Explained: How A Pilot Project Could Power India’s Ailing DISCOMs

Power distribution companies (DISCOMs) in India are facing an uphill task to reduce their financial burden despite several distribution reform measures.

While cumulative DISCOM losses reduced from Rs 51,480 crore in financial year 2016 (FY16) to Rs 15,049 crore until FY18 due to UDAY scheme implementation, it suddenly increased to a whopping Rs 28,369 crore in FY19.

The 89 per cent rise over the last year can be attributed to delays and inadequacies in tariff hikes and state government’s failure to pay in time.

Some of the losses can also be attributed to the government’s aggressive plan for electrification of households under the flagship “SAUBHAGYA” scheme.

In this scenario, a recent article about distribution companies getting cheap power from National Thermal Power Corporation (NTPC) through security constrained economic dispatch (SCED) was quite heartening as it would definitely help them alleviate some of the stress.

As per the article, there are currently 49 thermal power plants under SCED pilot project with a total installed capacity of 56 GW. This optimisation scheme has a cost saving potential of around Rs 3,000 crore per year if all coal stations of the IPPs (independent power producers) and state generation companies are brought under its ambit.

It is estimated that DISCOMs would save as much as Rs 2.5 crore per day under this mechanism. Power System Operation Corporation (POSOCO); the national load dispatch centre introduced SCED as a pilot programme on 1 April 2019 which would run for six months after a Central Electricity Regulatory Commission (CERC) order.

The Genesis Of The Pilot Project

According to the Central Electricity Authority (CEA), total installed capacity as on 31 May 2019 for India stood at 357,875 MW, out of which thermal constitutes around 63.2 per cent.

The overall plant load factor (PLF) of coal and lignite-based power plants hovers around 62.83 per cent out of which central sector PLF stands at 69 per cent and private sector PLF just below 60 per cent.

Generally, in India, power generators are tied with DISCOMs under long-term power purchase agreements or PPAs (except for captive power plants and merchant power plants) for around 85 per cent of their capacity.

The balance power is free for trading under short-term or medium-term contracts. The long-term arrangement helps generators and DISCOMs balance their demand and supply portfolio and plan accordingly.

Central generators like ISGS (inter-state generating stations) are bound under contract to provide power to state utilities under central allocations (quotas) or entitlements to states.

From a transmission point of view, with synchronisation and formation of one central grid, all beneficiaries (states) are getting their quota of power from around 150 ISGS according to an agreed time schedule.

This creates a complex system where one state gets power from multiple ISGSs and one ISGS supplies power to multiple state utilities.

Although it is a multi-layered, complex system, the robust central transmission system is in place with latest technology and running smoothly through various load dispatch centres without any major hindrances.

However, there exists a possibility of optimisation and merit order dispatch from the ISGSs to the states, to fully utilise the power station availability and in the process, cost saving for the entire system (both for the generator and DISCOMs).

This is the area where POSOCO would like to experiment with the SCED pilot system.

What Is SCED And How Does It Work?

With RRAS (reserve regulation ancillary services) coming into effect in 2016, merit order stacking of ISGS are already taking place and DISCOMs are also getting the requisite power through the merit order dispatch — cheap power from the generator under the portfolio would be scheduled first and then followed with a sequence from lower- to higher-cost generation.

At the interstate level, DISCOMs could not take the advantage of surplus power being available with any ISGS but not scheduled, as there is no contract between them. In this case, generators generally back down from producing the surplus power.

Also, with renewable energy supply coming under the must-run status after Ministry of Power (MoP) directive, DISCOMs are left with scheduling after meeting their obligations under renewable energy purchase.

So, the scope for exploring cheap power coming into the system without affecting the grid operation becomes more relevant in this scenario.

Additionally, MoP directive on flexibility scheme of generating stations allows a generating company to supply power from any of its generating stations according to the grid schedule.

It means a generating station would choose to first exhaust its least cost power to be scheduled so as to utilise the capacity to the maximum before it goes for other stations to meet the requirements.

The SCED scheme is actually taking the flexibility scheme a step forward by pulling in the generations from the ISGSs to utilise their capacity and at the same time offering the additional power to the needy DISCOMs without hampering the technical constraints of the power plants and the grid system.

