Detail Wind Energy Order

MAHARASHTRA
ELECTRICITY REGULATORY
COMMISSION
13th Floor, Centre No. 1, World Trade Centre, Cuffe Parade, M umbai - 400005
(Tel: 2163964/65/69 Fax: 2163976)
(Email: mercindia@mercindia.com)
(Website: www.mercindia.com)
ORDER
Case No. 17(3), 3, 4 & 5 of 2002
In the M atter of
APPLICATION FILED BY THE (I) MAHARASHTRA STATE ELECTRICITY BOARD
[MSEB], (II) SHRI PRATAP G. HOGADE, (III) RENEWABLE ENERGY DEVELOPERS
ASSOCIATION OF MAHARASHTRA [REDAM], AND (IV) INDIAN WIND ENERGY
ASSOCIATION [InWEA]
FOR
PROCUREMENT OF WIND ENERGY & WHEELING
FOR THIRD PARTY-SALE AND/ OR SELF-USE.
Date: November 24, 2003

Table of Contents
SECTION - 1
Section Page
Ref. Description
No
1.0 BACKGROUND 1
1.1 TECHNICAL VALIDATION SESSIONS 5
SESSION – I 5
SESSION – II 6
1.2 PUBLIC HEARING PROCESS 7
1.3 TARIFF PHILOSOPHY 8
1.3.1 Long Run Marginal Cost 9
1.3.2 Avoided Cost of Generation 9
1.3.3 Tariff prescribed by MNES 10
1.3.4 Tariffs based on the costs 10
1.4 TARIFF PROPOSAL 12
1.4.1 Tariff Proposal: Issues 13
1.4.2 Salient features of the Tariff Proposal (Given For Public Hearing) 14
1.4.3 Grouping of Projects 14
1.4.3.1 Group I 14
1.4.3.2 Group II 15
1.4.3.3 Group III 15
1.5 DETERMINATION OF TARIFF RATE AND TARIFF STRUCTURE 15
1.5.1 1.5.1.1 For Sale to MSEB and other Utilities / Licenses in the State 16
1.5.1.2 Adjustment for Self-use and Sale to Third Party 16
1.5.4 Special Condition 18
1.5.5 Review of the Tariff Rate and Tariff Structure 18
1.6 TARIFF RELATED OTHER ISSUES 19
Energy purchase Agreement (EPA) & Energy Wheeling Agreement

1.6.1 19
(EWA)
1.6.2 Evacuation Facilities 19
1.6.3 Tenure of EPA 19
1.6.4 Purchase of Energy 19
1.6.5 Metering 20
1.6.6 Rate/Unit of Reactive Energy (KVArh) Consumption from the Grid 20
1.6.7 Billing and Payment 20
1.6.8 Payment Security 20
1.6.9 Change in Third Party Purchaser & Change of Option 20
1.6.10 Banking 21
1.6.11 Wheeling 21
1.6.12 Transmission Loss Charge 21
1.7 MERIT ORDER DESPATCH 21
1.8 FORMULATION & SANCTION OF WIND POWER PROJECTS 21
UTILITIES TO FURNISH DETAILS OF ENERGY PROCURED FROM WIND

1.9 22
POWER ROJECTS.
1.10 APPLICABILITY OF THE ORDER 22
1.11 ORGANISATION OF THE DETAILED ORDER 22

SECTION - 2
OBJECTIONS RECEIVED AND COMMISSIONS' RULING
2.0 PREAMBLE 23
2.1 LEGAL 23
2.2 OBJECTIONS/COMMENTS ON BASIC ASSUMPTIONS OF PARAMETERS 25
FOR CASH FLOW MODEL
2.2.1 Project Cost Rs. 5.0 Crore/MW for Old Projects & Rs. 4.0 Crore/MW 25
for New Projects Commissioned after 01.04.2003
2.2.1 A Group II (Old) Projects 25
2.2.1 B Group III (New) Projects 27
2.2.2 Capacity Utilization Factor (CUF) 18% for Group II (Old) Project & 28
20% for Group III (New) Projects.
Analysis of MSEB Data 29
2.2.3 Deration of Generation for both Group II (Old) & III (New) Projects 33
2.2.4 Cost of O&M : - 2% of Project cost with 5% annual escalation 35
Group II (Old) & III (New) Projects 35
2.2.5 Debt Equity Ratio : - 70:30 37
Group II (Old) & III (New) Projects 37
2.2.6 Interest Rate on Debt 38
2.2.6 A Group II (Old) Projects - 14% 38
2.2.6 B Group III (New) Projects - 12.5% 39

2.2.7 Loan Repayment Period 40
2.2.7 A Group II (Old) Projects - 6 years 40
2.2.7 B Group III (New) Projects - 10 years 41
2.2.8 Income Tax Benefit : - 100% accelerated depreciation 42
2.2.9 Sales Tax Benefit : - 60% of the Project cost availed in 6 years 44
2.2.10 Return on Eqity (ROE) : - 16% Per Annum 46
Group II (Old) & Group III (New) Projects 46
2.2.11 Rate of Income Tax - 35% + 5% Surcharge ; MAT - 7.5 + 5% 49
& 12 Surcharge
2.2.13 Working capital and Interest Liability thereon has not been 50
considered separately as the amount earmarked for O&M out of sale
proceeds would meet this requirement
2.2.14 Period of Agreement : 10 & 13 years for Group II & III respectively 50
2.2.15 Comments on Cashflow Statements 52
2.3 COMMENTS ON TARIFF PROPOSALS 59
2.3.1 Part-A : Old Projects commissioned before 31.03.2003, which have 59
availed Sales Tax Benefits
2.3.2 Adjustment for self use and sale to third party : unit adjustment as 63
per TOD tariff time slot
2.3.3 Part-B : New Projects commissioned after 01.04.2003 with no Sales 66
Tax Incentive
2.4 COMMENTS ON TARIFF RELATED COMMON ISSUES 68
2.4.1 Wheeling Charges for self Use and Sale to Third Party : 2% as per 68
MNES Guidelines
2.4.2 T&D Loss Charge ; Not to be charged for first 3 years ; thereafter 69
@1% as per GoM Policy
2.4.3 Banking 70
2.4.4 Charges for Reactive Energy (kVArh) Consumption 72
2.4.5 Power Evacuation Agreement 75
2.4.6 Payment Security 76
2.4.7 Commercial Viability of Wind Energy 77
2.4.8 Does Wind Energy have a place in Power Plans 78
2.4.9 Policy Issues 80
SECTION - 3
COMMISSION'S DECISION ON TARIFF
3.1 INTRODUCTION 85
3.1.1 Tariff Principles 88
3.1.2 Tariff Methodology 88
A Long Run Marginal Cost 88
B Avoided Cost of Generation 89
C Tariff Prescribed by MNES 89

D Tariffs based on the costs 90
3.2 APPRAOCH 91
3.3 ANALYSIS OF FACTORS RELEVANT FOR DETERMINATION OF TARIFF 92
3.3.1 Capital Cost of Project (per MW) 92
3.3.2 Annual Estimated Generation 93
3.3.3 Cost of Operation & Maintenance 93
3.3.4 Debt - Equity Ratio 93
3.3.5 Interest Rate on Debt 94
3.3.6 Loan Repayment Schedule 94
3.3.7 Rate of Depreciation 94
3.3.8 Return on Equity 94
3.4 ANALYSIS OF OTHER TECHNO-COMMERCIAL FACTORS RELEVANT FOR 95
DETERMINATION OF TARIFF
3.4.1 High Initial year Tariffs 95
3.4.2 Income Tax Benefit through Accelerated Depreciation 95
3.4.3 Sales Tax Benefit 95
3.4.4 Capital Subsidy 95
3.4.5 Wheeling & Transmission Charge 96
3.4.6 Charges for Reactive Power Consumption 96
3.4.7 Cost of Evacuation Facilities and Infrastructure 97
3.4.8 Metering 97
3.4.9 Banking and Credit of Energy on the basis of TOD Tariff slots 97
3.4.10 Billing and Payment 98
3.4.11 Assurance of Payment 98
3.4.12 Tenure of Energy Purchase Agreement 98

3.4.13 Change in Third Party Purchaser and Change of Option 99
3.5 DETERMINATION OF TARIFF 99
Group - I Projects 100
Group - II Projects 100
Group - III Projects 101
Tariff Schedule 102
3.6 SPECIAL CONDITION 104
3.7 REVIEW OF THE TARIFF RATE AND TARIFF STRUCTURE 104
3.8 ENERGY PURCHSE AGREEMENT AND ENERGY WHEELING AGREEMENT 104
3.9 UTILITIES TO FURNISH DETAILS OF ENERGY PROCURED FROM WIND 104
PROJECTS
ANNEXURES
Annexure Page
No Description
Nos
1 M S E B policies on w ind energy : dev iations from the policies of G O M & guidelines of M N E S . 106
2 Interim Order of the Commission in Case Nos. 3, 4, and 5 of 2002 dated 3rd June, 2002 -
3 RoP of Technical Validation Session held on 14th A ugust, 2002 176
4 RoP of reconv ened Technical Validation Session (Second) held on 6th January , 2003
5 A copy of the Public Notice
6 S ummary Tariff P roposal for E nergy supplied by Wind P ow er P rojects in the S tate of Maharashtra
7 A list of objections / representations receiv ed before 16th A pril, 2003
8 A list of persons who attended the public hearing on 22ndA pril, 2003
9 Cash Flow (Modified) statements for Group II (Old) projects (Iteration 1 and 2)
10 Compilation of data for Wind Energy Projects (based on MSEB Data Submission)
11 A naly sis of CUF based on A ctual Generation ov er four y ears
12 Modified Cash Flow statements for Group II (OLD) / Group III (NEW) projects
List of Tables:
Table 1 Cash flow Model for Group II Projects as per Dr. Pendse’s suggestions 55
Table 2 Cash flow model for Group II (OLD) projects duly rev ised in Dr. Pendse’s format 56
Table 3 Cash flow model for Group III (NEW) projects duly rev ised in Dr. Pendse’s format 58
Table 4 Tariff Schedule - Rates applicable for Wind Power Projects in the State of Maharashtra 101
Table 5 Year wise installed capacity of wind power projects (for MSEB purchase] in the State. 103
List of Figure:
Figure (a) Yearwise Windmill Capacity (k W) Per Machine 30
Figure (b) Yearwise Total CUF Based On A ctual Generation 30
Figure (c) Number Of Machines Work ing Yearwise Within CUF Range 31
Abbreviations used in the Order:
CBR Conduct of Business Regulations

CDM Clean Development Mechanism
CPP Captive Pow er Plant
CT Current Transformer
CUF Capacity Utilisation Factor
DPR Detailed Project Report
EHV Extra High Voltage
EPA Energy Purchase Agreement
ERC Electricity Regulatory Commissions
EU European Union
EWA Energy Wheeling Agreement
GHG Green House Gas
GoI Government of India
GoM Government of Maharashtra
HT High Tension
InWEA Indian Wind Energy Association
IPP Independent Pow er Producers
IREDA Indian Renew ables Energy Development Agency
kVArh Reactive Kilo Volt Ampere Hour
kWh Kilo Watt Hour
LC Letter of Credit
LRMC Long Run Marginal Costs
MAT Minimum Alternate Tax
MEDA Maharashtra Energy Development Agency
MNES Ministry of Non-Conventional Energy Sources
MOM Minutes of Meeting
MSEB Maharashtra State Electricity Board
MW Mega Watt
NOCs No Objection Certificate
O&M Operation & Maintenance
OSD Officer on Special Duty
PGCIL Pow er Grade Corporation of India Ltd.
PLR Primery Lending Rate
PPA Pow er Purchase Agreement
PT Potential Transformer
RE Renew able Energy
REDAM Renew able Energy Developers Association, Maharashtra
RoE Return on Equity
RoP Record of Proceedings
ROR Rate of Return
SBI State Bank of India
ST Sales Tax
T&D Transmission & Distribution
TOD Time of Day
TPS Thermal Pow er Station
BEFORE THE
MAHARASHTRA ELECTRICITY REGULATORY COMMISSION
World Trade Centre, Centre No.1, 13th Floor, Cuffe Parade, Mumbai-400 005
Tel. (022) 22163964/65 Fax 22163976
Email: mercindia@mercindia.com
Website: www.mercindia.com
Case No.17 (3), 3,4 & 5 of 2002
IN THE MATTER OF
APPLICATION FILED BY THE (I) MAHARASHTRA STATE ELECTRICITY
BOARD [MSEB], (II) SHRI PRATAP G. HOGADE, (III) RENEW ABLE
ENERGY DEVELOPERS ASSOCIATION OF MAHARASHTRA [REDAM], AND
[IV] INDIAN W IND ENERGY ASSOCIATION [InW EA]
FOR
PROCUREMENT OF W IND ENERGY & W HEELING
FOR THIRD PARTY SALE AND OR SELF-USE
Shri P.Subramanyam, Chairman

Shri Jayant Deo, Member
Dr. Pramod Deo, Member
Dated: 24th November, 2003
ORDER
The Maharashtra Electricity Regulatory Commission, in exercise of the

powers vested in it under section 22(1)(c) of the Electricity Regulatory
Commissions (ERC) Act, 1998 and all other powers enabling it in this behalf,
determines the power purchase and procurement process including the price
for procurement of power by the MSEB, other Utilities and Licensees in the
State from Wind Power Projects.
1.0 BACKGROUND
In 1996, the Government of Maharashtra announced its Policy for

development of renewable energy projects. However, this policy failed to
attract the private sector investment into the sector. Therefore, on March 12,
1998, the Government of Maharashtra issued revised policy based on
Ministry of Non-Conventional Energy Sources (MNES), Government of India
(GoI) guidelines for the wind power projects.
MERC, Mumbai Page 1 of 176

WIND PROJECT TARIFF ORDER 03-04 Section 1 Background
The highlights of the revised policy are given below:
Energy Purchase Rate: All the delivered units would be purchased by

MSEB @Rs.2.25 per unit base year 1994-95 and would escalate @5%
every year thereafter. This escalation at the simple rate would be for the
first 10 years of operation of the wind farm project. After 10th year,
energy rate would remain constant for next three years (i.e. from 11th
to 13th years) and would again escalate @5% every year from the 14th
year for the next 7 years.
Banking of Energy: 100% delivered energy to MSEB grid from wind

farm project could be banked for a period of 1 year. Any balance-
banked units will not be carried forward to the next year but these
units would be purchased by MSEB at the prevailing power purchase
rate.
Transmission Losses: The transmission losses from wind farm energy

would be borne by MSEB for the first three years. From the fourth year
MSEB would charge 1% of energy as transmission losses.
Third party sale: Sale of energy from the wind farm projects would be
permitted by MSEB to any two industrial / commercial consumers per
MW of installed capacity
W heeling charges: For the wheeled energy from the wind farm project
MSEB would charge wheeling charges @2%
Power evacuation: The expenses for creation of evacuation facilities at

EHV / HV level would be borne by MSEB. Out of these expenses 50% of
the expenses would be collected by Maharashtra Energy Development
Agency (MEDA) from the wind farm developers and would pay to MSEB.
From the sub-station to the project switchyard the expenses for the
evacuation facilities would be borne by the Developer
Sales Tax benefit: Sales Tax deferral for 1/6th of qualifying amount for
the period of six years would be permitted for the industry and its
subsidiaries for the wind farm project developer
The MSEB revised its policy for power generation projects based on wind and
solar energy vide its circular No.Co.ord/cell/CPP/Gen./NCSE/37702 dated
5th October 2001. This revised policy of MSEB deviated from the policy of
GoM in many respects. [Annexure-1 gives the deviation of MSEB policy from
that of GoM and GoI]
The Commission was set up in August 1999 and the Commission issued its
Conduct of Business Regulations on 27th December 1999. The Conduct of
Business Regulations mandated that all Power Purchase / Procurement
transactions require approval of the Commission.

The MSEB by its’ letter dated 4th March 2002 approached the Commission
seeking approval of Energy Purchase from Wind/Solar Projects in line with
their existing policy. The Commission advised them to file proper affidavit in
fulfillment of section 22(1)(c) of the Act and regulations.
The MSEB, during this time, stopped executing EPA/EWA and withheld
payment/credit for the energy fed into the grid for sale to MSEB/self-use/sale
to third party on the grounds that developers/owners have to obtain the
approval of MERC under ERC Act 1998. As a result, the associations of
Developers/Owners have approached the Commission by submitting
applications praying for its intervention.
On 26th April 2002, Shri Pratap G.Hogade vide his Affidavit submitted petition
requesting the Commission to look into the issues associated with the
development of wind power projects. His application was registered as case
Nos.3/2002. On 16th May 2002 MSEB under its Affidavit submitted two
model drafts, namely (i) Energy Purchase Agreement [EPA], (ii) Energy
Wheeling Agreement [EW A], for Commission's approval.
InWEA and REDAM submitted their affidavits on 3rd April 2002 and 8th May
2002 respectively and were registered as case Nos. 4/2002 and 5/2002.
These applications were mainly for maintaining status quo in respect of
providing
(a) energy credits to wind energy developers for supply to MSEB or
wheeling for captive consumption/third party sale;
(b) for fixing of rate for third party sale of such energy and
(c) to look into the process of prevailing Govt. directives on procurement of
such energy and thereby rationalizing the same.
The Commission conducted a hearing on 24th May 2002 to consider these

applications. All the three applicants and officials of MSEB and MEDA were
present. After hearing the views expressed by all concerned, the Commission
observed that the purpose of hearing was limited to admissibility of
applications for maintaining status quo as on December 1999. Detailed
discussions on EPA/EWA and on determination of tariff could take place
when the proposal will be put up for public hearing for which a notice inviting
objections would be published in News Papers in due course. The
Commission further observed that an interim Order on following lines could
be considered.
(a) In case of sale to the MSEB, 70% of the payment to be released

against valid NOCs and balance 30% shall be adjusted and
released as per the final Order of the MERC as and when issued.
(b) To give credit for 85% of energy received for wheeling in the cases
where credit is yet to be given and balance 15% after final Order
of the MERC as and when issued.

