CERC Revises Framework For Recovering Costs Of Emission Control Systems In Thermal Power Projects

The Central Electricity Regulatory Commission (CERC) issued an order on November 29, 2024, revising the existing framework for recovering costs incurred by thermal power generating companies in installing emission control systems. This update builds upon the 2021 mechanism, addressing significant expenditures necessitated by compliance with revised environmental standards set by the Ministry of Environment, Forest, and Climate Change.

Initially, the 2021 framework provided a supplementary tariff structure to compensate for the costs of emission control systems. This ensured financial stability for generating companies, aiding their ability to secure funds and assess tariff impacts. However, operational data and stakeholder experiences over time highlighted the need for a more robust mechanism.

In its latest decision, the CERC introduced a revised framework under the 2024 Tariff Regulations, applicable to competitively bid projects governed by Section 63 of the Electricity Act, 2003. The revised framework includes a detailed approach to handling depreciation, operational costs, capital servicing, and provisional tariffs.

The Commission now allows 70% of the depreciation on emission control systems to be recovered over the first 12 years of operation. The remaining depreciation is spread over the system’s operational life, ensuring alignment with industry norms. Similarly, operational and maintenance costs for these systems are pegged at 2% of the capital expenditure, with an annual escalation of 5.25% until 2029. Revenue from by-product sales, like gypsum, will offset these expenses.

In terms of capital servicing, the CERC adopted a consolidated approach for debt and equity under Section 63 projects. A normative return is calculated using the State Bank of India’s marginal cost of lending rate (MCLR) plus an added 280 basis points. This aims to balance equity returns and debt obligations without enabling undue profit-making.

The Commission also addressed stakeholder concerns regarding restitution versus compensation principles. It clarified that the mechanism adheres to the restitution principle as outlined in the power purchase agreements (PPAs), ensuring stakeholders return to their economic position prior to any “change in law” events. This differentiation is maintained between projects under Sections 62 and 63 of the Electricity Act, reflecting their unique structures and funding dynamics.

To mitigate delays in cost recovery, provisional tariffs can be mutually agreed upon between generators and procurers, or sought through CERC, providing financial relief from the date of the emission system’s operation.

This order marks a significant step toward balancing environmental compliance costs with consumer interests and industry sustainability, fostering a fair and transparent regulatory environment.