, we pay the fine at considerably lower rates than those prescribed in the agreement with SECI. This is also important considering how there are chances that we might not even use the energy we buy since we are already in a surplus state. The long-term PPAs are already a matter of grave concern as per the standing committee report, and the central government is considering relaxing the same. Moreover, many major players have moved away from long-term PPA and got into short term or even medium-term agreements. It means that India could not be far behind.

There is no question regarding the legality of the deal, as it was made through the official channels as well as through e-tenders. The question is whether it was necessary considering the facts.

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