(c) Credit for the energy fed to the grid between the period from the date
of commissioning of the project and the identification of the third
party, the MSEB to give adhoc credit for 70% of energy received.
(d) The MSEB to maintain status quo only for projects which were
granted NOC before establishment of MERC or for projects whose
NOC is only for self use of power and not for any combination of
self use and third party sale or sale to the MSEB.
(e) The MSEB to submit detailed calculations and data/information/
proposal regarding (i) break-up of all NOCs issued for different
purposes, (ii) impact of these NOCs on MSEB’s revenue in the
next five years assuming the tariff mentioned in the NOC at the
prevailing HT tariff and (iii) to what extent the MSEB would buy
energy/power from non-conventional energy projects considering
least cost power purchase plan, impact on MSEB’s finances etc.
(f) The wind energy developers to submit detailed financial evaluation
of the projects with various depreciation, tax & other benefits
along with the MS Excel worksheet of these calculations.
Accordingly, on 3rd June 2002, the Commission issued an interim

Order in Case Nos. 3,4 & 5 of 2002. [A copy of which is enclosed as
Annexure-2]
The third meeting of the State Advisory Committee was held on 17th
June 2002. This meeting was specifically called to discuss the issues
related to the approval of Bagasse based captive/ cogeneration PPAs.
During the meeting, the participants also expressed their views on
policy support to be provided for power generation from Non-
conventional energy sources in general. The Commission has taken into
consideration their views while finalising this Order.
The Commission vide its letter dated 6th June 2002 had directed the
Government of Maharashtra to submit the copies of the various policy
decisions taken by the Government with regard to wind power
generation. Accordingly, OSD, Industries, Energy & Labour Department
submitted vide its letter dated 19th June 2002 copies of GoM policies on
wind power generation.
Neither the two associations nor individual developers were able to

submit detailed project reports to the Commission. However, REDAM
submitted two more applications; one vide Affidavit dated 28th June
2002 containing comments on GoM/MSEB policies, Model draft EWA of
MSEB and the second vide Affidavit dated 27th August 2002 containing
comments on model draft EPA of MSEB. It also submitted a letter dated
13th August 2002 providing information on the cost of a typical

WIND PROJECT TARIFF ORDER 03-04 Section 1 Technical Validation Sessions
windfarm project, cost of generation and its further comments on

GoM/MSEB policies and model draft EPA/EWA.
MSEB vide its Affidavit dated 5th July 2002 submitted the information
required by the Commission vide its interim Order dated 3rd June 2002.
The MSEB also provided revised impact analysis on its revenue due to
purchase of wind power, wind power for self-use and sale to third
party.
MEDA vide its letter dated 8th August 2002 submitted to the
Commission data in respect of project cost and cash flow statement for
two of the demonstration projects taken up by themselves.
1.1 TECHNICAL VALIDATION SESSIONS
Session - I
A technical validation session was held on 14th August 2002 which was
attended by (i) the representatives of Wind Power Project Developers
Association like REDAM and InWEA, (ii) consumer representatives u/s
26, (iii) Director General, MEDA, (iv) Advisor and Head of Power Group,
MNES, Govt. of India, (v) Objectors - Shri Pratap G. Hogade and
Shri Pradyumna Kaul and (vi) representative of MSEB. After hearing
the views expressed by all concerned, the Commission concluded the
session with the following observations:
(i) The Applicant (MSEB) shall submit within ten days, all the relevant
data/DPR/ information on affidavit to the Commission with a
copy each to (i) respondent developers, (ii) consumer
representatives’ u/s 26 of the ERC Act, 1998, (iii) objectors.
(ii) The Respondents (developers i.e. REDAM and InWEA) shall submit
within ten days, all the relevant data/DPR/information on
affidavit including its consultant’s reports duly signed, to the
Commission with a copy each to (i) MSEB (ii) consumer
representatives u/s 26 of the ERC Act, 1998, (iii) objectors.
(iii)The Government of Maharashtra shall forward within ten days the

copy of affidavit submitted to the Commission to (i) MSEB (ii)
consumer representatives u/s 26 of the ERC Act, 1998, (iii)
objectors.
(iv) The objectors and consumer representatives u/s 26 of the ERC Act,
1998 shall submit, within ten days from the date of receipt, their
rejoinder, if any, to the Commission with a copy to the Applicant
and the Respondents, for their perusal.

WIND PROJECT TARIFF ORDER 03-04 Section 1 Technical Validation Sessions
In pursuance of the requirements indicated in the technical validation

session held on 14th August 2002 [A copy of Record of technical
validation session is enclosed as Annexure-3], the developers
associations and others submitted following documents /affidavits.
i) REDAM vide its letter dated 23.08.2002 submitting views on MSEB’s

draft EPA/EWA and enclosing DPR.
ii) InWEA vide its Affidavit dated 26.08.2002 seeking approval of the
model third party sale agreement between individual developer
and third party consumer.
iii) REDAM’s letter dated 09.08.2002 enclosing a copy of project report
of M/s. Karma Engineering Ltd and a copy of the project report of
Liberty Oil Mills.
iv) REDAM’s application on Affidavit dated 28.11.2002 clarifying their
views.
v) MSEB’s letter dated 19.09.2002 submitting additional information.
vi) Comments of Janata Dal Secular on draft EPA/EWA of MSEB vide
its letter-dated 18.09.2002.
InWEA vide its application on Affidavit dated 29th August 2002 sought
extension of applicability of the commission’s interim Order dated
03.06.2002. This application was listed as case No.20/2002 and a
hearing for its admissibility was held on 13th September 2002. The
hearing was attended by the representative of InWEA who is the
applicant, representative of Respondent MSEB, representative of
REDAM, representative of Mumbai Grahak Panchayat, Objectors Shri
Pratap G. Hogade and Shri Pradyumna Kaul and representative of
MEDA. After hearing the views of all concerned, the Commission
reserved the matter for Order.
The Commission, vide its letter dated 3rd October 2002 directed the
MSEB to submit the basis of extending the interim relief to a few
developers which were not included in Commission's interim Order.
The MSEB clarified its position vide its letter dated 10th October 2002.
Session - II
Second technical validation session was held on 6th January 2003 for
validation of the data/information provided by the stakeholders.
Representatives of developers like REDAM and InWEA, consumer
representatives u/s 26, objectors Shri Pratap G. Hogade and Shri
Pradyumna Kaul, Director General MEDA, Advisor and Head of Power
Group MNES Govt. of India and representative of MSEB attended this
session. After hearing the views of all concerned, the Commission
observed that no developer came up with relevant data as was required
and also that developers or their representative associations failed to

WIND PROJECT TARIFF ORDER 03-04 Section 1 Public Hearing Process
bring in transparency as mandated under the ERC Act, 1998 in the

whole process by refusing to divulge details.
In pursuance of the proceedings [A copy of Record of reconvened

technical validation session is enclosed as Annexure-4] of the technical
validation session held on 06th January 2003, further information on
cost data, project-wise details, was provided by the following:
i) REDAM vide its application on affidavit dated 31.01.2003

ii) InWEA vide its application on affidavit-dated 07.01.2003.
However, no detailed project report as required by the Commission and

other stakeholders were provided. Thus the Commission was
constrained to proceed without adequate data and financial
information.
1.2 PUBLIC HEARING PROCESS$$
Notice dated 10th March 2003 for public hearing [a copy of the Public
notice is enclosed as Annexure-5] to be held on 22nd April 2003 was
published in English and Marathi News Papers. Summary of the Tariff
Proposal [Summary is enclosed as Annexure-6] under consideration
was provided free of cost which was also available on the Commission’s
website for free download. Detailed tariff proposal was provided for
inspection and also for sale. Initially, comments/ objections were
required to be submitted on or before 25th March 2003 upto 1700 Hrs.
Considering the representations of Prayas Pune, Shri Pratap G. Hogade

and Shri S.R.Paranjpe, additional documents were provided for perusal
as Supplementary Public Documents and the last date for submission
of comments/objections [A list of objections received including
representations made is at Annexure-7] was extended up to 1700 Hrs
on 16th April, 2003 vide notice dated 29th March, 2003.
The public hearing was held on 22nd April 2003 [A list of persons who
attended the public hearings is at Annexure-8].
Subsequently, to facilitate the analysis of Capacity Utilisation Factor

[CUF] based on operational wind generators, the Commission vide its
letter dated 28th May 2003 directed MSEB to submit sample data that
was complied by MSEB vide its letter 21704 dated 1st July 2003.
$$
The Commission with the help of its expert consultant floated a tariff proposal for purchase
of energy from Wind power projects and invited comments and or objections – Refer Section
2.

WIND PROJECT TARIFF ORDER 03-04 Section 1 Tariff Philosophy
1.3 TARIFF PHILOSOPHY
The Commission derives its powers to determine tariffs for generation

projects from Section 22(1)(c), which reads as follows:
“c) to regulate power purchase and procurement process of the

transmission utilities and distribution utilities including the
price at which the power shall be procured from the generating
companies, generating stations or from other sources for
transmission, sale, distribution and supply in the State;”
Further, Section 29 of the ERC Act prescribes the specific principles of

tariff fixation. Relevant principles, which shall guide the Commission,
are reproduced below:
" c) that the tariff progressively reflects the cost of supply of

electricity at an adequate and improving level of efficiency;
d) the factors which would encourage efficiency, economical use of
the resources, good performance, optimum investments, and
other matters which the State Commission considers appropriate
for the purpose of this Act;
e) the interest of the consumers are safeguarded and at the same
time, the consumers pay for the use of electricity in a reasonable
manner based on the average cost of supply of energy;
f) the electricity generation, transmission, distribution and supply
are conducted on commercial principles”
g) national power plans formulated by the Central Government."
As one will notice that these sections do not mandate the Commission
to use any particular methodology for determination of tariffs for either
generation projects or for retail consumers. The Commission has
generally been guided by the prudent practices of tariff determination,
which it has consistently used since its first major tariff Order in year
2000 for determination of tariff for the MSEB consumers. These
principles are:
No tariff shock to any class of consumers
Consistency in principles and its applications
Minimise Regulatory Uncertainty
Uniform Principles for tariff setting
Transparency
Compliance of regulatory and judicial procedures

As mentioned earlier, the Commission had wide choice of

methodologies to choose from while determining the tariffs for wind
power projects. These methodologies and their relative merits have
been discussed below:
1.3.1. Long Run Marginal Cost
The marginal cost is the cost incurred to supply an additional unit at a

particular time, and it represents the cost to society for meeting that
incremental demand. At times of peak demand, when additional or
marginal capacity is likely to be called for, marginal cost will often
exceed average cost; at other times, marginal costs is likely to be less
than average cost.
The Short Run Marginal Cost typically includes only costs associated
with generation of additional unit of electricity i.e. means only variable
costs of generation while Long Run Marginal Costs [LRMC] also include
a component of capacity charge or fixed charge component. However,
as per classical economic principles this capacity charge component
should reflect the cost advantages due to technological improvements,
general trends in equipment and erection market. This results in
subjectivity in determination of LRMC. Further, one will appreciate that
since LRMC is function of the load, factors such as change in the load
profile of the consumers, any new interconnection with other grid, type
of generation added would have substantial impact on the LRMC at any
particular point.
1.3.2. Avoided Cost of Generation
It is the fact that the power flows by displacement and therefore in

economic terms the cost of the new power could be the cost of the
power being replaced by new power. This cost is referred to as “Avoided
Cost of Generation”.
The Avoided Cost of Generation could be derived by identifying the

generation, which is being replaced by the new generation project. This
could be done by network analysis for various system conditions such
as peak, off peak, and for seasonal and geographical variations of the
demand. On identification of the generation being displaced, cost for
that source of generation could be determined followed by cost of
transmitting the same to the place of new generation. The new
generation project could be awarded the addition of the two costs as
tariff. This method is akin to Location Based Marginal Pricing
methodology.

As one would expect, in any complex system, new generation would

displace different generation during different systemic conditions.
Further, the cost of generation depends on various parameters such as
loading of the unit, weather, type and quality of fuel etc. Also, the cost
of transmission varies depending on the loading of the lines, weather,
actual transmission path followed etc. This makes it nearly impossible
to determine the avoided cost of generation, which could be used as a
proxy for determination of wind tariffs.
1.3.3. Tariff prescribed by MNES
The Commission notes that the MNES had prescribed the tariffs for
purchase of power from various renewable sources of energy. Various
state governments and utilities while purchasing the power have used
these tariff guidelines. The utilities generally and in our specific case,
the MSEB has argued that these prices are unrealistically high and
provide windfall profits to developers which is against prudent
principles of utility regulation.
The Commission had asked the MNES to clarify its position and submit
rationale for these tariffs. The representative of the MNES during the
course of proceedings has confirmed that the tariffs prescribed were
essentially based on the tariffs of Independent Power Producers (IPP)
Projects in the base year of 1994-95 and adopted to promote the non-
conventional sources of energy and had not taken into account some of
the benefits such as Sales Tax benefit offered by the State Governments
subsequently. The MSEB as well as many other stakeholders had
argued that these benefits have made these projects hugely profitable
and therefore these benefits should be factored into the costs while
developing tariffs.
1.3.4. Tariffs based on the costs
Another widely used methodology is calculation of tariffs by actually

scrutinizing the costs of the project. While scrutinizing the costs, any
concessions / tax exemptions availed by the promoters are factored
into the costs. This method is used by Central Electricity Authority to
accord the Techno-Economic Clearance to any power project. Since this
method involves scrutiny of all aspects of the project such as costs,
concessions, generation pattern, displacement etc, the tariffs so arrived
provide equitable financial return to the developers while avoiding
unsustainable burden on the consumers.
The Commission has analysed these options carefully and is inclined to

use “Cost Plus” methodology for determination of tariff of wind projects.
The factors, which have contributed to the Commission’s decision, are
as follows:

While Long Run Marginal Cost and Avoided Cost of Generation

are likely to give correct economic signals, it is not possible in
today’s context to arrive at the correct estimates for these
numbers.
Wind and other renewable technologies are operating at fringe i.e.

generation from these technologies is insignificant as compared
to that of conventional energy sources. Any change in generation
price based on economic principles is unlikely to have impact on
generation market, as price of large portion of generation is not
giving any economic signals.
Cost plus methodology will allow the investors to earn reasonable

return commensurate to the risks borne by them
This methodology will provide that certainty of revenue to the

investors, which in turn will make financing of these projects
feasible.
When the technology is evolving, rapid reduction in prices of the

equipment is likely. Periodic review under the “Cost plus
methodology” will allow the Commission to review cost elements
at regular intervals and factor in the cost advantage of newer
technology while deciding the tariffs for new projects.
Lastly promotion of renewable energy to ensure that its share in

energy mix reaches 10% over a period of time is part of the
guidelines issued by the Ministry of Non-Conventional Energy
Sources [MNES], Government of India. Thus, these guidelines
are an integral part of the national power plans formulated by the
Central Government - Section 29(1)(g) referred to above.
Therefore, the Commission decided to adopt the Cost Plus Methodology

for determination of tariffs for wind energy projects.
The Commission had to make a choice between analysis of each

individual wind project followed by tariff determination and analysis of
the sample project and determination of tariff for that sample project.
The Commission is aware of the fact that individual/ small owners own
large numbers of the wind turbines and thus each wind turbine is
potentially a different project. Tariff determination for each project
would have not only been impossible task for the Commission, it would
not have also been economical for these wind turbine owners to pursue
their cases. Also, this would have lead to different tariff for each
project, which would have been very difficult for the MSEB to manage.

WIND PROJECT TARIFF ORDER 03-04 Section 1 Tariff Proposal
While analyzing sample projects, which were commissioned in last

three years, the Commission found wide variation in capacity
utilisation factor (CUF) at same sites and also with same size of
machines. Operational data suggest that wind power technology per se
and its Operation and Maintenance (O&M) in Maharashtra are yet to
fully stabilise. This suggested that "Cost Plus" approach if adopted
mechanically might do injustice to developers who have taken the risk
of investing in a technology, which is new to local conditions. The need
to make an allowance for this uncertainty to protect investors' interest
has to be recognized.
1.4 TARIFF PROPOSAL
In view of the considerations explained in earlier section, the

Commission decided that it would analyse only representative cases
and determine the tariffs for all wind turbines based on the analysis of
these cases. However, the Commission noted that in terms of legal
jurisdiction as well as policy application, three distinct types of wind
projects exist.
Therefore, the Commission in its 33rd Meeting held on 23rd January

2003 decided that while dealing with approval of EPA/EWA with
respect to wind energy projects submitted by the MSEB, broadly three
groups shall be considered as follows: -
i) Projects, which were commissioned before the Commission framed

its Conduct of Business Regulations (CBR) i.e. 27th December
1999, under the then prevailing policy guidelines. Referred to as
first group of projects. - Group I
ii) Projects that have been commissioned during intervening period i.e.
after 27th December 1999 and before 1st April 2003. Referred to
as second group of projects. - Group II
iii) Projects, which will come up after 1st April 2003 under the policy
guidelines to be formulated and suggested by the Commission.
Referred to as future projects. - Group III
Basic formulations approved by the Commission for finalization of the
tariff proposal are as follows: -
a) For the first group of projects: - Since the Respondent as well as

nodal agencies are not in a position to provide any data regarding these
projects and since the number of projects under this category is small,
it is not possible to determine the tariff. Further, these projects have
been commissioned prior to the formulation of CBR of the Commission.
Commission’s jurisdiction over tariff for such projects is not clear.
Therefore the Commission decided that then prevailing Government
policy should continue to apply to such projects.

b) The future projects could be offered Front Loaded Tariff with a

suggestion to the GoM to provide infrastructural support to promote
the environment friendly power.
c) For the second group of projects, the tariff may be decided as per
policy guidelines to be formulated by the Commission. However,
benefits such as Sales Tax, accelerated depreciation, CDM etc. availed
shall be shared by the developer with the MSEB. A formula to share
these benefits to be worked out.
d) To determine T&D loss at local level, a study should be
conducted by the Consultant. The Commission also decided that
public hearing need not wait for completion of such a study.
1.4.1 Tariff Proposal: Issues
Based on the above decisions of the Commission, the draft tariff

proposals were prepared which were made available to public as a part
of the documents for the public hearing process. These tariff proposals
(Annexure-6) were essentially loud thinking of the Commission on how
it could proceed in this matter with limited information at its disposal.
Some of the Issues faced by the Commission were specifically included

in the Tariff Proposal as detailed below:
1) Should power be produced using only fastly depleting resources

like coal thereby denying natural resources share to future
generations?
2) Who should share the higher cost for such environmentally

benign power till the technology is matured? The power
produced by renewable technology like wind/solar is more
expensive in the initial years as the technology for the same is
still new and not matured like for conventional coal based
generation. Untill critical mass is created in this sector; the cost
is unlikely to come down.
3) Shoul d c onsumer support this promotions or onl y the

government? Due to globalization the tax rates have moved
southwards thereby reducing the government's ability to provide
fiscal incentives for the promotion of such power. To what extent
consumers can support these promotions, through higher energy
charges? 1 paise, 5 paise, per kilowatt-hour, or any other
amount.

1.4.2 Salient features of the Tariff Proposal (Given For Public

Hearing):
The Commission believes that it is essential to encourage private sector

capital investment in wind power projects in the State by enabling a
remunerative return on the investment through tariffs. The
Commission notes that this is the universal principle applied by the
economic regulators all over the world to promote any particular
technology. The Commission also wanted to ensure that undue burden
on the electricity consumer in the State is not caused.
The Commission notes that in Cost Plus Approach, which the

Commission has adopted for tariff proposal, rate per unit charged by
such projects during initial period of 10 years is bound to be higher as
during this period the project has various debt related obligations.
However, it is essential that the consumer is able to enjoy the benefit of
cheaper power once all debt related obligations are paid off and project
has virtually no variable costs.
The Commission notes that the tariff of wind power projects is likely to
be substantially higher than the average cost of power purchase of the
utility during initial ten-year period of the life of the project. This may
cause marginal increase in the average cost of supply of the power by
the Utility. If large numbers of wind power projects are developed
during a very short period of time, there could be substantial impact on
the average cost of supply of the utility, which will result in increase in
tariffs. In Order that the electricity consumer in the State is not unduly
burdened with a high tariff on this account, wind power capacity to be
developed for sale to Utility in the remaining four years of the 10th Five
Year Plan period from 01.04.2003 to 31.03.2007 shall be limited to
400 MW. No such limit has however been specified for projects to be
developed for self-use or third party sale.
1.4.3 Grouping of Projects
Wind power projects in the State have been classified into three groups
for tariff determination;
1.4.3.1 Group I
The Commission notes that as per the information placed before the
Commission, very few wind projects were commissioned before
27th December, 1999. Very little or practically no data could be made
available to the Commission either by the developers of the projects or
by the nodal agency in the State. Moreover, investment in these
projects was based on GoM's existing policy. Therefore, the Commission
felt that these projects should be dealt with as per the policies of Govt.
of Maharashtra prevailing then.

Determination of Tariff (Gr II) rate and Tariff structure
1.4.3.2 Group II
The Government of Maharashtra had offered Sales Tax benefit to wind

power project developers during this period. All projects developed
during this period availed this benefit except one. The developers of the
project had claimed that the projects have been developed based on the
guidelines of Ministry of Non-Conventional Energy Sources (MNES),
Govt. of India as adopted by the Govt. of Maharashtra (GoM). The GoM
policy on wind power generation provided that rate payable shall be
Rs.2.25 per unit in the base year 1994-95 with 5% escalation every
year for the first 10 years. With 5% escalation on base year rate (simple
escalation) every year, rate per unit payable with effect from 1st April,
2003 works out to Rs.3.24.
1.4.3.3 Group III
The Sales Tax benefit offered by the Government of Maharashtra was

available for projects commissioned before 31.03.2003. Therefore, any
project commissioned after this date will not have any Sales Tax
benefit. The Commission has considered that no such Sales Tax benefit
will be offered to the developers while developing the Tariff Proposal for
this group of projects. While developing tariff for this category of
projects, benefits due to improved technical specification such as lower
cost per MW / kWh, higher hub height, higher efficiency turbines have
been taken into account.
While preparing Tariff Proposals for Group II and Group III following
factors were taken into account: -
- Income Tax benefit is available through accelerated depreciation
- Tax exemption for ten year is available under section 80IA
- Maximum debt period is ten years
- Investors earn 16% Return on Equity as per national policy
- Capital investment is related to performance and better efficiency
and reduction in cost is ensured.
The Commission gave wide publicity to tariff proposals so prepared and

had wide discussion through public process already described.
1.5 DETERMINATION OF TARIFF RATE AND TARIFF STRUCTURE:
The Commission has taken into account views expressed by various

organizations, corporate, utilities, individuals, consumer
representatives, MSEB and developers of the wind projects while taking
decision on this important matter. The Commission has described its
decision in the following paragraphs.

