Fuel adjustments remain high

Another 64 paisas per unit gets added to the monthly Fuel Charges Adjustment (FCA) for February 2021. This takes the average monthly adjustment in FY21 so far to 82 paisas per unit, of Rs1 per unit sought originally. February is historically the month with lowest electricity demand, and invariably the month with least economic merit order violations.

Low power demand, coupled with easing domestic and imported gas demand pressure, ensures the system runs rather smooth in February. That said, there were still deviations from the reference monthly tariff, as power generation based on domestic pipeline gas plummeted to the second lowest ever, and the lowest reading for February.

Domestic system gas obviously sits high on the merit order, hence has more weight in the reference generation. For February, the revised reference generation puts gas-based power generation at 17 percent of the mix or 1.24 billion units. The same for LNG was referenced at 12 percent or 0.9 billion units.

Gas shortage, which will unfortunately now be a recuring phenomenon, causes the roles to reverse. LNG ended up with the share domestic gas-based power was referenced at, and vice versa. Luckily, because of rather stable share from other sources such as hydel, coal, and nuclear – the overall deviation did not get completely out of bounds.

Recall that the reference fuel tariffs have been revised slightly upwards with effect from February 2021. With more nuclear energy in the system expected to come online sooner, this should offer a breather in terms of monthly upwards adjustments. That said, a lot will continue to depend on global commodity prices and the currency movement.

Nothing suggests that the violations of merit order will cease to exist, as system constraints remain unanswered. Mind you, a significant portion of allowed and disallowed tariff in lieu of monthly FCA is only provisional, and could be reversed, once a detailed review of plant availability and merit order violations is conducted. But for now, the FCA may remain on the more manageable side.

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