This is how the system would operate:

One, it advocates a gate closure system (gate closure is the time before the start of a settlement period when physical notifications are finalised under the Grid Code) for transmission corridor booking to the participants to avoid continuous revision of the schedules.

Two, once gate closure is done for a particular time block, pre-determined delivery period is set.

Three, the optimisation model allows the cheapest available generator to dispatch its full declared capacity followed by the next available generator until the entire requisition is met.

Four, any deviation (positive or negative) with the schedule is recorded and settled with variable charges as declared by the generators for their ancillary services. This variable price is taken as the benchmark for settlement procedures.

Five, any payments that arise due to settlement process would go to a proposed ‘national pool account’ and any pay in and pay out to the generators or DISCOMs would be transacted through the pool account only. This system obviously negates any payment related disputes that might have occurred due to direct transfer.

The process itself is self-regulated in terms of honouring the technical minimum and declared capacity constraint besides any ramp-ups and network congestion issues, thus justifying its name — security constrained economic dispatch.

This would be much needed reform for day ahead market (DAM) based transaction, which would ensure reduction of marginal system cost, reduced overall cost of procurement for the buyer, better flexibility to the grid.

This is envisaged to supplement energy market reforms while the market inches ahead to real time energy market in India.

Issues And Concerns

One, while the scope of SCED is wider and covers all generating stations whose tariff is determined or adopted by CERC, the IPPs are left out.

Even if under competitive bidding under Section 63 of Electricity Act 2003, where tariff discovered is much lower than many of the thermal generating stations under ISGS, the nature of PPAs do not allow sale of surplus power beyond the requisitioned supply.

This has created some sort of discomfort with private players who are demanding a level-playing field with state and central generating stations.

Two, there are some concerns that the optimisation process, which are actually targeted at DAM may create hindrances in developing a real-time market for power systems based on competition.

There is an apprehension that central generating stations like NTPC which would gain the most from this arrangement will be averse to the idea of a competitive market-based on real time settlements and price discovery.

Three, there are concerns from the stakeholders on the issue of network congestion and transmission corridor availability for bilateral transactions.

SCED scheduling may hamper the transmission corridor availability in ISTS networks if given first preference over bilateral transaction and collective transactions under power exchanges.

Though POCOSO has clarified that there will not be any deviation from the scheduled transmission corridor booking, it can only be ascertained after the system gets into operation.

However, there may be a need to augment the transmission capacities at certain corridors depending on the demand and available capacity at the generator end which would create an opportunity for the transmission players.

Four, the settlement for any decrease in generation will be at the rate of its variable charge after discounting compensation due to part load operation. So, POCOSO claims that any loss due to heat rate degradation will be taken care of with the compensation amount offered to the generators.

Five, there is a fear that this would impact the coal procurement process. Coal India Limited and its subsidiaries which are alleged to have a positive bias towards central generating stations may favour NTPC and increase their coal supply to these companies and thus further reduce the supply to the private companies, resulting in further PLF loss for the private generators.

Way Ahead

Though it only targets to optimise the ISGS at regional level, various options can be studied for better evolution of the process so that all power plants can be integrated and optimisation benefits can be transferred to all stakeholders including generating stations of private and state entities.

At present, around 72 per cent of ISGS which are considered for SCED, are from NTPC and thus making NTPC a large beneficiary of the optimisation process in terms of cost saving and profitability.

While the flexibility scheme of MoP proposed to share the gains by 50:50 to the beneficiary, the sharing of the benefits for SCED has not been decided yet.

SCED is seen as complementing the flexibility scheme of the government and directed towards analysing the effect of the optimisation process.

The outcome of SECD pilot project would greatly impact a proposed framework by CERC known as market-based economic dispatch (MBED) model which is under discussion now.

While this process is a step towards the right direction and help save a considerable amount of cost for the system as a whole, it is largely seen as a programme only for the regional ISGS as there is very limited scope of private players taking part in this process.

At this stage, the pilot programme is under operation and the process is being studied and documented. One can sincerely hope that the programme is a success without any operational and technical glitch, less disputes among operators so that it can be scaled up to include private and state-level operators.