The Commission determines that the tariff rate for energy delivered by
wind power projects shall be as follows:
1.5.1 Group I
Wind power projects commissioned before 27.12.1999 i.e. before the

Commission notified its regulations.
1.5.1.1 For Sale to MSEB and other Utilities/ Licensees in the State
The purchase price shall be as notified by the Government of

Maharashtra vide its Order No. NPC/1097/CR-57/URJA-7 dated
12.03.1998, which is as follows:
Rs. 2.25 per unit in the base year 1994-95
The purchase rate shall be increased at 5% every year for the first ten
years from the date of commissioning, no increase in rate for the next
three years and 5% increase in rate every year for the next 7 years.
The Govt. of Maharashtra vide its Order No.NCP2000/PRA.KRA.775/

URJA-7 dated 7th January, 2002 has decided that the 5% increase per
year in the rate of purchase shall be on the compounded basis.
1.5.1.2 Adjustment for Self-use and Sale to Third Party
For the period ending 31st March, 2003, credit shall be given as per the
policy of GoM in force as on 27th December, 1999.
From 1st April, 2003 onwards, net energy delivered to the grid for self-
use or for sale to third party shall be adjusted at the rate of prevailing
base HT energy tariff.
1.5.2 Group II
Wind power projects commissioned after 27th December, 1999 but

before 1st April, 2003 the tariff prescribed by the Commission is as
follows:
The Purchase rate shall be as notified by the GoM vides its Order No.
NCP 1097/CR-75/NRG-7 dated 12th March 1998, i.e. Rs.2.25 per unit
in the base year 1994-95. The purchase rate shall be increased at 5%
per year (simple rate). The validity of EPA shall be only 8 years from

the date of Commissioning in departure from GoM/MSEB policy.

Reasons for this variation are discussed below:
While determining tariff for this group of projects

Sales Tax and accelerated depreciation benefits were factored in.
Loan repayment period being 6 years it was envisaged that by giving
a grace period of 4 years a wind farm developer will be able to repay
the loan and earn 16% return on equity (RoE).
In the 11th year investors will have the balance of equity and
freedom to earn RoE determined by the market.
The results were: Rs. 2.50 per unit for the first year from the date of
commissioning of the project. The purchase rate was to be increased at
10 paise per unit every year for a period of ten years from the date of
commissioning of the project.
However, as mentioned in section1.3 this mechanistic approach of cost

plus tariff fixation would not cover all the risks taken by the investor in
a new technology which is still in the process of taking roots in the
State. Moreover, these investors had developed their projects based on
the guidelines of GoM. Though they could not be given GoM tariff for
20 years period, they should be allowed to sell energy to MSEB/Utilities
at the rate indicated in that policy till loans taken by them were fully
discharged. Comparison of two cash flow models [included in
Annexure-9 as part of modified cash flow] suggests that loan
repayment period after factoring in Sales Tax and other benefits will be
around 5 to 6 years. Hence, by giving a grace period of 2 to 3 years
these developers will be able to earn market return on their
investments; they would have had more than 16% RoE during loan
repayment period. Even the projects with very low CUF around 12%,
that is eligible for Sales Tax incentive, can earn fair return on equity.
This approach will also facilitate technology upgradation.
For the period ending 31.03.2003, credit shall be given as per the
policy of GoM/MSEB in force as on 27.12.1999
From 01.04.2003 onwards, net energy delivered to the grid for self-use
or for sale to third party shall be adjusted against the energy
consumption made as per the TOD tariff time slots.
For projects not provided with TOD meters, the energy wheeled for self-
use/ sale to third party shall be adjusted against the energy
consumption made at lowest energy tariff slab/ time slot first and then
at next higher slab and so on till such time appropriate meters are
installed.

Determination of Tariff (Gr III) rate and Tariff structure
1.5.3 Group III
For wind power projects to be commissioned after 01.04. 2003 during

the balance period of10th plan ending 31st March, 2007, the tariff
prescribed by the Commission is as follows:
Rs. 3.50 per unit for the first year from the date of commissioning of
the project.
The purchase rate shall be increased at 15 paise per unit every year for
a period of thirteen years from the date of commissioning of the project.

Net energy delivered to the grid for self-use or for sale to third party
shall be adjusted against the energy consumption made as per the TOD
tariff time slots. For projects not provided with TOD meters, the energy
wheeled for self-use/ sale to third party shall be adjusted against the
consumption made at lowest energy tariff slab/ time slot first and then
at next higher slab and so on till such time appropriate meters are
installed.
1.5.4 Special Condition

New wind power capacities to be permitted for sale to Utilities shall not
be more than 750 MW during the balance period of 4 years of 10th Plan
Period ending 31st March, 2007. This ceiling is based on the target for
wind power for the State of Maharashtra indicated by Director General,
MEDA and urgent need for capacity addition through short gestation
power projects. The Commission is of the view Maharashtra should
reach more than 1000 MW of installed capacity during this plan period
so that economies of scale and cost reduction would bring wind power
on par with conventional power in terms of cost.
1.5.5 Review of the Tariff Rate and Tariff Structure

The Commission shall review the tariff rate and the tariff structure for
wind power projects after 31st March, 2007 or on addition of 750 MW of
additional wind capacity after 1st April, 2003 whichever is earlier.
During this review the Commission will not revisit any old projects.
The tariff rates for wind projects, which have already been
commissioned or will be commissioned before the next review, are
linked to the year of operation of wind project and not to the fiscal year.

WIND PROJECT TARIFF ORDER 03-04 Section 1 T ariff related other issues - Decision
1.6 TARIFF RELATED OTHER ISSUES - DECISION
The Commission determines that the tariff related other issues, which
are common to the projects under Group II & III shall be as follows:
I.6.1 Energy Purchase Agreement (EPA) & Energy W heeling

Agreement (EW A)
It is not the intention of the Commission to approve the EPA/EWA for
each wind project individually. The Commission however has
formulated the principles of EPA/EWA, which have been elaborated in
the Order. The Commission directs the MSEB and other utilities/
licensees to modify Draft EPA/EWA to reflect the tariff provisions and
principles of EPA / EWA as approved in the Order before executing the
EPA/EWA with developers. The Commission further directs the MSEB
and other utilities/ licensees to make all EPAs/EWAs public.
1.6.2 Evacuation Facilities

The developer shall bear the cost of project switchyard and
interconnection facilities at the project site upto the point of energy
metering. The MSEB/utilities/licensees will bear the cost of
transmission lines and associated facilities beyond the point of energy
metering for the evacuation of power. The Developer(s) shall provide an
interest free advance to the MSEB/utilities/licensees equivalent to an
amount of 50% of the cost of works to be carried out by the
MSEB/utilities/licensees for power evacuation purposes. In case there
is more than one Developer sharing the transmission line/evacuation
facilities to be set up by the MSEB/utilities/licensees, the advance
amount shall be shared amongst the Developer(s) in equal proportion.
The MSEB/utilities/licensees shall refund the above interest free
advance to the Developer(s), in five equal installments, spread over the
period of five years, commencing from one year after the date of
commissioning of the respective projects.
1.6.3 Tenure of EPA
Old projects under Group I, for which EPA/EWA have already been
executed; the tenure of EPA/EWA shall be as per the agreements in
force.
For Group II projects, tenure of EPA/EWA shall be 8 years.
Tenure of EPA/EWA for new projects under Group III (Projects

commissioned after 1st April, 2003) shall be 13 years.
1.6.4 Purchase of Energy

Purchase of energy from wind power projects by the MSEB and other
utilities/ licensees shall be in the nature of infirm purchase of energy.
As regards supply of energy by wind power projects to the MSEB/
Utilities/ licensees is concerned, there shall be no limitation, except for

WIND PROJECT TARIFF ORDER 03-04 Section 1 T ariff related other issues - Decision
force majeure, on the maximum or minimum quantum of energy to be

supplied by wind power projects. However, wind power projects must
follow grid discipline.
1.6.5 Metering
Real time ToD meters with online reading feature are required to be
installed at entry and exit point of each transaction.
1.6.6 Rate/Unit of Reactive Energy (kVArh) Consumption from the

Grid
The Commission determines that charges for kVArh consumption from
the grid shall be 25 paise/unit which may be revised from time to time
subject to the condition that simple escalation in rate per unit shall not
be more than 5% per year from the date of commissioning for reactive
energy consumption upto 10% of the active energy delivered to the grid
by the developer. The reactive energy consumption in excess of 10%
shall be payable at the prevailing rate.
Reactive energy charges shall be recovered from the bill of the developer
for energy sold to Utility; in case of self-use, these charges shall be
added to the monthly electricity bill of the developer; incase of sale to
third party, these charges shall be added to the monthly electricity bill
of the consumer (third party purchaser to whose premises energy is
wheeled). For the period when wheeling is discontinued, it will be
recovered from the developer.
1.6.7 Billing and Payment

The Developer shall raise a monthly energy bill based on the joint meter
reading taken by the Developer and the MSEB/Utility at the end of
each month. The due date for the payment by the Utility shall be 45
days from the date of the bill. In case of delay in payment beyond the
due date, the Developer shall be entitled for an interest on delayed
payment @2% above the State Bank of India, short-term lending rates.
1.6.8 Payment Security

The MSEB/ Utility at the cost of and option of the developer shall open
a Revolving Irrevocable Letter of Credit in favour of the Developer for an
amount equivalent to the average monthly bill.
1.6.9 Change in Third Party Purchaser and Change of Option

Change in Third Party Purchaser will be permissible subject to
installation of real time ToD meters with online reading feature as per
Para 1.6.5. Owners/Producers can also switch over to the option of
sale to MSEB/Utility subsequently subject to the conditions to be laid
down by the Commission.

WIND PROJECT TARIFF ORDER 03-04 Section 1 Merit Order Despatch
1.6.10 Banking
Banking of energy delivered to the grid for self-use and or sale to third
party shall be allowed any time of the day and night subject to the
condition that surplus energy (energy delivered into the grid but not
consumed) at the end of the financial year shall not be carried over to
the next year.
Surplus energy at the end of the year, limited to 10% of the net energy
delivered by the developer to the grid during the year shall be
purchased by the Utility at the lowest TOD slab rate for HT energy tariff
applicable on the 31st March of the financial year in which the power
was generated.
In the event of unforeseen and force majeure conditions, surplus

energy at the end of the year in excess of the 10% limit specified above
shall be purchased by the Utility at a rate equivalent to the weighted
average fuel cost for the year as determined by the Commission in the
Tariff Order.
The payment of surplus energy shall be made to the developer/owner

and not to consumer in case of third party sale.
1.6.11 W heeling
Pending determination of Wheeling charges by the Commission those
charges would be levied at the rate of 2% of energy wheeled.
1.6.12 Transmission Loss Charges

The Commission has decided that a study should be conducted to
determine the T&D loss at local level. Based on the results of the
study, T&D loss charges to be levied on energy supplied by wind power
projects shall be determined by the Commission. Till then, uniform
transmission losses at the rate of 5% shall be applicable.
1.7 MERIT ORDER DESPATCH

Merit Order dispatch shall not be applicable to purchase of energy by
the MSEB/ Utilities from wind power projects.
1.8 FORMULATIONS AND SANCTION OF W IND POW ER

PROJECTS
The Commission has designed the tariff rate and tariff structure to
facilitate private capital investment in development of wind power
projects to promote such projects while at the same time keeping in
view the interests of other stakeholders, and development and
maturation of wind technology in Maharashtra.

WIND PROJECT TARIFF ORDER 03-04 Section 1 Ut ilit ies T o F urnish Det ails O f E nergy P rocured F rom Wind Power
P roject s / A pplicabilit y of t he O rder / O rganisat ion of the detail Order
1.9 UTILITIES TO FURNISH DETAILS OF ENERGY PROCURED

FROM W IND POW ER PROJECTS
MSEB/Utilities/Licensees should provide and update every month

details in respect of quantum of energy purchased, source from which
procured and the cost paid on their web sites.
1.10 APPLICABILITY## OF THE ORDER

The Order shall be applicable for energy purchase from wind power
projects by the MSEB/Utilities/Licensees in the State of Maharashtra
and for wheeling of energy delivered by wind power projects through
the grid of MSEB/Utilities/Licensees for self-use/sale to third party
within the State of Maharashtra.
1.11 ORGANIZATION OF THE DETAILED ORDER
Detailed order of the Commission regarding supply of energy by wind

power projects is broadly divided into four parts.
This first section consists of background and chronology of events and

working order of the Commission passed on 18th September 2003. It
also covers the tariff rates determined by the Commission and the
Commission’s determination of tariff related other issues.
The second section discusses various objections raised by the

objectors/ petitioners in writing as well as during the public hearing
before the Commission. They have been broadly grouped issue-wise
and for the sake of convenience, the various points have been listed
under an index along with page numbers where the relevant objections
have been stated briefly and the ruling of the Commission on each of
these points has also been given.
The third section of the detailed order comprises the Commission’s

analysis and its approach for tariff determination. This section
succinctly describes the issues involved in tariff determination, and the
Commission’s reasoning for determination of tariff rate and other tariff
related issues. The section also discusses the Commission’s outlook
and recommendations for evolution of policies on wind power
generation.
The fourth section comprises of Annexures to the detailed order. A

separate index for the Annexures has been provided.
##
The original application was for Approval of Energy Purchase from Wind / Solar power plants
in the State. However no such submission was received from any Solar based plant
manufacturer or user. Neither the Commission has received any details with regard to such
solar Energy plants. Therefore this order is based on the deliberations that have taken place
with respect to only Wind Energy Projects. In future, any such application for Solar based
plants will be dealt with separately as per the provisions of the EA 2003.

WIND PROJECT TARIFF ORDER 03-04 Section 2 Objections
Preamble
OBJECTIONS RECEIVED AND COMMISSION’S RULING
2.0 PREAMBLE
The Commission was constrained in the absence of any specific

technically validated wind project tariff proposal that could be floated
for public hearing purpose. As an alternate, the Commission engaged
the services of a reputed consultant and expert in this field to facilitate
developing a tariff proposal, which could be made available to public,
for such wind projects under the prevailing policy regime. The proposal
mooted by the consultant was perused by the Commission and
approved for making it available for the public hearing process and
inviting comments and/or objections. This draft tariff proposal for
energy supplied by wind power projects in the State of Maharashtra
was made available to the public.
MSEB, being the original applicant for approval of EPA/EWA, was

directed to host the copy of the public notice alongwith the above-
mentioned summary proposal on their Web site also.
On publication of the public notice inviting comments and or objections

on the issues involved, the Commission received various objections.
These were also heard in person during the public hearing at Mumbai
on 22nd April 2003. The objections have been broadly grouped Issue-
W ise for the sake of convenience, and the Ruling of the Commission on
each of these points has also been given.
Subsequent to public hearing, to facilitate the analysis of Capacity

Utilisation Factor [CUF] based on operational wind generators, the
Commission vide its letter dated 28th May 2003 directed MSEB to
submit certain data based on field measurements, which was furnished
by MSEB vide its letter dated 1st July 2003.
2.1. LEGAL
Shri Pradyumna Kaul questioned the legality of the tariff determination

process on the following grounds:
i) Applications from each generator for tariff determination being

mandatory as per the provisions of Electricity Supply Act 1948
and ERC Act 1998, determination of tariff on the basis of
applications made by the associations who did not have proper
authority to speak on behalf of the individual members was
illegal.
ii) Rules and Regulations governing the special features of wind power
projects should be framed before undertaking determination of
tariff.

WIND PROJECT TARIFF ORDER 03-04 Section 2 Objections
Legal
iii) Observations of the Chairman of the Commission during the

technical validation session held on 6th January, 2003 indicated
a possibility that the Commission was being unduly influenced
by powerful vested interests, and the Chairman recuse.
iv) Data furnished by developers as well as the Consultant was false.
Shri S.R. Paranjpe was of the view that the tariff determination process
could not be considered as complete and tenable under law unless final
suggestions from all the participants in the process were invited by
providing copies of all documents/submissions and the complete data
relied upon by the Commission to determine the tariff.
Commission’s Rul ing

The applications of Shri Pratap G. Hogade, InWEA and REDAM
registered as Case Nos. 3, 4 & 5 of 2002 and the reply dated 14th May,
2002 of MSEB brought to the notice of the Commission the urgent need
to regulate the power supply from wind power projects and also the
need to determine the tariff for procurement of energy from this source
by the utilities.
The Commission understands the need to regulate the power purchase

from all sources of energy, including renewable sources of energy. The
Commission also appreciates the necessity to treat each type of projects
in a different manner. Wind projects are typically smaller in terms of
energy output and financial outlay. The investors involved are also
small investors. Insisting that each investor should seek approval of the
project would not only discourage these investors but also will result in
substantial loss of manpower resources in discussing same/similar
issues. In order to avoid this, the Commission permitted the
associations to represent the various investors. Further, the
Commission has taken due care to ensure that the associations have
necessary authority from the investors and any decision taken by the
Commission will be binding on the investors.
To regulate power purchase and procurement process of the utilities

including the price at which power shall be procured from the
generating companies, generating stations or from other sources for
transmission, sale, distribution and supply in the State are functions of
the Commission under Section 22(1)(C) of the ERC Act, 1998. The
Commission has framed rules and regulations in this regard. In the
case of wind power projects in the State of Maharashtra, the
Commission has decided to determine the tariff for the projects already
commissioned and future projects relying on the existing rules and
regulations and data furnished by the Associations, MEDA, MSEB and
other sources. There is no need to frame separate rules and regulations
for the determination of tariff of wind energy projects.

WIND PROJECT TARIFF ORDER 03-04 Section 2 Objections / Comments on Tariff Proposals
As regards the views of Shri S.R. Paranjpe, the Commission would like
to state that the tariff proposal under consideration, which contains the
data relied upon by the Commission for its decisions and copies of
contributions of participants were made available for inspection and all
interested participants were given adequate opportunity to express
their views in writing as well as through oral submission before the
Commission during the public hearing held on 22nd April 2003.
Further, the Commission took views of all the stakeholders into
account and made necessary changes to the tariff proposal published
by the Commission. Therefore, the Commission rules that the objection
of Shri Paranjpe is not sustainable. The Commission has discussed the
validity and correctness of the data furnished by the developers and by
the consultants in subsequent sections.
The Commission is satisfied that it has carried out its functions in

accordance with the applicable laws/rules/regulations, that adequate
opportunity was provided to everyone concerned to express their views,
and that the views expressed before the Commission have been given
due consideration. The Commission also finds no valid ground for the
suggestions of bias and the need for the Chairman to recuse.
2.2. OBJECTIONS / COMMENTS ON BASIC ASSUMPTIONS

OF PARAMETERS FOR CASH FLOW MODEL
2.2.1 Project Cost–Rs.5.0 Crore/MW for Old Projects & Rs.4.0

Crore/MW for New Projects Commissioned after 01.04.2003
2.2.1.A. Group II (OLD) PROJECTS
Shri Sriram Madhukar Sane has suggested that data about initial cost
provided by the developers/producers need to be critically checked.
Shri Pratap G. Hogade of Janata Dal Secular (Maharashtra) has

mentioned that project cost should not be more than Rs.4.0 crores per
MW even for old projects.
The Technical Director, MSEB has represented that, if fixation of tariff

on cost plus basis is to be considered, project cost per MW for old
projects indicated as Rs.5.0 crore per MW is on the higher side and is
more than the project cost for Thermal Power Stations. Absorbing the
benefits/incentives provided by the Centre and State Governments at
least partially, if not fully, should reduce project cost.
Shri Hiralal Ramdas Jadhav, Electricity Consumer of Nashik is of the

view that justification for the assumed project cost of Rs.5.0 crore per
MW for old project is required.

