Friday, March 25, 2011

Electricity prices and elections

Summer time which coincides with elections is a sure-shot recipe for spot power prices in our power exchanges going over the roof. Two upward demand pressures on electricity consumption are at work - the seasonal cycle associated with higher consumption in summers and the pressure on governments facing elections to cut back on load reliefs.

This trend is playing out now, with Assembly elections due in many states. Businessline reports of day-ahead spot prices in the southern region zooming to over Rs 12 a unit in the last couple of days, over four times the price quotes for the rest of the country on the IEX — the country's largest power exchange (handles 80% of transactions). It writes,

"A key reason for spot electricity prices shooting through the roof in South India is the mad scramble among utilities in the region to arrange power to ensure zero power cuts before the polls in States such as Tamil Nadu, Kerala and Puducherry. Lack of adequate grid interconnection between the southern region and the rest of the country has compounded the problem."

The concern here is about the regulators staying away even in the face of such price volatility. There has been ample evidence of spot market prices inching upwards in anticipation of polls from January.

Being a regulated industry, it is natural that regulators step in whenever required to protect the interests of all stakeholders. It is therefore unfortunate that, depsite clear indications of surging prices and resultant profiteering at the expense of consumers, the regulators have stayed away.

It is all the more surprising since the the Central Electricity Regulatory Commission (CERC) had intervened to regulate prices before the Maharashtra Assembly elections in September-October 2009. The CERC invoked the proviso to Section 62 (1) (a)read with Section 66 of the Electricity Act of 2003 and imposed price ceiling on the purchase of electricity through bi-lateral agreements and power exchanges. In order to curb profiteering opportunities in response to a sudden surge in demand, the CERC announced a price band of 10 paise per unit to Rs 8 per unit to cover all inter-state day-ahead trades for a period of 45 days.

The argument that better grid inter-connectivity of the eastern region with the northern and western regions is responsible for the absence of similar price spikes in the NEW grid is a straw man. Neither Assam nor West Bengal are in the market making purchases similar in magnitude to Tamil Nadu. West Bengal is amongst those with the lowest deficits. In any case, as the example with Maharashtra in 2009 shows, when the bigger states enter the market, the demand pressures show up and forces prices upwards.

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