Prayas, Pune are of the view that the cost per MW, which is crucial for
arriving at cost of generation, has not been adequately justified.
Subordinate Engineers Association (MSEB) is of the view that the cost

of old projects indicated in the proposal as Rs.5.0 crore/MW is highly
exaggerated and that it should not be more than Rs.253 Lacs.
Shri Pradyumna Kaul, supporting the views of Prayas, Pune and Shri
S.R.Paranjpe about the assumptions for old projects has stated that the
project cost has been deliberately assumed as high as it enables
determination of a higher tariff.
Shri S.R. Paranjpe has stated that while the cost of sub-station
required for evacuation has been indicated in detail, no such break-up
is available in respect of the cost of project.
Shri Bhimsen Ramchandra Khedkar of Akhil Bharatiya Grahak

Panchayat, Pune has suggested that in the absence of details and in
view of the concessions availed, the project cost considered should be
checked by independent experts.

The Commission notes that InWEA, vide their sworn affidavit dated 17th
January 2003, have provided cost data in respect of 89 projects
completed before 31st March, 2003 in the State of Maharashtra.
Similarly, REDAM, vide their submission on affidavit dated 20th

February, 2003 have provided data in respect of 88 projects completed
before 31st March, 2003 in the State. Average project cost/MW for these
177 completed projects is Rs.5.36 crores. Further, it was pointed out
to the Commission that an average project cost of Rs.5.0 crores/MW
has also been observed in the State of Rajasthan. The project cost for
MEDA’s pilot project also indicates a similar level of cost.
The Commission would also like to point out that, while several
objectors have stated that the project cost of Rs. 5 crore per MW is on
the higher side, no objector has been able to submit substantial
evidence before the Commission to prove their point. On the other
hand, IREDA, the financial institution responsible for financing
renewable projects under the aegis of the Government of India, has on
several occasions accepted the project cost of Rs. 5 crore per MW or
more.
Therefore, the Commission considers the project cost of Rs. 5 crore per
MW for old projects as reasonable for the purpose of determination of
tariff for sale to Utilities.

2.2.1.B. Group III (NEW ) PROJECTS
As regards the project cost of Rs.4.0 crores/MW for new projects, the
Technical Director, MSEB was of the view that the upper limit to be
considered for tariff determination should be Rs.3.50 crore/MW and
procurement of machines and equipment at this price was possible
through competitive bidding. However, he did not submit any
evidence/proof in support of his argument.
Shri Hiralal Ramdas Jadhav, is of the view that justification for the
assumed project cost of Rs.4.0 crores per MW for new projects is
required.
M/s Dunil Electric Saver & Maintenance Company Pvt. Ltd., Mumbai
has stated that, for projects to be set up in future, there should be a
provision for review of the capital cost after 3 years in view of the
possibility of reduction in cost with a large number of installations.
Prayas, Pune are of the view that the cost per MW, which is crucial for
arriving at cost of generation, has not been adequately justified.
Subordinate Engineers Association (MSEB) is of the view that the

project cost of Rs.4.0 crore per MW for new projects, which is 20% less
than the cost assumed for old projects, should also be adequately
justified.
Shri S.R.Paranjpe has stated that the project cost for new projects will
tend to increase with general inflation and may come down depending
upon technological progress. He is of the view that the project cost for
new projects is likely to be higher than Rs.4.0 crore per MW and that,
at the recommended level of tariff, it is doubtful if any new wind power
project will be added.
Indian Wind Turbine Manufacturers’ Association, Chennai are of the

view that the cost of new projects should be considered as Rs.5.0 crore
per MW instead of Rs.4.0 crore per MW in view of the facts that import
content of higher capacity machines is high; exchange rate is going up
and that items under concessional customs duty for wind mills have
been reduced.
InWEA, in their presentation, stated that the capital cost assumed,

particularly for new projects, is rather low if it has to cover
infrastructure development costs to be paid to MEDA and bearing other
expenses.
Shri G.M.Pillai, Director General, MEDA, in his oral submission, has

stated that the assumed project cost of Rs.4.0 crores/MW for new
projects, though achievable, appears to be low as of now.


Project cost not only includes cost of the plant and machinery but also
includes other costs such as cost of infrastructure development such
as access roads, cost of improvement in the EHV system for power
evacuation, soft financing costs, administrative costs etc. It was
brought to the notice of the Commission that since the infrastructure
development is being done for all projects in the region by MEDA, per
MW cost is likely to go down. It was felt that considerable scope for
reduction in the cost of infrastructure development is possible.
Further, a declining trend in the cost of wind power plants is observed

in the National/International markets. A copy of the article “On the
Track as the Cheapest in Town” that appeared in Wind Power Monthly,
January 2002 (provided as Annexure 8 to the Detailed Tariff Proposal
made available for Public Hearing) indicates that the price of machines
is likely to fall by 8% for each doubling of production. Keeping these in
view, the assumption of Rs.4.0 crore/MW as project cost for new
projects for the Tenth Five Year Plan (2002-2007) is considered to be
quite reasonable vis-a-vis Rs. 5.0 crore/MW for old projects.
The Commission further notes that the project cost is related to the
machine efficiency, namely the Capacity Utilisation Factor (CUF) that it
can provide, and that a higher CUF could be achieved by using
machines of better efficiency but the project cost would be higher. In
view of this position, the Commission has benchmarked the CUF for
new projects at 20% and considers the project cost per MW for new
projects commissioned from 1st April, 2003 onwards as Rs.4.0
crores/MW for the purpose of determination of tariff for sale to Utilities.
2.2.2 Capacity Utilization Factor (CUF) 18% for Group II (old)

Projects & 20% for Group III (new) Projects
2.2.2.A Group II (OLD) PROJECTS
Shri Pratap Hogade of Janata Dal Secular (Maharashtra) is of the view

that CUF for old projects should be not less than 20%.
REDAM is of the view that 18% CUF considered for Group II projects is
quite reasonable.
Technical Director, MSEB has stated that 18% CUF assumed for old
projects is as per actuals but the power is infirm, seasonal and 60% of
the annual generation is available from May to September, and in the
night hours only 30% is available. Therefore, MSEB is required to have
adequate power generating capacity to meet the demand when wind
power is not available.

Shri S.R.Paranjpe is of the view that the assumed CUF of 18% for old
projects is too low. He has stated that it should be taken as 25%. He
has further stated that once the better sites are exhausted, lower CUF
can be hopefully compensated by reduction in capital cost.
Subordinate Engineers Association (MSEB) is of the view that CUF for

old projects should be assumed as 28.5% instead of 18%. They have
further mentioned that wind power does not help the system, as it is
not available during peak hours.

The data provided by InWEA in respect of energy generation recorded at
46 metering points for 371 machines of 0.35 MW rating for the year
2001-2002 indicates that the actual CUF ranged from 8.57% to
21.98%. The average CUF worked out to only 16.68%. This is primarily
due to use of shorter towers, poor siting and teething trouble besides
poor grid availability. Except for grid availability, the other two factors
cannot be corrected easily. The Commission also notes that the first
phase installations came up during an early stage of the evolution of
the technology in India. The knowledge about micro-siting issues and
country specific designs was evolving, which has resulted in sub-
optimal installations. Since many wind plants have been in operation
during the last 4 years, the Commission decided to call for additional
data based on field measurements, showing, inter alia, generation and
export figures for wind generators of different capacities at different
locations (with 50 or more samples for each), along with loss of
generation hours due to non availability of the grid, for the last four
years.
The MSEB, on the Commission’s direction of 28th May 2003, furnished

field measurement based data and information about actual and
deemed generation in each of the last four financial years (1999-2000
to 2002-2003) by wind energy projects in four different MSEB circles,
viz. Ahmednagar, Dhule, Sangli, and Satara for total of 444 annual
readings covering an aggregate capacity of 212.55 MW. The compiled
data is enclosed as Annexure-10.
Analysis of MSEB Data
Figure (a) below gives analysis of data submitted by MSEB in terms of

the maximum size of machine and average capacity of machine
operating during the year, and the year-wise total capacity in operation
over these four years. Based on the date of Commissioning furnished
by MSEB, It is observed that the capacity addition in the third year
under report is much higher. It can be seen from Figure (a) that the
average machine capacity has increased from 225 kW in the year 1999-
00 to 538 kW in the year 2002-03. This is so on account of
introduction of 1000KW machine.

based on MSEB Data
335
Figure (a): YEARW ISE W INDMILL CAPACITY (KW ) PER MACHINE
Based on the field measurement data provided by MSEB in respect of

444 machines (belonging to 95 developers) during the period 1999 –
2000 to 2002 - 2003, an analysis of CUF, based on actual annual
generation (enclosed as Annexure-11), was carried out. To avoid
distortion in CUF evaluation, on full year operation the deemed
generation is not considered since it involved estimation of generation
during the grid non-availability.
Figure (b): YEARW ISE TOTAL CUF BASED ON ACTUAL

GENERATION
Figure (b) above gives the total CUF based on MSEB data for four
financial years. The data, based on actual generation, gives a CUF of
15.96% in 1999-00, 13.09% in 2000-01, 23.33% in 2001-02, and
21.04% in 2002-03. It is also observed that the CUF is comparatively
higher at Dhule and Sangli, which establishes the need to carry out the
micro-siting more accurately to exploit the potential. Most of the earlier
machines have continued to show CUF between 15% to 20%, though
few of the new machines show a CUF of 33%. This further emphasizes
the Commission’s view that there is a large potential for applying rapid
technological developments that are taking place in the wind sector and

that such application needs to be encouraged during the critical growth

period for the benefit of consumers and other stake-holders.
Further, the Commission observes that, the first phase installations

have not been made in the best possible locations of the State; far
better sites have been exploited subsequently. In order to increase the
CUF of these installations, either the height of the turbine needs to be
increased or the location has to be changed. Both would require
substantial extra investment.
The following Figure (c) shows the number of machines, out of those
being analysed, which have been in operation for the full year spanning
four years. These machines have been grouped under various CUF
ranges (below 10, 10 to 15, 15 to 20, 20 to 25, 25 to 30 and 30 &
above).
Figure (c): Number of Machines working yearwise within CUF

Range
Over a period of time, the knowledge base has tremendously increased,
resulting in optimization of the projects. At the same time, with the
evolution of the technology, machines with higher ratings have become
available in the market, with higher CUF and further this process is on.
In such circumstances, tariff setting demands fixing different tariffs for
each small group of machines (Capacity, type, vintage) & make/locations
posing logistical difficulties. Based on the results of the above analysis
of the CUF data, the Commission has considered a reprentative range
for arriving at the CUF rate to be used for cash flow analysis. It also
notes that the Technical Director, MSEB has confirmed that the actual
average CUF is about 18%.

The Commission, therefore, considers the CUF for Group II (old)

projects commissioned before 31.03.2003 as 18% for the purpose of
cash flow. With this CUF, annual energy generation will be 15.77 Lac
units/year/MW (i.e. 1.577 MUs per annum per MW).
2.2.2.B Group III (NEW ) PROJECTS

that CUF for new projects should be not less than 22%.
Shri Hiralal Ramdas Jadhav, Electricity Consumer of Nashik is of the

view that wind power is not available during peak hours and in peak
demand season; therefore, this negative aspect should be taken into
consideration in determination of tariff.
Dunil Electric Saver and Maintenance Company Pvt. Ltd., Mumbai are
of the view that CUF assumed for new projects is low and has
suggested fixing a higher normative CUF with provisions for incentive/
disincentive for generation above or below the normative CUF.
Shri S.R. Paranjpe is of the view that the assumed CUF of 20% for new
projects is too low. He has stated that it should be taken as 25%.
Subordinate Engineers Association (MSEB) is of the view that CUF for

new projects should be assumed as 28.5% instead of 20%.
InWEA have stated that the sensitivity analysis of the assumed CUF,
particularly for new projects, is critical and that a percentage swing in
CUF impacts cash-flow analysis and returns significantly.
The Commission has already clarified the reasons for promotion of

wind energy in another section. The issues such as infirm nature of
power, availability of power during peak hours, etc., has been dealt
with there. The Commission is of the opinion that, having taken a
decision to promote renewable energy sources, including wind power,
at the highest level of governance, the project developers should not be
penalized by prescribing very high performance norms for the installed
machines. It is sufficient that the Commission takes an objective
decision based on available data.
Therefore, the Commission has considered the published wind data for
10 different sites in the State of Maharashtra. The Commission notes
that the average CUF per annum with a reasonable machine and grid
availability has been assessed as 20%. If the developer uses higher
hub height and machines of improved technology, higher CUF could be
achieved. However, the cost of such plants would be higher, which will

increase the over all project cost. The ideal indicator is not cost/MW
but cost/kWh produced. To ensure better efficiency, the cost/kW h
has been benchmarked at Rs.22.50/kW h, which means that if the
investment is Rs.4.0 crore/MW the CUF should be 20%. CUF should be
correspondingly higher for technologically advanced machines. The
Commission is of the view that investment to be made by the
developers should be based on optimum techno economic parameters
and is best left to their business judgement.
The Commission has observed from the CUF analysis that a very small
number of projects have already attained a CUF level of 33%. At such a
CUF level, the average cost for new projects would work out to around
Rs. 2.24 per unit that is comparable with the present day cost of
conventional power, (assuming an investment of Rs.4 crore per MW for
Wind Power). With a thrust on more efficient technology and research
and development in this field, wind power generation would favourably
compare with the conventional source of thermal generation. This
reinforces the need for the Commission to provide a dispensation which
would accelerate the development and application of improved
technologies. In fact, the rapid investment in such technologies,
including that in storage devices to tide over the problem of seasonal
and infirm generation, in EU countries indicates that wind energy can
be a viable alternative and must be exploited to its full potential
quickly.
The Commission therefore approves, while striking a balance between

capital cost and CUF, the CUF per annum for Group III (new) projects
commissioned from 1st April, 2003 as 20% for the purpose of
determination of tariff. With this CUF, annual energy generation will be
17.52 Lac units/year/MW (i.e. 1. 752 MUs per annum per MW). This
tariff will also encourage the adoption of better technologies for the
efficient utilisation of natural resources.
2.2.3 Deration of Generation for both Group II (old) & III (new)
projects
Shri Sriram Madhukar Sane is of the view that 5% deration in annual
generation after 10 years should not be accepted, as technological
improvements will enable increase in generation by 5% every year.
Technical Director, MSEB has suggested that the 5% deration assumed

in annual generation after 10 years should be properly incorporated in
the EPA/EWA. He further pointed out that, as against the assumed
deration in energy availability @5% after 10 years, the rate of deration
used in the cash-flow statement for Group III projects is 10%.
Shri Hiralal Ramdas Jadhav, is of the view that deration in annual

generation after 10 years should be only 2% and not 5% as assumed.

Subordinate Engineers Association (MSEB) is of the view that the

annual generation to be considered should be 25.27 Lacs and that
annual deration after 10 years should be @2% instead of 5% as
proposed.
Shri Pradyumna Kaul stated that the deration in energy availability

considered is false and misrepresentative.
Prayas, Pune has pointed out that, while the report mentions that a 5%
deration in energy availability has been assumed, the cash flow
statement for Group III projects provides for deration at 10%. The
reasonableness of this assumption has not been adequately justified.

For any rotating machine, wear and tear of the rotating part is a normal
phenomenon, which cannot be avoided. This wear and tear results in
increase in outage time for the machines, which in turn gets reflected
in lower output.
The wear and tear is a continuous process and reduces efficiency

marginally. It is the usual practice to consider the reduction in
efficiency every year by a certain percentage level. The Commission
notes that, in the case of large thermal plants, the equipment supplier
provides efficiency curves, which are used as the basis in the Power
Purchase Agreement.
Further, the Commission observes that deration by 5% after 10 years is

actually a notional and simplified method to take into consideration the
decline in efficiency, which would have occurred over the years.
As regards the issue of technological improvements, the Commission

notes that these improvements will be available for new projects only
and cannot possibly be incorporated in the machines already installed.
The Commission further points out that 10% deration in energy

availability after 10 years shown in the cash-flow for new projects is an
inadvertent error. The Commission confirms that deration should be
restricted to 5% only.
The Commission also notes that there will be a decline in machine

efficiency due to ageing, causing a reduction in energy generation over
the years. The Commission therefore considers a notional deration of
5% in energy generation after 10 years for developing the cash flow
towards determination of tariff for sale to Utilities.

2.2.4 Cost of O&M: - 2% of project cost with 5% annual escalation
GROUP II (old) & III (new) PROJECTS
Shri Pratap Hogade of Janata Dal Secular (Maharashtra) has

mentioned that M/s. Vestas have quoted 1% of the project cost as O&M
cost; therefore O&M cost to be allowed should not be more than 1% of
the project cost.
Technical Director, MSEB considers that assumption of O&M cost at

2% of project cost with 5% annual escalation is high. He is of the view
that O&M cost exclusive of cost of insurance should only be 1%, with
5% annual escalation, and cost of insurance should be 0.5% with no
escalation.
Shri Hiralal Ramdas Jadhav is of the view that the O&M cost should be
2% of Asset Value and not of project cost.
Prayas, Pune is of the view that no concrete basis has been provided for
the O&M cost assumed.
Subordinate Engineers Association (MSEB) is of the view that it should

be 2% of the asset value and not of project cost.
Dr. Ashok Pendse of Mumbai Grahak Panchayat has stated that O&M
cost should be 1% of the project cost excluding the cost of land per year
for the first 3 years and 1.5% per year thereafter.
REDAM has stated that O&M cost considered at 2% of project cost is

reasonable, and that the wind power projects are not comparable to
hydro projects in this regard as the wind turbines are spread over a
wide area.
The Commission notes that the type of technology plays a crucial role
in determining O & M expenses for any project. The wind power plants
are installed over a wide area, which is typically hilly and difficult to
access. Further, the plant is mounted on a tall tower with substantial
rotating components. These features, typical to wind power projects,
make the O&M of the project expensive.
The Commission would like to point out that the offer dated 06.09.2002
of M/s RRB-Vestas appended to the submission of Shri Pratap G.
Hogade mentions that no other expense except service charges and
O&M charges are covered in 1% of project cost quoted by them. They
have also mentioned that one-year warranty provided by them will not
over damage due to lightning and over voltage. Other expenses like

insurance, statutory expenses, expenses towards O&M of installation

other than machines, reactive energy charges etc. have to be borne by
the owner/developer. Therefore, it would not be prudent to compare the
O & M expenses indicated by Vestas RRB with those considered in
financial model being considered by the Commission.
The Commission observes that the O&M expenses considered in the

financial model include not only the O&M of plant but O&M of other
installations like roads, internal OH lines, sub-stations, maintenance
charges payable for grid, insurance of the installations, charges payable
for reactive energy consumption made from the grid, establishment
expenses and annual statutory fees and charges etc. The experience in
operation of wind power projects in the country and abroad indicates
that O&M expenses are well over 2% of the project cost. Given the
benefit of cheap labour in India, the breakup of the expenditure would
be broadly as follows:
Manpow er - 0.8%
Insurance - 0.5%
Statutory fees - 0.1%
kVArh Charges - 0.1%
Spares & Repairs - 0.4%
Consumables - 0.1%
T otal - 2.0%
With ageing of equipment, expenses towards repairs and replacements

increase; so do other expenses due to inflation. It should be noted that
different components of the total O & M expenses would increase at
different rates. For example, manpower expenses typically increase at a
rate more than inflation expenses, while statutory fees may not
increase at all. It is a normal business procedure wherein certain level
of increase is permitted based on the expert opinion and inflation
estimate. A similar procedure is also followed in commercial dealings
with large independent power plants all over the world. The
Commission intends to follow the same methodology.
Based on the past experience in India and abroad, it appears that the
2% of the project cost as O & M expenses in the first year of operation
is reasonable. However, it was pointed out to the Commission that the
contracts for supply, erection, testing and commissioning of wind
power plants invariably provide for supply of spares and services for
replacement free of cost under the guarantee/ warranty clause. In view
of this, the Commission has assumed 1.5% of the project cost for the
first three years of operation, and 2% of project cost per year in the
fourth year of operation.
As regards inflation-related adjustment to arrive at year-on-year O & M

expenses, the Commission notes that the inflation rate has been
around 5% for the last couple of years. Also, experts in this field are of

the opinion that the inflation rate will remain in this range for the
foreseeable future. Therefore, the Commission has considered annual
escalation in O & M costs at 5% on cumulative basis from the fourth
year onwards.
2.2.5 Debt Equity Ratio: - 70:30
GROUP II (OLD) and III (NEW ) PROJECTS
REDAM has stated that assumption of 70:30 is quite reasonable as it is

as per IREDA norms.
Technical Director, MSEB is of the view that higher equity will result in
higher tariff. He has therefore stated that the debt-equity ratio should
be 80:20 as in case of generating companies, particularly when power
is invariably purchased by the MSEB and Govt. provides incentives in
various forms.
Dr. Ashok Pendse of Mumbai Grahak Panchayat has stated that the
debt-equity ratio should be 75:25.
The Commission notes that the financial institutions essentially

determine Debt: Equity norms. Further, these norms are based on
many considerations like nature of project, project cost, credit
worthiness of the borrower, etc.
At the same time, the Commission cannot ignore the impact that higher
equity would have on the tariff to utilities. It is the responsibility of the
Commission to ensure that the interest of both the consumers as well
as that of investors is protected. Therefore, while adopting norms set by
financial institutions, the Commission would remain conservative.
The Commission had asked both InWEA and REDAM to submit the
information related to financing of the completed projects, which was
submitted during the regulatory process. The IREDA’s letters of loan
sanction for three projects provided by InWEA in their submission
indicate that the debt-equity ratio accepted by IREDA is 61.25:38.75 for
one project, 75:25 for the second and 68.8:31.2 for the third project.
Further, the Commission notes that the Government of India has set a
norm of 70:30 for financing various power sector projects. Major
financial institutions, including IREDA, generally adhere to this norm.
In view of this position, the Commission has decided to use a debt-

equity ratio of 70:30 for determination of tariff for purchase of energy
by utilities from wind energy projects.

2.2.6 Interest rate on Debt
2.2.6.A. GROUP II (OLD) PROJECTS – 14%

Shri Pratap Hogade of Janata Dal Secular (Maharashtra) has stated
that interest rate as per IREDA norm is 12.5% with a rebate of 0.5% for
timely payment; therefore, interest rate to be allowed for determination
of tariff should not be more than 12%.
Technical Director, MSEB is of the view that interest rate for old
projects should be the Prime Lending Rate (PLR) fixed by the Reserve
Bank of India, restricted to 12%.
Dr.Ashok Pendse of Mumbai Grahak Panchayat has stated that the
interest rate to be considered for old projects should be 11% as it is a
long-term debt.
Shri Pradyumna Kaul has stated that the interest rate of 10 to 10.5% is
correct as interest rates charged by the banks have fallen.

The Commission notes that the rate of interest charged by financial
institutions/lending agencies is governed by many considerations such
as type of project, risk profile, credit worthiness of the borrowers etc. It
is essential to provide enough provision for interest expenses so that
borrower can pay interest as well as repay borrowed money to the
lenders. Unless, lenders see enough provision for interest payment,
they will not be ready to lend money to projects, which will significantly
impact the investments in the sector. Therefore, the Commission is
required to find out a just and feasible provision for interest payment.
The association of developers, InWEA, submitted sanction letter of

IREDA for three wind projects. The interest rate charged for one of the
projects was 14.5%, and 13.5% for other two projects. Interest liability
is to be borne by the developer separately. IREDA has permitted rebate
of 0.5% in interest for timely repayment in all the three cases, and a
further rebate in interest for achievement of specified level of generation
in one project. However, this marginal rebate in interest is conditional
and would be available only at the end of the loan repayment period. It
is subject to the condition that all installments of loan repayment have
been paid within due time and the specified level of generation has
been consistently maintained.
The Commission notes that while IREDA provides loan for wind power
projects at a concessional interest rate, other financial institutions
provided loan at normal interest rate only which, during the period
1997-2002 varied from 13.5% to 14.5%. Also, other financial
institutions do not offer incentives similar to those offered by IREDA.

The Commission further notes that, over a period of the last five years,
interest rates have come down. However, this trend is recent and it is
unlikely that the projects already commissioned would have been able
to get the benefit of lower interest rates.
Therefore, the Commission is of the opinion that a large proportion of

the projects commissioned before 31.03.2003 are likely to have raised
debt at rates ranging between 13.5 to 14.5%. Therefore, the
Commission has considered the interest rate as 14% for old projects
commissioned before 31.03.2003 for the purpose of determination of
tariff for sale to utilities.
The conditional rebate in interest allowed by IREDA, which is only

marginal, is not considered as many may not fulfill the conditions
governing such rebates, and since other financial institutions do not
allow such rebates.
2.2.6.B. GROUP III (NEW ) PROJECTS – 12.5%
Technical Director, MSEB is of the view that the interest rate for new
projects should be not more than 10% in view of the declining trend
observed in the interest rates. He is further of the view that financing
through the methods of refinancing, tax-free bonds etc. may bring
down the interest liability further.
Subordinate Engineers Association (MSEB) and Shri Hiralal Ramdas

Jadhav, are of the view that the interest rate to be allowed for new
projects should be only 10% in view of the declining trend observed.
Dunil Electric Saver and Maintenance Company Pvt. Ltd., Mumbai

have suggested incorporation of price variation clause in the tariff
model to take care of variations in interest rates over the 10-year period
of loan repayment.
Dr.Ashok Pendse of Mumbai Grahak Panchayat has stated that the

interest rate to be considered for new projects should be 11% as it is a
long-term debt.
Shri S.R.Paranjpe has stated that, in determination of tariff for new

projects commissioned from 01.04.2003, lower interest rates should be
considered.

The Commission, in the earlier section, has discussed the rationale

behind permitting reasonable interest expenses in the tariff. The
Commission also noted that the interest rates have come down
substantially during the last few years.
The Commission further notes that, though the interest rates are on
the decline, project finance is generally considered as a risky financing
opportunity by financial institutions and banks. Typically, project
finance is offered with substantial premium on ‘Prime Lending Rate” or
PLR. This would mean interest rates ranging from 12 to 14% for wind
projects based on the support provided by the promoter to the project
company. It is only in exceptional cases, where the borrower is credit
worthy and the project size is large, that finance is provided at a rate
lower than 12%. The Commission has already noted that large
numbers of projects in this category are expected to come up on project
finance basis, as other fiscal benefits such as Sales Tax benefits are not
available to these projects.
Further, 0.5% rebate in interest offered by IREDA is given only after the
loan is repaid in full, subject to the condition that there is no default.
The cost of availing a loan, which is substantial, should also be taken
into account.
Considering these factors, the Commission has taken the interest rate
at 12.5% for new projects as reasonable for a large number of
Investors.
2.2.7 Loan Repayment Period
2.2.7.A. Group II (OLD) PROJECTS – 6 YEARS
The Technical Director, MSEB is of the view that the methodology for
loan repayment and for repayment period should be so planned as to
result in lowering of tariff, which is the ultimate aim.
Prayas, Pune has stated that while the actual period of IREDA loan
repayment is 10 years, the proposal has assumed repayment in 6
years, which increases the cost per unit in the initial years.
loan repayment period to be considered for old projects should be 10
years with a moratorium in the first year.
Shri Pradyumna Kaul has stated that the shorter period assumed for
loan repayment distorts the cash-flow statement and benefits the
generators.


The Commission notes that the loan repayment period could have
significant impact on the tariff if it included as a direct expense for
determination of tariff. If it is not considered as an expense in
determination of tariff and it is assumed that repayment would be
made out of depreciation charge, then it could significantly impact the
cash flows of the developer. Development of wind projects in the State
would be adversely affected, if the lenders to such projects form an
opinion that the developer will not be left with enough cash to make
repayment.
Another important aspect is that of the lending norms of the financial

institutions or lenders. Earlier, IREDA norms applicable to wind power
projects required the loan to be repaid within 6 years. This norm has
been subsequently revised to 10 years. The copies of letters of IREDA
sanctioning loans for three projects submitted by InWEA indicate that
the loan repayment period is 10 years. However, prior to 2000, the
loan repayment period was 6 years. Norms set by other major financial
institutions also require loans to be repaid within 6/7 years.
The projects which were commissioned prior to 31st March 2003 would
have achieved financial closure atleast two years ahead of
commissioning. This would mean that a large number of projects would
have availed of the loan from IREDA as per the old repayment norm of
6 years prevailing then. In case these projects have availed of loans
from other financial institutions, the repayment norms would be 6
years anyway.
Therefore, the Commission has considered the loan repayment period

for the Group II (old) projects commissioned before 31st March, 2003 as
6 years for the purpose of determination of tariff for sale to utilities.
2.2.7.B. Group III (NEW ) PROJECTS – 10 YEARS
Shri Hiralal Ramdas Jadhav is of the view that the loan repayment
period to be considered for new project should also be 6 years.
loan repayment period to be considered for new projects should be 10
years, with a moratorium of one year.
The Commission has deliberated on the issue of basic principles behind

the assumption regarding loan repayment period in earlier sub
sections.

The Commission has noted earlier that, since 2000, IREDA has been
sanctioning loans with repayment period of 10 years. It has been
brought to the notice of the Commission that, recently, other major
financial institutions are also permitting loan repayment over a period
of 10 years.
Therefore, the Commission has considered the loan repayment period
for Group III (new) projects commissioned after 1st April 2003 as 10
years for the purpose of determination of tariff for sale to utilities.
2.2.8 Income tax benefit: - 100% accelerated depreciation

2.2.8.A. Group II (OLD) PROJECTS
Technical Director, MSEB has stated that, in respect of old projects,
depreciation should be limited to 90% of project cost, as land cost will
not depreciate. He further pointed out that, as against the Income Tax
depreciation of Rs.145 Lacs as availed, the Income Tax/MAT liability
has been shown as Rs.101.44 Lacs in the cash-flow statement for old
projects. He is of the view that tax benefits availed should be shown as
reduction in project cost. He has further stated that the tax benefits
and liabilities should be properly accounted for with a view to reduce
the tariff without adversely affecting the ROE to developers.
Dr. Ashok Pendse of Mumbai Grahak Panchayat has pointed out that,
as against the IT depreciation benefit of 171.5 Lacs to be availed in 2
yrs at 85.75 Lacs per year, the benefit considered in the cash-flow for
old projects is considered at Rs.145 Lacs to be availed in 2 yrs at
Rs.72.5 Lacs per year.
Shri G.M.Pillai, Director General, MEDA clarified that the corporate

rate of I.T. is only 35%.

The Commission notes that the representations on this issue are
largely clarificatory in nature. The Commission notes that there are
some misconceptions about the tax benefit through accelerated
depreciation, and they need to be clarified.
100% cost of wind power project is not eligible for exemption.

Cost of land, etc., are not eligible.
Net tax saving will not be at the prevailing rate of 35%, since in
any case Minimum Alternate Tax (MAT) at the rate of 7.5% must
be paid. The net tax saving can, therefore, be a maximum of at
(35-7.5)+5% surcharge = 28.87%
Full tax benefit in the first year can be availed only if the project
is commissioned before September. Otherwise, only 50% benefit
can be availed of in the first year
Depreciation rate has already been reduced to 80% from 100%

Rate of taxation changes every year. Therefore, benefit cannot be

calculated accurately.
If accelerated depreciation is availed of the first year, the tax
liability will be higher after ten years of 80-IA benefit.
Since a large numbers of projects are typically completed during the

second half of the financial year, the Commission has assumed that the
projects would avail the benefit over a period of two years. For old
projects, at the cost of 5 Crores per MW, tax benefit eligible through
accelerated depreciation and considering MAT works out to Rs.145
Lacs, and is availed of two equal installments of Rs.72.50 Lacs.
2.2.8.B. GROUP-III (NEW ) PROJECTS
Technical Director, MSEB is of the view that tax benefits availed should
be shown as reduction in project cost. He has further stated that the
tax benefits and liabilities should be properly accounted for with a view
to reduce the tariff without affecting the ROE to developers. As regards
new projects, he has pointed out that accelerated depreciation benefit
still available has not been considered in the cash-flow. He has further
stated that Income Tax/ MAT liability is shown as Rs.87.77 Lacs, and
stated that if accelerated depreciation benefit is not considered, tax
liabilities should also not be considered.
Shri Hiralal Ramdas Jadhav, is of the view that 100% accelerated
depreciation benefit in respect of Income Tax, which is still available,
should be considered for new wind energy projects as it will lower the
tariff.
Dr. Ashok Pendse of Mumbai Grahak Panchayat has pointed out that
the cash flow for new projects does not consider this benefit at all,
when it continues to be available, and that for a project of Rs.4 crore
per MW cost, the benefit available is Rs.136.50 Lacs to be availed at the
rate of 68.25 Lacs per year in 2 years.
In order to determine the long term tariff for energy to be purchased by

the Utilities from new wind power projects to be commissioned after 1st
April,2003, different cash flow models have been worked out, with and
without income tax benefit through accelerated depreciation.
The Commission deliberated at length on the issue of whether the

benefit due to accelerated depreciation should be factored into the cash
flow model. The Commission notes that, if the projects are to be viable
only after consideration of income tax benefit, the consequences would
be:

The investment will get restricted only to such investors who

have high tax liability in their existing business.
Investors with high tax liability have many other options to avail
of tax benefits, and investment in wind power may not be an
attractive option for them.
Rate of accelerated depreciation has already been reduced to 80%
from the earlier 100%. Also, further reduction in rates cannot be
ruled out. This would make projects risky for financing. In the
last seven years, there has been some change in tax rate
especially the surcharge applicable, every year. Consequently,
future projects would become risky investments if the viability of
the projects depends critically on this benefit.
The Commission is also aware of the fact that the profit making and
high tax liability companies prefer to invest in the businesses, related
to their ‘Core Strength’, wind power certainly can not said to be the
priority list of investments, today.
Further, to ensure sustained growth, to reach the critical mass, during

the current plan period itself, it is essential to attract a large number of
investors in the sector. The Commission intends to fix the tariff for the
current plan period i.e., upto 2007, Therefore, the Commission has
decided that the income tax benefit through accelerated depreciation
should not be factored into the cash-flow calculations. The Projects
should be financially viable and bankable without consideration of this
benefit. The income tax benefit through accelerated depreciation should
be treated as an incentive over and above the normal profitability. This
would help ensure healthy growth and attract substantial investment
in the sector.
The benefit of accelerated depreciation has, however, been availed

against revenue income for first five years.
2.2.9 Sales Tax Benefit: - 60% of the project cost availed in 6 years
2.2.9.A. GROUP II (OLD) PROJECTS
Shri Pratap Hogade of Janata Dal Secular (Maharashtra) has stated

that the Sales Tax benefit for old projects should be considered as 80%
of project cost, availed in 6 years, in view of the position that Sales Tax
benefit is being sold on 80:20 basis today.
Technical Director, MSEB has stated that, as against 100% of project

cost availed as Sales Tax benefit, the benefit considered in the cash
flow statement is only 60%. He is of the view that tax benefits availed
should be shown as reduction in project cost. He has further stated
that the tax benefits and liabilities should be properly accounted for
with a view to reduce the tariff without affecting the ROE to developers.

Dr.Ashok Pendse of Mumbai Grahak Panchayat has stated that, on the

project cost of Rs.500 Lacs, excluding the cost of land, a sum of Rs.490
Lacs is available as Sales Tax incentive, as against which the amount of
benefit considered in the cash flow is only Rs.300 Lacs, which is only
60% of the project cost. He has further stated that, under the
deferment scheme, repayment of the Sales Tax benefit availed
commences from the 12th year and is completed in the 18th year.
Further, the Govt. of Maharashtra has introduced a scheme under
which interest at 11% on the benefit provided is discounted and the
balance amount is provided as incentive, which works out to Rs.61.3
Lacs per year for 6 years. As against this, the Sales Tax benefit
considered in the cash flow is Rs.50 Lacs per year for 6 years.
Shri. Pradyumna Kaul and Prayas have pointed out that, as against
100% of project cost available as Sales Tax benefit, the benefit
considered in the cash-flow is only 60% of project cost, and that partial
consideration of the benefits inflates the cost of generation and gives
undue benefit to the generators.
Shri G.M.Pillai, Director General, MEDA clarified that Sales Tax

incentive is discounted between 60% to 80%, as third party sale of this
incentive is also allowed.
The Commission notes that the Sales Tax benefit is available for
projects completed before 31st March 2003 and is, therefore, relevant
only for determination of tariff for past installations.
The Commission observes from the data provided by InWEA and

REDAM that the Sales Tax benefit has been availed of either through
exemption or deferment route. Under the exemption route, the Sales
Tax amount saved is treated as income and is subject to payment of
Income Tax at 35% plus 5% surcharge (average). This means that the
net amount actually available would be 63%.
Further, the Commission notes that Sales Tax benefit can be availed of
only by an existing business, and income tax is payable on this income
as per prevailing rates. Also, no tax concessions (MAT/80IA) can be
claimed against this source of revenue.
Under the option of deferment, the amount has to be returned after a

period of 12 years. It has been considered that, out of Rs.100/- Sales
Tax deferment, a sum of Rs.35/- will be set aside and only Rs.65/-
would be utilized. Rs.35/- initially set aside would amount to Rs.100/-
after 12 years on consideration of net 10% return on compounded basis
after tax (which means a pre-tax gross return @ 16%.)

Further, the tax liability of an investor would vary not only with his
overall business considerations, but also with the changes in tax rate.
Therefore, it is essential that a notional average should be used for the
purpose of calculation of the value of this benefit.
The Commission is of the opinion that the Sales Tax benefit availed of
under both the routes cannot be more than 63% of the project cost
and, therefore, has considered the Sales Tax benefit for projects
commissioned on or before 31st March,2003 as 63% of the project cost
for the purpose of determination of tariff for sale to utilities.
2.2.10 Return on Equity (ROE) :- 16% per Annum
GROUP II (OLD) & GROUP III (NEW ) PROJECTS
Shri Shriram Madhukar Sane is of the view that 16% ROE is high and
that it should be limited to the PLR of SBI, particularly when profit due
to sale of electricity is tax-free for 10 years. He has also suggested that
to take care of inflation, ROE could be fixed at 1.2 times of the PLR of
SBI.

that, interest rates on loans and deposits having declined by 5 to 6%
from 1994-95, ROE to be allowed should not be more than 12%.
Shri Yusuf Mohd. Shaikh, Energy Activist, Nashik has mentioned that
ROR earned by MSEB is only 4.5%. He has suggested that ROE to be
allowed should be limited to 10% as it is the consumers of electricity
who have to bear the increase in cost. He has further suggested that
terms and conditions for purchase of energy by Utilities should be
determined keeping in view the possibility of restructuring of MSEB
into a number of companies so that the consumers are not unduly
burdened with the claim for ROR by more than one company.
REDAM has suggested that in view of the unpredictable nature of wind

energy, it is not strictly comparable to IPPs and that the ROR that
would be available with 16% ROE would be much less. They have,
therefore, suggested that ROE to be allowed should be at a rate which
will provide a minimum of 16% ROR on the project cost. They have
further stated that the suggestion of MSEB that wind power projects
should provide 12% of energy free to the State, as is done by Hydro
projects, is not justified. According to REDAM, in a few States hydro
projects are required to provide 12% power to the State free of cost in
lieu of the water resources availed by them.
Technical Director, MSEB has stated that, ROE allowed for IPPs was
16% when the interest rate was 20%; that the interest rate having
declined considerably, ROE for projects selling energy to MSEB should

be only 12%. He has further stated that projects availing energy for
self-use or for sale to third parties should compensate the MSEB for the
loss of revenues suffered by providing 12% free power to MSEB. He
has pointed out that ROE outflow indicated in the cash flow statement
of the proposal for old project is Rs.483.14 Lacs, which should be not
more than Rs.384 Lacs (120 x 16% x 20 years).
Shri Hiralal Ramdas Jadhav is of the view that return allowed on

investment for new projects is quite high, and enables recovery of
investment within the first 10 years itself.
Shri S.R.Paranjpe is of the view that, considering the declining trend in

the rate of interest, 12% tax-free return on equity and 10% on debt are
reasonable.
Shri Pradyumna Kaul has stated that, in an environment where bank

PLR is about 8%, return on equity should be 4% over the bank PLR as
per schedule VI to the Electricity (Supply) Act, 1948.
The Commission appreciates the importance of Return on Equity in the

cost-plus methodology used for determination of tariffs in the electricity
sector in India at present. In a true cost-plus methodology, the ROE
component reflects the net cash flow to the developer. Further, the
higher the ROE, the higher will be the returns on investment, and the
higher will be the tax liability, resulting in further increase in tariffs.
In a perfect market, return on equity is determined by adjusting risk-

free return for risks being borne by the investors. This essentially
means that the investor looks for a return on equity which would cover
the risks being borne by him.
Risks can be viewed from different perspectives. An investor has several

options to invest his money, with associated risk profiles. One could
argue that investment in thermal power generation assets is less risky
or safer, given the plant load factor and low volatility in output.
Further, while volatility in fuel prices cannot be avoided, given fuel cost
pass through and the availability of long-term fuel contracts such
projects are less risky as compared to wind projects. Therefore, if the
return on equity allowed by Govt. of India is 16% for investment in
thermal power plants, then for wind projects, where there could be
±15% variation in annual energy output, the risk element is higher and,
consequently, the ROE should be higher.
The Commission is also aware of the fact that wind technology

development (which is site specific) in the State of Maharashtra is only
at the start-up stage. Investors perceive a high risk for such project,
which have a long period of return or payback period that is a direct

function of the ROE. The risk is further increased for wind power
projects on account of continued and rapid technological enhancement.
In a short span of 4 to 5 years, the machine capacity in Maharashtra
has increased from 240 KW to over 1 MW. Shri Pillai, Director General
of MEDA, deposed before the Commission that technology upgradation
is taking place and that in the next 2-3 years, we will see significant
upgradation across the board, and 2 MW machines are slated to appear
in the market.
At the same time, consumers and purchasing utilities could argue that,
since all the costs are reimbursed in the cost-plus regime, 16% ROE is
too high as compared to ROE earned in free market conditions.
However, the Commission has to keep in mind that PLR continues to be
much higher compared to retail deposit rate.
The Commission has to bear both these points of view in mind while
deciding on this issue. The Commission is aware of the need to attract
private sector investment in the sector and, at the same time, has the
responsibility to ensure fair treatment to the consumers.
The Commission is also of the view that, normally, a project must be

able to get an amount equivalent to its equity back at the end so as to
facilitate replacement of the old generation machine with a new, more
efficient one.
The Commission is of the opinion that the methodology used for

determination of tariffs for thermal power projects is essentially the
same methodology that has to be used for wind power project i.e. cost
plus methodology. In this methodology, since costs are recovered, the
investor does not have to bear any risks associated with costs. He has
to bear the operational risks. Further, the argument of REDAM as
regards volatility is not correct, as thermal power projects could also
face volatility of supply and may also have to bear the risks associated
with the supply of fuel. Therefore, the Commission has decided to
follow the declared policy of the Government of India for private sector
participation in the power sector, which mandates 16% ROE to
investors.
As far as the 4.5% return to SEBs is concerned, it needs to be pointed

out that the return of 4.5% is on Net Fixed Assets, while 16% in case of
private investors is applicable on their equity investment. It would not
be proper to compare 4.5% return on NFA with 16% ROE.
In the financial model for new projects, cash return on equity is very
low during the first three years due to substantial loan repayment
liability. A higher return has been provided subsequently to ensure
overall 16% ROE.

2.2.11&12 Rate of Income Tax–35%+5% surcharge; MAT–7.5+5%

surcharge
Group II (OLD) & Group III (NEW ) PROJECTS
Technical Director, MSEB is of the view that there is no need to
consider the financial burden on these accounts as tax liabilities can be
met out of the additional income that would be available from: -
i) 100% accelerated depreciation benefit on income tax, which is

available to wind projects.
ii) Income tax exemption for 10 years on the profit due to sale of
electricity.
iii) Revenue income through sale of additional energy generated
above the CUF considered in the cashflow.
He is further of the view that the tax benefits and liabilities should be
properly accounted for in such a manner as to lower the tariff without
affecting the ROE to developers.
He has also mentioned that tax benefits available as per rules should
either be considered as reduction in capital cost, or no tax liability
should be considered in determination of tariff.
The Commission notes that the rates of income tax, i.e. 35% plus 5%
surcharge, and MAT, i.e. 7.5% plus 5% surcharge considered for old
and new projects are as per the prevailing Income Tax Rules, which are
statutory liabilities.
Further, the accelerated depreciation can be claimed only on income

from other business of the Investor. The investor, however, is liable to
pay MAT on income through generation and sale of wind energy.
Minimum Alternate Tax (MAT) @7.5% on the book profits is attracted

where the Income Tax payable by a Company on its total income
determined under the normal provisions of the Income Tax Act, 1961
(after deduction of all admissible expenses such as Operation &
Maintenance cost, interest on capital borrowed for the project and
depreciation at the accelerated rate of 80% of the capital cost of the
project) is less than 7.5% of its book profit. For this purpose, book
profit means the net profit as shown in the Profit & Loss Account
prepared in accordance with the provisions of Schedule VI to the
Companies Act, 1956. For the assessment year 2004-05 (Financial
year 2003-04), tax payable is also to be increased by a surcharge at
2.5% of the income tax.

The financial model for old and new projects provide for the income
available through various sources, including benefits, and the
expenditure, including tax liabilities.
The financial model is based on the assumed annual average

generation. If there is a possibility of increased generation availability,
there is equally a possibility for reduced generation availability also in
some other year. These possibilities have, therefore, not been
considered in the cashflow.
The Commission is of the opinion that the income tax and MAT are
statutory liabilities, and should accordingly be provided in the cash
flow analysis.
2.2.13 W orking capital and Interest Liability thereon has not been
considered separately as the amount earmarked for O&M out
of sale proceeds would meet this requirement.
Group II (OLD) & Group III (NEW ) PROJECTS
Technical Director, MSEB considers this proposal as acceptable.

Shri Hiralal Ramdas Jadhav is of the view that cost of wind power
should be cheap as working capital and interest liability thereon, which
is a major requirement for thermal power stations, is nil for such
projects.
The Commission notes that the amount earmarked for O&M out of
revenue would meet the need for working capital and interest liability
thereon. The Commission, therefore, considers working capital and
interest thereon as not separately necessary for the purpose of
determination of tariff for sale to utilities.
2.2.14 Period of Agreement: 10 & 13 years for Group II & III

respectively
Shri Pratap G. Hogade of Janata Dal Secular (Maharashtra) has

mentioned that REDAM consider the life of Wind Electric Generator as
30 years. Therefore, the life of wind power projects for the purpose of
tariff determination should be considered as 30 years.
Technical Director, MSEB is of the view that the project life indicated as
20 years is quite reasonable and that the agreement period should be
20 years as proposed. He has suggested that a clause to this effect
should be incorporated in the EPA, providing for guaranteed power

supply for a period of 20 years life, as energy availability for a lesser

period will affect the tariff model.
Shri S.R.Paranjpe has stated that EPA for sale of electricity to SEB and
the EWA for self-use/third party sale should be for 20 years duration or
longer, with backward-loaded tariff based on an appropriate discount
factor.
Prayas, Pune have stated that the period of agreement (EPA) should be
for 20 years to ensure benefit of energy at a lower cost to consumers in
later years.
Shri G.M.Pillai, Director General, MEDA stated that the PPA for sale to
MSEB should be for 20 years.
The Commission notes that the designed life expectancy of wind
turbine generator as estimated by the manufacturers in the country
and abroad is around 20 years. Major financial institutions that
provide finance to such projects have also accepted this assessment.
However, considering obsolescence due to rapid technological
development, it is not in the interest of the consumers and investors to
contract for 20 years, particularly for start up projects. For investor, as
well as for society the wind plant- the potential sites for which are
limited – should have optimum efficiency, in converting wind into
electricity throughout its life. This objective alone will give the
renewable power a competitive edge over the conventional power, in the
market lead power scenario envisaged under Electricity Act 2003.
Based on the policies of the main lending institution such as IREDA,

the loan repayment period has been considered as 6 years for Group II
projects and 10 years for Group III projects.
In view of the possible slippage in loan repayment due to yearly

variations in wind resources within the loan repayment period
considered, the tariff rate for purchase of energy has been determined
for 8 years (as against loan repayment period of 6 years) in the case of
Group II projects from the date of commissioning, and 13 years (as
against loan repayment period of 10 years) from the date of
commissioning of the project for Group III projects.
The Commission also notes that the provisions of the Electricity Act
(EA), 2003 that has come in to force from 10th June 2003 are
substantially different from the earlier Acts. Specifically, the
Commission notes that the new Act provides that the utilities shall
have to purchase a certain percentage of their total energy requirement
from renewable sources of energy. The Commission notes that it would
take some time before the procedures for such purchases are in place.

The Commission observes that in the light of the Act, it is essential that
the duration of the contract being entered be of minimum duration. On
the other hand, it has to be kept in mind that no project would be
financed if the duration of the agreement is shorter than necessary for
loan repayments. The Commission also notes that it is essential that
some contingency is required to be provided for in the duration of the
agreement to take into account uncertainty of wind, a natural resource,
and also other commercial exigencies. The Commission has, therefore,
permitted 2 and 3 years period respectively for such contingencies.
Therefore, the Energy Puchase Agreement Period has been

determined as 8 years for Group II projects and 13 years for Group
III projects.
The Commission also takes a note at this point that the EA2003 has
opened up a host of opportunities for CPP and private sector
generation. It also envisages the market-oriented operation of the
electricity sector. Therefore, the Commission took a conscious decision,
that, once the objective of market and technology stabilization is
achieved, such projects must be allowed to compete in the market. This
would enable the distribution entities to source, based on competitive
bidding with the benchmark of higher CUF and consequent penalty for
under-achievement, their energy requirements on commercial basis
rather than being saddled with a long-term (20 years as prescribed by
MNES policy) purchase agreement.
2.2.15 Comments on Cashflow Statements
2.2.15.A. GROUP II (OLD) PROJECTS
InWEA have stated that cash flow statements, which envisage loan
repayment at non-linear rate, should be revised to provide for loan
repayment at a linear rate.
Technical Director, MSEB has stated that, in case of old projects, cost
of energy delivered to the grid upto 31.03.2003 and the amount
received by the developer for the same may be considered as reduction
in capital cost, and that tariff for the period from 01.04.2003 onwards
for these projects may be determined taking into account the benefits
availed.
Shri Hiralal Ramdas Jadhav has stated that the principle of 5%

escalation in the rate should not be admitted for wind power projects as
air is free and the project does not involve purchase of fuel at a cost
which will vary. He has further stated that cost of generation and
supply of power for MSEB ranges between Rs.1.649 and Rs.3.15 per
unit, and that tariff for wind power should not be higher than the
supply cost of MSEB. He has also stated that T&D loss of 26.87% as in

the MSEB tariff Order should be applicable to energy delivered by wind

power projects also.
Shri Pratap G. Hogade of Janata Dal Secular (Maharashtra) has stated

that escalation rate per unit per year for the first 10 years should not
be more than 2%. He has welcomed the proposal to freeze the rate at a
lower level after 10 years for the balance period of project life. He has
further stated that the rate recommended by MNES in their guidelines
did not consider Sales Tax incentive. Therefore, the rate recommended
in MNES Guidelines should be considered along with the Sales Tax
benefits provided by the State Government subsequently. He has
further mentioned that the Tamil Nadu Government, vide their policy
dated 27th September, 2001, has fixed the rate of Rs.2.70/unit for the
next five years without any escalation for old projects, and
Rs.2.25/unit for new projects.
Prayas, Pune has stated that almost 80% of the project cost is borne by
taxpayers by the way of tax concessions /incentives provided by State
and Central Governments. In the light of such huge subsidy, the tariff
proposed appears to be very high. There are a number of shortcomings
in the tariff proposal made available for the public hearing. Therefore as
a rational unbiased financial analysis is essential, which should be
done afresh taking into consideration all subsidies, incentives and
considering a reasonable capital cost and cost of O&M.
Shri Pradyumna Kaul has stated that the cashflow statements have not
taken into consideration the 100% IT depreciation, 100% Sales Tax
benefits and other incentives availed by the generating companies
correctly and fully. Therefore, the tariff derived on the basis of these
cash flow statements are incorrect.
Dr. Ashok Pendse, Mumbai Grahak Panchayat in his presentation

before the Commission on 22nd April 2003, expressed his view that
benefits provided for wind power projects should be considered in the
cash flow, and 16% ROE to the developer should be safeguarded in the
interest of growth of wind power projects in the State. He has
presented a financial model comparing the cash outflow with income
through sale of energy year-wise for the first 10 years, when loan is
repaid with interest. Based on this model, Dr. Pendse has proposed
that (i) rate for energy provided by old wind power projects
commissioned before 31st March 2003, which were eligible for Sales Tax
incentive should be Rs.2.25/unit with 5% simple increase every year.
Dr. Pendse has further stated that MNES guidelines considered only
two incentives (a) 100% depreciation in first year and (b) no income tax
on profit from sale of energy, but the State Govt. gave 100% Sales Tax
benefit and a further additional subsidy of Rs.20 Lacs per MW through
MEDA. Thus GOI and GOM have given enough incentives to promoters
to cover capital costs.

Shri Vijay Kumar Sarvade, appearing on behalf of Shri S.R. Paranjpe,

stated that the assumption that wind power was initially costly but
cheaper subsequently was not correct. He further mentioned that the
benefits availed have led to generation of considerable cash surplus.
Shri G.M.Pillai, Director General, MEDA in his oral submission stated
that the CDM benefit under Kyoto Protocol cannot be taken into
consideration at present, as the international market for this is yet to
mature. He further clarified that the subsidy provided by MEDA was
Rs.20 Lacs/project, and not per Megawatt. He also mentioned that this
subsidy could not be provided by MEDA in time due to budgetary
problems, and that there was a huge backlog to be cleared. In case of
such benefits materializing in future an equitable mechanism to share
the same can be formulated.
Subordinate Engineers Association (MSEB) has stated that the cost of

generation and supply of power for MSEB ranges between Rs.1.64 to
Rs.3.15 per unit. The tariff for wind power should not be higher than
the supply cost of MSEB.
REDAM has stated that, as of now, CDM benefit under the Kyoto
Protocol is not likely to be available and that when it becomes available,
it should be to the account of the developer in view of the risks
undertaken by him.
The Commission notes that, out of the various issues raised above, it
has already discussed the following: elsewhere in the order.
1. Capital Cost of the Project

2. Sales Tax benefit
3. Benefit of Accelerated Depreciation
4. Income Tax/ MAT Liability
5. O & M expenses
6. Debt: Equity Ratio
7. Rate of interest for long term debt
8. Rate of interest for working capital
9. Return On Equity
10.Tenure of the loan
The Commission welcomes the detailed analysis carried out by

Dr. Pendse. However, given the fact that the Commission has already
discussed the basic assumptions in previous parts of the Order, the
Commission will not go further into details of any specific assumption.
Further, based on the response during public process and subsequent
submissions by various stakeholders, the Commission has fine-tuned
some of the assumptions in the cash flow model.

The revised cash flow suggested by Dr Pendse, for Group II projects (On
the format suggested by him) after incorporating the corrected
assumptions is shown below.
Table - 1
Cash flow Model for Group II Projects as per Dr. Pendse’s suggestions
All f igures are in Rs. Lakhs.
Year IN- IN- OUTFLOW Sale Income as per Net Cash
FLOW FLOW O & M Interest Loan Return MAT/ Income Proposed Rate Surplus/Deficit
I.T. S.T. on Loan Repay- on equity IT Needed Rate Amount Yearly Cumula-tive
Benefit Benefit ment (Benefit - Rs per
Ex pense) Unit
1 70.74 52.50 7.50 49.00 24.00 -42.74 2.25 35.48 78.22 78.22
2 70.74 52.50 7.50 49.00 38.89 24.00 -3.85 2.36 37.25 41.11 119.33
3 52.50 7.50 43.56 38.89 24.00 61.44 2.48 39.03 -22.42 96.91
4 52.50 10.00 38.11 38.89 24.00 58.50 2.59 40.80 -17.70 79.21
5 52.50 10.50 32.67 38.89 24.00 53.56 2.70 42.57 -10.98 68.23
6 52.50 11.03 27.22 38.89 24.00 48.64 2.81 44.35 -4.29 63.94
7 11.58 21.78 38.89 24.00 96.24 2.93 46.12 -50.12 13.82
8 12.16 16.33 38.89 24.00 91.38 3.04 47.90 -43.48 -29.66
9 12.76 10.89 38.89 24.00 86.54 3.15 49.67 -36.87 -66.54

10 13.40 5.44 38.89 24.00 81.73 3.26 51.44 -30.29 -96.83
350.00 531.43 2.76 434.61 -96.83
Basic Assumptions:
Cost of Project : Rs 500 Lakh / MW Annual CUF : 18%
Debt Equity Ratio : 70:30 Units Generated per MW/annum : 15.77 Lacs
Interest Rate : 14 % p.a. O & M Cost (f irst three y ear) : 1.5%
IT Rate : 36.75% O & M Cost (f ourth y ear onwards) : 2%
MAT Rate : 7.875% O & M escalation(f rom f ourth y ear) : 5%
Return on Equity : 16% Working Capital & Interest : included in O & M
Note: Second decimal figure may vary due to rounding off
Analysis of the cash flow given in Table 1 above:

As per the norms for loan repayment, following a one-year moratorium,
loan is to be repaid in nine equal installments. There will be negative
cash flow from 3rd year of operation. The surplus cash available in the
first two years gets fully consumed and, from the 8th year, the cash
deficit keeps on increasing. Consequently, the loan cannot be repaid in
ten years.
If the surplus available is fully utilized for loan repayment, even then
the loan can be repaid in 7 years (instead of the IREDA norm of 6
years.) Moreover, the cash surplus available at the end of the 10th year
would be quite low and, even after consideration of residual value, the

gross surplus (residual value plus cash surplus) will be less than the
equity of the promoter.
As regards the suggestion of InWEA to revise the cash flow statement to

provide for loan repayment at linear rate, the cash flow statement is to
be considered only as an indicative model and the investor is free to
choose the repayment rate that may be convenient to him based on the
total amounts earmarked for repayment and ROE.
As regards the views expressed by the Technical Director MSEB, Shri
Hiralal Ramdas Jadhav, Dunil Electric Saver and Maintenance
Company Pvt. Ltd., Mumbai and Shri Pratap G. Hogade, the cash-flow
statements take into consideration the benefits of tax incentives
availed, liability to repay the loan with interest and reasonable return
on investment.
The Commission notes that the c ash fl ow model for Group II (old)
projects provided in the tariff proposal has been duly revised,
based upon assumptions, which have been validated. It can be
presented in Dr. Pendse’s format as below:
Table - 2
Ex pense) Unit
1 70.74 52.71 7.50 49.00 82.38 24.00 39.43 2.50 39.42 0 0
2 70.74 52.71 7.50 37.47 95.49 24.00 41.00 2.60 41.00 0 0
3 52.71 7.50 24.10 39.69 24.00 42.58 2.70 42.57 0 0

4 52.71 10.00 18.54 44.32 24.00 44.16 2.80 44.15 0 0
5 52.71 10.50 12.34 51.60 24.00 45.73 2.90 45.73 0 0
6 52.71 11.03 5.11 36.52 24.00 0.42 24.37 3.00 47.30 22.93 22.93
7 11.58 24.00 0.90 36.48 3.10 48.88 12.4 35.33
8 12.16 24.00 0.98 37.13 3.20 50.46 13.33 48.66
9 12.76 24.00 1.06 37.82 3.30 52.03 14.21 62.87
10 13.40 24.00 1.13 38.53 3.40 53.61 15.08 77.95
350.00 387.23 465.15 77.95
Basic Assumptions:
Debt Equity Ratio : 70:30 Units Generated per MW/annum : 15.77 Lacs
Interest Rate : 14 % p.a. O & M Cost (f irst y ear) : 1.5%
MAT Rate : 7.875% O & M escalation(f rom f ourth y ear : 5%

The Commission notes that the revised cash-flow analysis has taken
into account all sources of realistic income including the Sales Tax and
income tax benefits availed, as well as expenditure. The Commission,
therefore, considers this revised cash flow for the purpose of
determination of tariff for sale to Utilities.
2.2.15.B. GROUP III (NEW ) PROJECTS
Technical Director, MSEB has stated that the project cost should be
reduced by the extent of tax and other incentive benefits availed from
the Government.
Dr. Ashok Pendse, Mumbai Grahak Panchayat expressed his view that
benefits provided for wind power projects should be considered in the
cash-flow, and 16% ROE to the developer should be safeguarded in the
interest of growth in wind power projects in the State. He has
presented a financial model comparing the cash outflow with income
through sale of energy year-wise for the first 10 years, when loan is
repaid with interest. Based on this model, Dr. Pendse has proposed
that rate for energy provided by new projects commissioned from 1st
April, 2003 without any Sales Tax incentive should be Rs.2.75 per unit
with 5% simple increase every year. Dr. Pendse has further stated that
MNES guidelines considered only two incentives (a) 100% depreciation
in first year and (b) no income tax on profit from sale of energy but the
State Govt. gave 100% Sales Tax benefit and a further additional
subsidy of Rs.20 Lacs per MW through MEDA. Thus, GoI and GoM
have given enough incentives to promoters to cover capital costs.
The Commission notes that out of various issues raised above the
Commission has already discussed the parameters for cash flow
statement preparation in earlier sections, wherein Group II and III
projects have been discussed in the light of the various issues and
related basic assumptions.
The Commission would like to point out that the 10% deration in
energy generation shown in the cashflow for new projects is an
inadvertent mistake. The deration in energy availability has been
restricted to 5%. Further, based on the response during the public
hearing process and subsequent submissions by various stakeholders,
the Commission has fine-tuned some of the assumptions in the cash
flow model.
As regards the suggestion of InWEA to revise the cashflow statement to

provide for loan repayment at linear rate, the cashflow statement is to
be considered as a model and the investor is free to choose the
repayment rate that may be convenient to him.
The Commission notes that the financial model for new projects used
for preparing the tariff proposal under consideration is based upon
assumptions, which have been validated, and includes all sources of
income and expenditure.
A revised Cash fl ow for Group III (NEW) projec ts (in the format
recommended by Dr. Pendse), after incorporating these
corrections, is shown below.
Table - 3
Ex pense) Unit
1 6.00 35.00 8.32 19.20 68.52 3.50 61.32 -7.20 -7.20
2 6.00 33.96 11.73 19.20 0.26 71.15 3.65 63.95 -7.20 -14.40
3 6.00 32.49 15.51 19.20 0.58 73.78 3.80 66.58 -7.20 -21.60
4 8.00 30.56 17.88 19.20 0.77 76.40 3.95 69.20 -7.20 -28.80
5 8.40 28.32 21.99 19.20 1.12 79.03 4.10 71.83 -7.20 -36.00
6 8.82 25.57 26.57 19.20 1.50 81.66 4.25 74.46 -7.20 -43.20
7 9.26 22.25 31.66 19.20 1.92 84.29 4.40 77.09 -7.20 -50.40
8 9.72 18.29 37.31 19.20 2.39 86.92 4.55 79.72 -7.20 -57.60
9 10.21 13.63 43.59 19.20 2.91 89.54 4.70 82.34 -7.20 -64.80
10 10.72 8.18 50.57 19.20 3.50 92.17 4.85 84.97 -7.20 -72.00
11 11.26 1.86 14.88 19.20 3.81 51.01 5.00 83.22 32.21 -39.79
12 11.82 19.20 4.10 35.12 5.15 85.72 50.60 10.81
13 12.41 19.20 4.24 35.85 5.30 88.21 52.36 63.17
280.00 925.44 4.40 988.61 63.17

Basic Assumptions:
Debt Equity Ratio : 70:30 Units Generated per MW / annum : 17.52 Lacs
Interest Rate :12.5 % p.a. O & M Cost (f irst y ear) : 1.5%
MAT Rate : 7.875% O & M escalation(f rom f ourth y ear : 5%
The Commission, therefore, considers this financial model for the

purpose of determination of tariff for sale to Utilities, to ensure better
technology which can give more than 20% CUF.

WIND PROJECT TARIFF ORDER 03-04 Section 2 Objections / Suggestions / Comments
on Tariff Proposals
2.3 COMMENTS ON TARIFF PROPOSALS
2.3.1 Part-A: GroupII (Old) Projects commissioned before

31.03.2003, which have availed Sales Tax Benefits
Tariff for Sale to MSEB, other utilities and Licensees: Rs.3.24/Unit

w.e.f. 01.04.2003; increase @11 paise per unit every year for 10
years from the date of commissioning; rate to be reduced and
frozen at Rs.3/- per unit from 11th year onwards
Mahratta Chamber of Commerce, Industries and Agriculture, Pune
have stated that ceiling limit of 90% of HT tariff on the rate payable per
unit by the MSEB as per its policy should not be imposed.
REDAM has stated that GoM, vide its circular dated 7th January, 2002,
has clarified that escalation at a cumulative rate of 5% on the rate for
sale to MSEB fixed at Rs.2.25 per unit for the base year 1994-95 would
be allowed. REDAM have further stated that developers have made
investments considering this policy, and any deviation will adversely
affect the return on investment, and no ceiling on purchase rate linking
it to HT tariff as indicated by MSEB should be allowed.
Technical Director, MSEB has stated that the tariff for old projects
should be as per the policy of MSEB, which is as follows:
Rate per unit for the base year 1994-95: Rs.2.25 per unit
Annual increase at a fixed rate of 5% on the base year rate
(11.25 paise per unit) every year for the first 10 years.
No increase for the next 3 years
Increase at a fixed rate of 5% on base year rate (11.25 paise per
unit) every year for the balance period of 7 years.
Purchase rate payable will have a ceiling limit of 90% of HT
industrial base energy tariff in force which, for the year 2002-
2003, was Rs.2.80 x 90% = Rs.2.50 per kWh
If tax benefits are considered, cost per unit will be below
Rs. 2.50.
The Technical Director, MSEB in his presentation, further stated that

the benefits provided by Govt. of India, Govt. of Maharashtra as well as
by MEDA should be taken into account in determination of tariff, and
also that after 6 years, when the loan is repaid, the tariff should show
declining trend.
Prayas, Pune have stated that considering the substantial incentives

provided to wind power projects in Maharashtra by the State and
Central Governments, the rate proposed per unit is very high. The rate

on Tariff Proposals
should be fixed considering efficiency and economy as well as the

various incentives/concessions provided so as to ensure that the
promoters do not get excessive profits and the consumers are not
burdened with a high tariff. They have further stated that in view of
the clarifications provided by Shri Ajit Gupta of MNES to the effect that
MNES did not recommend any Sales Tax relief/incentive, the cost of
generation for projects that have availed 100% ST benefit should be
substantially less than MNES guidelines. They have proposed that the
tariff should be re-determined through a rational, unbiased financial
analysis, which should be done afresh taking into account all
subsidies, incentives, etc. and considering reasonable project cost and
cost of O&M. They have also suggested that the consultant’s final draft
report put to the public should be reviewed by at least two renowned
energy experts having no commercial relationship with the wind power
industry. They have further stated that developers/ promoters who
have not opted for sale to MSEB initially should not be permitted to opt
for sale to MSEB subsequently.
Shri S.R.Paranjpe is of the view that the proposed tariff provides over
20% return on equity (at a low CUF of 18%), which is very high, and
the tax rebates provide a considerable surplus cash from 6th to 10th
year as observed from the cash-flow statement. Therefore, the tariff
from the 6th year should be fixed at Rs.2.80/unit for the next 5 years,
and at Rs.2.50/unit for the next 10 years. He has further stated that
the promotional aspect may be limited to Government giving full
income tax holiday, energy banking facility to enable third party
sale/self-consumption with a commitment to purchase upto 25% of the
annual output at TOD rate, and directing the Financial Institutions to
provide loan at a reasonable interest. He has further stated that, at a
capital cost of Rs.5.0 crores per MW, 10% interest on loan, 12% ROE
and 25% CUF, the levelized cost of energy will be less than Rs.3/unit.
He has proposed that the tariff rate to be fixed should be based on a
proper comparison of life cycle costs of thermal generation and wind
based generation by comparing costs involved in plants commissioned
in the same year.
Subordinate Engineers Association of MSEB is of the view that the

proposed annual escalation of tariff at the simple rate of 5% is not
justified as air is free and use of procured fuel at varying cost is not
involved. The Association has suggested that the annual rise in tariff
should be linked to the percentage rise in MSEB power generation cost.
Dr. Ashok Pendse, Mumbai Grahak Panchayat has put forward,
through cashflow statements provided by him, a rate of Rs.2.25 per
unit with simple increase @5% a year for old projects w.e.f. 1st April,
2003.

on Tariff Proposals
InWEA have stated that, for projects commissioned during the financial
year 1998-99 and 1999-2000, energy purchase rate should be Rs.2.69
per unit and Rs.2.80 per unit respectively during these years.
Shri Arun Kumar, on behalf of Energy Department, Government of

Maharashtra, submitted that the tariff proposal under consideration
indicated that the increase considered as per GoM policy in the rate per
unit is as 5% on simple basis for old projects, and 5% on compound
basis for new projects whereas the Govt. of Maharashtra has declared,
vide its decision dated 7th January, 2002, that the 5% increase in rate
shall be on compound basis for old as well as new projects.
The Commission has already elaborated on the methodology adopted

for the purpose of determining the tariff for sale of power to utilities.
The Commission is acutely aware of the responsibilities placed on it
under ERC Act. The Commission has to balance the interests of the
consumers and, at the same time, ensure fresh investment in this
sector by providing reasonable incentives to the investor. In view of
these responsibilities, the Commission has critically analysed the
submissions made by various stakeholders in the following paragraphs.
Both the associations of the developers, i.e. InWEA and REDAM, have
urged the Commission to approve the tariffs based on the Government
of India policy guidelines. The Commission needs to ensure that the
tariffs approved by it are reasonable. Therefore, before making any
decision in this regard, it had directed both the developers and
representatives of Government of India to submit the detailed reasoning
as well as calculations used for the development of these policy
guidelines. Unfortunately, no such submission was made before the
Commission. Neither does the mere submission of various notifications
by the GoM make it easy to understand the rationale behind these
policy initiatives. As a result the Commission is neither in a position to
check the reasonableness of the policy guidelines of the MNES,
Government of India, nor can it see the rationale of GoM’s rapidly
changing policy directions.
Technical Director, MSEB has appealed to the Commission that the

policy adopted by the MSEB with regard to wind projects should be
retained. However, the Commission notes that all the developers in the
State have objected to one particular feature of the policy, namely
limiting the tariffs of wind projects to 90% of the highest HT tariff. The
MSEB explained that this feature is necessary to ensure that financial
viability of the MSEB is not put in jeopardy. However, on the other
hand, this feature could put the financial viability of the wind projects
in jeopardy. Further, the Commission observes that no linkage exists
between the costs of the wind power project and the HT tariff.

on Tariff Proposals
Therefore, the Commission cannot accept the MSEB policy as the basis
for deciding tariffs of wind projects for sale to utilities.
The Commission further noted that there has been a spate of policy
changes effected by the MSEB, in view of GoM resolutions, over a short
time period, leading to an unstable policy regime. The Commission
recognizes the importance of a stable and continuous policy framework
for a reasonable period to drive sectoral growth and instill investor
confidence.
In view of these considerations, the Commission felt it necessary to

develop a tariff structure, which is based on certain verifiable and
rational principles. The Commission, in Section I of this Order, has
discussed the reasons behind the extensive use of the Cost Plus
Methodology to determine the price of services. The Commission has
noted that, depending on the technology adopted, machine size, siting
condition, etc., there would be individual tariffs for each wind machine.
However, this is both logistically and operationally difficult to derive
and implement. Therefore, a common approach has been adopted by
grouping the projects based on the benchmark of commissioning date
and various financial parameters.
The Commission has used this methodology for determination of the

tariff of wind power for sale to the utilities. In earlier paragraphs of this
section of the order, the Commission has deliberated on the various
assumptions used in the financial model and presented the rationale
for adoption of those assumptions.
The Commission has considered and included the benefits availed by

the Group II (old) projects in the form of Sales Tax incentive, income tax
benefit due to accelerated depreciation, and exemption of profit from
sale of energy from income tax in the financial model. Cash subsidy to
the extent of Rs.20 Lacs per project provided by the GoM through
MEDA has, however, not been taken into account as most of the
projects have not been able to avail of this benefit. The Director
General, MEDA has confirmed in his oral submission that this subsidy
could not be provided in time due to budgetary problems, and that a
large backlog is still to be cleared. Therefore, the Commission
recommends that such benefits, if materialising in future, should be
equitably shared between the developer and the purchasing agency
since the rate determination is based on the Cost Plus Methodology.
As explained earlier, the Commission has considered 16% ROE for the
purpose of tariff determination through a cash flow model which takes
into consideration all the inflows and outflows to the project.

on Tariff Proposals
Based on these assumptions, the consultant had earlier arrived at the

rate of Rs.2.50 per unit of energy provided by old projects for the first
year from the date of commissioning of the project, with an increase of
10 paise per unit every year for 10 years from the date of
commissioning.
Given the option of ‘Third Party Sale’, the developer may switch to
‘Third Party’ at the cost of licensee. Therefore, the consultants’
proposed rate would not be economically sensible. Further, as
mentioned earlier, this mechanistic approach of cost plus tariff fixation
would not cover all the risks taken by the investor in a new technology
which is still in the process of taking root in the State. Moreover, these
investors had developed their projects based on the guidelines of GoM.
Though they could not be given GoM tariff for 20 years period, they
should be allowed to sell energy to MSEB/Utilities at the rate indicated
in that policy, at least for six years for availing Sales Tax benefit and
discharging the loan obligations.
Comparison of the two cash flow models, discussed at Section 2.2.15,
suggests that the loan repayment period, after factoring in Sales Tax
and other benefits, will be less than or equal to 6 years depending on
CUF level. Due to teething troubles normally the first year operations
are not optimum, hence, by giving a grace period of 2 years, these
developers will be able to earn market return on their investments.
Even the early projects, which are operating with CUF of 12% and
eligible for Sales Tax benefit, could thereby earn a fair return close to
that which has been envisaged in the MNES and/or GoM policy.
Therefore, they will also be in a position to repay the loan in 8 years.
Therefore, the purchase rate as notified by the GoM vide its Order No.
NCP 1097/CR-75/NRG-7 dated 12th March 1998, i.e. Rs.2.25 per unit
in the base year 1994-95 shall be valid for purchase by utilities from
wind energy projects. The tariff shall be increased at 5% per year
(simple rate). The validity of the EPA shall be only 8 years from the
date of commissioning, in departure from GoM/MSEB policy.
2.3.2. Adjustment for self use and sale to third party : unit
adjustment as per TOD tariff time slots
OLD & NEW PROJECTS
Mahratta Chamber of Commerce, Industries and Agriculture, Pune
have stated that sale to commercial consumers should also be
permitted. They have further stated that unavailed energy at the end of
the year should be treated as sold to MSEB, and MSEB should pay to
the owner/developer for the same at the rate applicable for the year.
REDAM have stated that adjustment in monthly electricity bills on TOD
basis could lead to disputes as such adjustment involves complicated
calculations. GoM/MSEB policies, based on which investments have
been made, do not provide for adjustment on TOD basis. Any deviation
on Tariff Proposals
from the policy now will adversely affect the return on investment to
developers. Therefore, adjustment should be at base energy tariff plus
T&D loss charges uniformly for old as well as new projects. They are of
the view that bankable buy back rate and prompt payment by MSEB
would encourage developers to opt for sale to the utility.
InWEA have stated that the proposal for adjustment in monthly

electricity bills on TOD tariff basis, though good, may pose
administrative problems. For instance, a consumer working on A & B
time slots only will not be able to avail of the energy delivered in C & D
time slots. For such consumers, energy should be adjusted against
consumption in the time slots actually made, irrespective of the time
slots in which it is delivered.
InWEA have further stated that adjustment on TOD basis and credit in
monthly electricity bills in terms of money value on monthly basis is
acceptable, but the modalities should be clarified to avoid ambiguity in
implementation. They have suggested that a TOD meter be provided at
the grid sub-station instead of providing separate TOD meters for each
project, as a more convenient arrangement.
Technical Director, MSEB has stated that credit for energy availed for
self-use/third party sale should be computed at the lowest slab of
applicable HT energy tariff for adjustment as per their existing policy.
He has further stated that, on commencement of third party sale,
MSEB should not be made liable to buy the surplus energy at the end
of the year.

have stated that the tariff proposed for sale to MSEB should not be
made applicable for sale to third parties. They have further stated that
the rate for sale to third parties should be 10% less than the HT
industrial tariff and that if TOD meters are provided at the consumers’
end, incentive of TOD tariff should be made available to wind power
projects.
Shri Syam Sundar Venkatesh Deo of InWEA, in his submission, has

dealt with the issue of adjustment of energy delivered on TOD slot
basis. He has proposed that if there was no consumption in the slot in
which energy was delivered, the energy not consumed should be
converted to the next slot in which there was consumption by a formula
A x A/B charge for adjustment. In this manner, the energy not
consumed in a slot can travel to the next slots for adjustment.
The Commission notes that the existing policy of the MSEB, which
requires energy wheeled for self-use/sale to third parties to be adjusted

on Tariff Proposals
against the consumption in the lowest slab of the TOD Tariff, has
severe financial implications to the wind project developer. Further, this
policy has no rational justification in terms of relationship between the
cost of production of wind energy and TOD tariff slabs applicable to the
HT category. Therefore, the Commission does not approve the same,
since it goes against the philosophy behind introducing TOD tariff.
The Commission is of the view that, to avoid any adverse impact on net
average cost of energy in the State, the third party sale and Captive
consumption should be treated as only displacement of energy, and
credit should therefore be provided strictly as per TOD time slot. This
would mean that the credit for wind power generation would be given in
the energy bill for a particular TOD slot only to the extent that energy is
being consumed in that TOD slot. In case the energy delivered to the
grid in a particular time slot of TOD tariff is not consumed in full in the
same time slot, the surplus energy not consumed will be deemed as
banked with the utility for consumption in subsequent months within
the financial year, subject to the banking policy discussed in
subsequent paragraphs.
use/ sale to third parties shall be adjusted against the consumption
made at the lowest energy tariff slab/time slot first, and then at the
next higher slab, and so on till such time as appropriate meters are
installed.
As regards reactive energy charges, these will be recovered from the

wind power producer for energy sold to the Utility. In case of self-use,
these charges will be added to the monthly electricity bill of the
producer, and in the case of third party sale, these charges will be
added to the monthly electricity bill of the consumer (third party
purchaser to whose premises energy is wheeled). For the period when
wheeling is discontinued, it will be recovered from the bill of the
producer for surplus energy banked with the Utility.

on Tariff Proposals
2.3.3 Part-B: New Projects commissioned after 01.04.2003 with no

Sales Tax Incentive
Tariff for Sale to MSEB, other utilities and Licensees: Rs.3.50/unit

for the first year with escalation @30 paise per unit every year for
the first 10 years from the date of commissioning of the project
and rate to be reduced and frozen at Rs. 3.25 per unit from 11th
year onwards.
Akhil Bharatiya Grahak Panchayat, Pune are of the view that the
proposed rate of Rs.3.50/unit is very high as compared to thermal
power tariff, and there is considerable scope for reduction in project
cost. They have further stated that the developer is being called upon
to pay Electricity Duty by the MSEB, which adds to the cost of
generation, whereas it is the consumer who should pay it.
Dr. Ashok Pendse, Mumbai Grahak Panchayat has justified, through

cashflow statements provided by him, a rate of Rs.2.75 per unit with a
simple increase @5% a year for new projects from 01st April 2003.
Shri Pradyumna Kaul has stated that the proposed tariff rates for new
projects should not be accepted as they are based upon incorrect and
incomplete data.
InWEA have stated that the report at page 29, indicates a rate of
Rs.4.25 per unit in the first year for new projects, whereas the tariff
proposal mentions the rate as Rs.3.50 per unit. The project are not
viable at the recommended rates, and the proposal does not take into
account the credit due to wind energy for its environmental benefits.
Shri G.M.Pillai, Director General, MEDA in his oral submission

suggested reconsideration of the limit on the wind power project
capacity to be developed in the remaining 4 years of the 10th Plan
ending 31st March 2003 to 400 MW at 100 MW a year in view of the
GoM’s plan to develop 750 MW in this period.
The Commission has earlier discussed all the basic issues and
assumptions associated with the tariff determination for wind power
projects while considering the tariff for sale to energy from old projects.
These assumptions are valid even for new projects commissioned after
1st April 2003.
As explained earlier, the Commission has taken into account the
benefits in the form of accelerated depreciation of income tax and
exemption of profit from sale of energy from income tax in the financial
model for the typical project. Cash subsidy to the extent of Rs.20 Lacs
per project to be provided by the GoM through MEDA has however not
on Tariff Proposals
been taken into account as most of the projects have not availed of this
benefit. However, such benefit, if availed of in future, would be
equitably shared between the utility and the developer.
In the case of projects being commissioned after 1st April 2003, due to
non-availability of certain fiscal incentives, the tariff in initial years is
required to be maintained at substantially higher levels to provide for
16% ROE. This will adversely impact the net average cost. In order to
reduce the impact on net average cost, a lower tariff of Rs.3.50 has
been approved. This initial rate will not provide 16% return on equity
after meeting all liabilities. However, the Commission has provided for
higher return during subsequent years to compensate the project
developer for this loss of return during the initial years. Annual
escalation at 15 paise per unit for the first 13 years would provide a
slightly higher rate of return in subsequent years to ensure an overall
16% ROE.
Based on these assumptions, the Commission has approved the rate of

Rs.3.50 per unit of energy provided by new projects with effect from
01st April 2003 for the first year with escalation at Rs.0.15 per unit
every year for the first 13 years from the date of commissioning.
The Commission has taken note of the declining trend in the cost of
equipments and interest rate, and improvements in technology, which
are likely to have a vital bearing on the cost benefit economics. The
Commission is of the opinion that it would be necessary to study this
cost benefit economics and review the role of wind power in the overall
power scenario at a later date. Therefore, the Commission has
restricted the applicability of rates to the projects commissioned during
the period from 01st April 2003 to 31st March 2007. The Commission
proposes to review and revise the tariff at an appropriate time and
revise it, if necessary, for projects to be commissioned beyond after the
10th Plan period.
The Commission further clarifies that the limit of 750 MW on additional

wind power generating capacity (installed capacity) placed for the
balance period of the 10th Plan is applicable only for sale to
MSEB/Utilities/Licensees. No limitation on the capacity addition for
Self-use/Third Party Sale is envisaged.

on Tariff Proposals
2.4 COMMENTS ON TARIFF RELATED COMMON ISSUES
2.4.1 W heeling Charges for Self Use and Sale to Third Party: 2% as
per MNES Guidelines
Shri Sriram Madhukar Sane has stated that the proposed MSEB policy
in this respect is reasonable.
Mahratta Chamber of Commerce, Ind. & Agriculture, Pune(MCCIA),

REDAM & InWEA have stated that the proposed 2% wheeling charges
as per GoM Policy/ MNES Guidelines is quite reasonable and that it
should be applicable to all the utilities.
Technical Director, MSEB has stated that the Power Grid Corporation
(India) Limited (PGCL) charges 13 paise per unit for wheeling on the
tariff of Rs.2.50 per unit, which works out to 5.2%. As against this, the
proposed policy of MSEB provides for levy of wheeling charges ranging
from 2% to 6% depending upon the distance involved.

have stated that the proposed levy of 2% for wheeling is reasonable.
They have suggested that revision of this levy, when required, should
be done after a careful study and not on an arbitrary basis.
Dr. Ashok Pendse, Mumbai Grahak Panchayat has proposed that

wheeling charges for self use and third party sale should be 2% for a
distance of 0-50 km, 3% for distance of 51-200 km and 4% for a
distance above 200 km.
Prayas, Pune have proposed that wheeling and T&D loss charge should
be 15%.
The Commission notes that the philosophy behind levy of T & D Loss
charges is substantially different from that of wheeling charges and,
therefore, these two charges should not be bundled together. Wheeling
charges are meant to include charges for use of the utility’s physical
infrastructure for wheeling and the administrative expenses involved.
In the absence of any other methodology, levy of 2% wheeling charges
as recommended in the guidelines of MNES, Govt. of India is
considered as reasonable. The Commission, therefore, has approved the
wheeling charges at the rate of 2% of energy wheeled for self and third
party sale cases, pending more substantive determination of these
charges by the Commission in future.

on Tariff Proposals
2.4.2 T&D Loss Charges : Not to be charged for first 3 years;

thereafter @1% as per GoM Policy
REDAM and MCCIA, Pune have stated that proposed T&D loss charges
levy, which is as per GoM policy, is reasonable.
Technical Director, MSEB has stated that the Consultant to MERC and
the PGCL agree that T&D loss at EHV level is 8%. He has further
stated that, based on the studies conducted by the MSEB, actual T&D
loss from wind power projects, to the EHV sub-station is found to be
between 2.3% to 4.16% in low wind season; that this loss would be
much higher in high wind season when power flow would be high, and
that the loss in transmission of power from one EHV sub-station to the
other has also to be taken into account. In view of this position, the
Technical Director, MSEB feels that levy of T&D loss charges from 2%
to 6% depending upon the distance involved, as per the proposed policy
of MSEB, is quite justified.

have stated that the proposal to levy 1% T&D loss charges from 4th year
is reasonable.
Prayas, Pune have stated that the T&D loss charge levied on all
consumers of MSEB is to account for excessive T&D losses in the
MSEB grid; wind power projects using the MSEB grid for wheeling of
energy for self-use/third party sale should also bear this levy in
addition to the T&D loss actually involved in wheeling; therefore,
wheeling & T&D loss charge to be recovered from wind power projects
should be 15%.
The Indian Wind Turbine Manufacturers’ Association, Chennai has
stated that the consumers availing the facility of self-use/third party
sale being HT consumers, the T&D loss will be negligible; therefore it
should be levied at a flat rate of 2%.
Dr. Ashok Pendse, Mumbai Grahak Panchayat has proposed that T&D
loss charge for self use and third party sale should be 2% for a distance
of 0-50 km, 3% for distance of 51-200 km and 4% for a distance above
200 km.

It is the view of the Commission that wind energy is essentially
displacing thermal energy, which is primarily being transmitted from
thermal stations in eastern Maharashtra. No major thermal station
exists in the area where wind projects are located. Further, this area is
highly industrialized and the electricity demand in this area is
increasing. The Commission is not convinced that wind projects result
in incremental T & D losses. It is the considered view of the

on Tariff Proposals
Commission that these projects may in fact be contributing to the

reduction in transmission losses since the requirement of transmission
of energy is reducing.
However, the Commission would like to ascertain these assumptions by

conducting an in-depth study, including Load-Flow analysis, to
determine whether wheeling of energy for self-use/sale to third party
would actually cause increase in T&D loss, and if so, to what extent.
Based on the results of this study, the Commission would determine
the T&D loss charges to be levied on wind power.
The Commission disagrees with the views of Prayas that wind power
projects should bear T & D loss charge to the extent of 15%. The
Commission is of the view that T & D loss charge is being levied with
the purpose of penalizing inefficiencies in the system and creation of
awareness among consumers. Further, it is levied on the consumers
and not on generators. The Commission observes that the consumers,
whether seeking supply of power from the utility or from the wind
projects, is anyway subjected to T & D loss charge. Therefore, levy of T
& D loss charge in effect would mean a double penalty on those
consumers.
The Commission has decided that a study should be conducted to

determine the T&D loss at local level. Based on the results of the
study, T&D loss charges to be levied on energy supplied by wind power
projects would be determined by the Commission. Till then, uniform
transmission losses at the rate of 5% shall be applicable.
2.4.3 Banking : Permitted any time of the day & night; balance at
the end of year will not be carried over to next year; surplus
energy at the end of the year not exceeding 10% of the net
energy delivered to the grid during the year shall be
purchased by the MSEB at the lowest TOD slab rate
applicable on 31st March of the financial year in which the
energy was banked
MCCIA, Pune have stated that surplus energy at the end of the year
(unavailed energy) should be purchased by MSEB.
Shri Shriram Madhukar Sane has stated that the TOD concept should
be made applicable for the energy to be banked.
REDAM, InWEA and The Indian Wind Turbine Manufacturers’
Association, Chennai have stated that, while energy generation and
supply from wind power projects would be normal for the period of
project life, the same can not be true for the third party purchaser. The
possibility of the purchaser not availing the delivered energy in full for
reasons beyond control cannot be ruled out. Therefore, the balance

on Tariff Proposals
quantum of surplus energy at the end of the year should be treated as

sold to MSEB, and MSEB should pay the owner/developer for this
energy at applicable rates without any ceiling limit either on quantum
or on rate, particularly since MSEB would get additional revenue
through sale of such energy every month.
REDAM have further stated that the surplus energy at the end of the
year should be to the account of developer/owner and not to the
account of consumer.
InWEA have proposed that purchase of surplus energy at the end of the
year in excess of 10% at a different rate may be considered, which will
be fair to the producer and the utility.
Dr. Ashok Pendse, Mumbai Grahak Panchayat has proposed that
banking should be allowed as per MSEB policy.
The Commission notes that banking of energy is involved in case of

self-use and sale to a third party. The MSEB, in the past, have adopted
a policy according to which the MSEB is not liable to purchase any
energy once the producer opts for sale to third party. Any surplus
energy at the end of the year gets lapsed, and the producer of the
energy does not get any compensation for it.
While the Commission shares the view of the MSEB that banking
facility is being provided for the benefit of the developer and/or third
party purchaser, and also that is infirm power which the MSEB can not
schedule and optimally utilize, the Commission does not agree with the
treatment mooted by the MSEB for the banked energy.
A developer who opts for self-use/sale to third party is expected to limit

the project size such that the energy provided can be availed by him in
full. However, inability to consume the energy fed into the grid fully
due to factors beyond control cannot be ruled out, especially since the
generation of wind power is to some extent unpredictable due to its
dependence on nature. Matching of load and generation may not be
possible. Further, the Commission’s decision to allow settlement of
energy on the basis of TOD time slots may create problems for
matching load and generation. Any need to change third party
purchaser may take time, during which the energy will be continually
fed into the grid and consumed by consumers for which the MSEB
would be collecting revenue. Therefore, the Commission is of the view
that it would not be prudent to allow this energy to get lapsed.
The Commission understands that the developers generally plan the

size of their wind projects after taking into account their own energy
requirement as well as that of the third party purchaser if it is
on Tariff Proposals
contemplated. Therefore, under normal circumstances, the developer

will not have to bank a substantial portion of the energy with the
utilities. Even if the developer had to bank substantial portion in one
month, he could use it in the next month. This would mean that it
would be reasonable to assume that more than 10% of total energy
generation from the project will not be banked with the utility at any
point of time. Therefore, the Commission has decided that upto 10% of
total energy generation from the project banked with the utility will be
purchased by the utility at the rate specified by the Commission.
Further, the Commission feels that, under force majeure conditions,
surplus energy in excess of 10% may be purchased by the Utility at a
rate less than the rate applicable for the 10% limit as the Utility derives
commercial advantage from such energy by selling each consumer.
In view of these considerations, the Commission has taken the
following decisions:
i) Banking of energy will be permitted at any time of the day and
night
ii) Balance at the end of the financial year will not be carried over to
the next year
iii) Surplus energy at the end of the financial year, limited to 10% of
the energy (kWh) fed into the grid during the financial year, will
be purchased by the utility at the lowest TOD slab rate for HT
energy tariff applicable on 31st March of the financial year in
which the energy was banked.
iv) Surplus energy in excess of 10% of the energy fed into the grid
during the year due to force majeure conditions shall be
purchased by the utility at a rate equivalent to the weighted
average fuel cost as determined by the Commission in the tariff
order and in force from time to time.
v) The payment for surplus energy should be made to the
developer/ owner and not to the consumer in case of third party
sale.
2.4.4 Charges for Reactive Energy (kVArh) Consumption made

from the grid : 25 paise per unit of kVArh which may be
revised by MSEB from time to time
REDAM have stated that the proposed rate of 25 paise per unit of
kVArh consumption should remain constant for the entire period of
project life.
Tata Power Company have stated that kVArh consumption from the
grid to be paid for should be on net energy basis, i.e. import minus

on Tariff Proposals
export, and that MSEB should pay for the excess kVArh exported to the
grid by wind power projects.
The Indian Wind Turbine Manufacturers’ Association, Chennai have

stated that kVArh consumption in wind power project depends on
frequency and harmonics over which the owner/developer does not
have any control. Therefore, developers who draw kVArh upto 10%
should not be required to pay any penalty and consumption in excess
of 10% should only be billed at 25 paise per unit. They have further
stated that the reactive power consumption should be on the net
consumption basis, which is the difference between import and export.
Dr. Ashok Pendse of Mumbai Grahak Panchayat has proposed a rate of

25 paise per unit of kVArh.
InWEA have proposed that charges for reactive energy consumption

should be levied on net energy consumption basis.
Shri Shyam Sundar Venkatesh Deo of InWEA, in his submission,

clarified that the induction generators mainly used in wind power
projects require reactive energy input from the grid for power
generation in order to compensate for which capacitor banks were
provided; that at time of low generation, capacitor banks export reactive
energy to the grid and that quantum of reactive energy fed to the grid
on an average would be 10% of the energy generated. He further stated
that reactive power being a necessary input for power generation in
wind power projects, the price at which reactive energy is provided
should remain constant for the period of project life of 20 years.
The Commission observes that the reactive energy is an essential

component of power generation in wind power projects, and it is
reasonable that the producer pays for the reactive energy supplied by
the grid to facilitate power generation.
Further, the power system with a limited reactive power generating

capacity is required to meet the demand of consumers as well as that of
the inductive load in the system which is invariably far in excess of
reactive power generation. The utility therefore attempts to limit the
reactive power consumption of the consumers through power factor
penalty clauses. The utility also installs capacitor banks at strategic
locations to compensate the reactive power consumption in the system.
The Commission is of the opinion that, as far as reactive power

consumption is concerned, the wind power producer is also a consumer
who is required to minimize the reactive power consumption by
providing adequate capacitor banks. Imposing a cost for purchase of

on Tariff Proposals
this reactive power is the only means through which the utility can
compel any consumer of reactive power, including wind power
producers to minimize his consumption. Various methods such as
power factor penalty, kVARh billing, etc are available to impose this
cost.
The Commission has opted for cost per unit of reactive power purchase
as a method of billing for the reactive energy as this is a straightforward
method of billing and the necessary metering is already in place.
Further, the Commission notes that the cost of generation of reactive

energy increases with time and the utility is required to revise the
charges for supply of reactive energy from time to time for which it
needs to be compensated. Therefore, it is essential to increase the cost
per unit of reactive power in tandem with the costs incurred by the
utility in providing it.
However, it would be appropriate to put a ceiling on the increase in the

cost of reactive power. The Commission notes that this cost has already
been provided for in O & M costs of the project. Therefore, the
Commission has decided that the utility may be allowed to review the
tariff for reactive power, subject to escalation being less than or equal
to 5% per annum, from the date of commissioning, for supply to wind
power projects.
The Commission does not see merit in the suggestion that payment for
reactive power should be permitted on net basis. In the view of the
Commission, the suggestion is not practical as the export and import
are at different times and the consumption has to be met in full when
the project requires it. For the same reason, the suggestion for
purchase by the utility of the reactive power exported to the grid is also
not practicable.
The Commission directs that the reactive power charges shall be
recovered from the wind power producer’s bill in case of sale of power
to the utility. In case of self-use, these charges will be added to the
monthly electricity bill of the producer, and in the case of third party
sale, these charges will be added to the monthly electricity bill of the
consumer (third party purchaser to whose premises energy is wheeled).
For the period when wheeling is discontinued, it will be recovered from
the producer.
To ensure better discipline and efficiency, the Commission considers
the charges for reactive energy consumption at 25 paise per kVArh with
5% annual escalation for the quantum of reactive energy consumed
upto 10% of active energy delivered and excess reactive energy
consumed, to be billed at the prevailing rate.

on Tariff Proposals
2.4.5 Power Evacuation Arrangement
The Technical Director, MSEB has stated that the full cost of power
evacuation arrangement in the EHV system i.e. cost of construction/
augmentation of EHV system (lines, sub-stations, capacitors in sub-
stations etc) be paid by the developer directly to the MSEB before
commissioning of the project. The amount to be paid will be
determined by MSEB.
have stated that, keeping in view the possibility of an interconnection
facility developed for a project being used for other projects also, the
tariff order should specify the proportion in which the cost of
interconnection should be shared by the beneficiaries.
The prevailing GoM policy provides that 50% of the cost of

improvements required in the EHV system for power evacuation will be
borne by the developer and the balance 50% by the Utility. The policy
also mentions that MEDA will collect this amount from the developers
as a part of infrastructure development costs and pay the same to
MSEB. However, MSEB insists that developers should pay this amount
directly to them.
The Commission would like to follow the policy prescribed by the
Government of Maharashtra, as EHV infrastructure required for
evacuation of power could be common for several projects. These
projects may be developed over a period of time. Recovering part of the
cost from each developer could result in over or under recovery for the
utility and/or for the developer. In either case, it is not desirable.
Further, the Commission would like to point out that the amount
recovered by MEDA towards cost of power evacuation and other
infrastructure development is substantially higher than the amount
recovered in Tamil Nadu as the full cost towards such facilities. The
appropriate authorities should look this into.
In view of the above, the Commission directs that the developer shall
bear the cost of project switchyard and interconnection facilities at the
project site upto the point of energy metering. The utilities will bear the
cost of transmission lines and associated facilities beyond the point of
energy metering for the evacuation of power. The developer(s) shall
provide an inerest free advance to the utilities, equivalent to an amount
of 50% of the cost of works to be carried out by the utilities for power
evacuation purposes. In case there is more than one Developer sharing
the transmission line/evacuation facilities to be set up by the utilities
the advance amount shall be shared amongst the Developer(s) in equal
proportion. The utilities shall refund the interest free advance to the

on Tariff Proposals
developer(s) in five equal installments spread over a period of five years,

commencing from one year after the date of commissioning of the
respective projects.
2.4.6 Payment Security

Dr. Ashok Pendse of Mumbai Grahak Panchayat has proposed that bill
for sale to the utility should be raised every month, payment should be
made within 45 days and interest should be payable for delay in
payment at the rate of 2% above the SBI short term lending rate.
InWEA have proposed that payment security in the form of irrevocable

LC covering at least 3 months average billing amount should be
provided by the utility.
REDAM have proposed that payment should be made within 30 days
and interest @2% above the SBI PLR should be paid for delay.
Shri G.M.Pillai, Director General, MEDA in his submission mentioned
that payment security from the utility was an essential requirement
without which projects would not be bankable. According to him,
lending agencies were prepared to reduce the rate of interest provided
the payment is assured.
The Commission appreciates that timely payment by the utility for the
energy purchased by it is an essential requirement without which the
developer cannot meet his liabilities in time.
The Commission also notes that the main cost component for
generation of wind power is the interest liability on the debt. Any delay
in payment of debt and/or interest would have substantial impact on
the wind power tariff, and if the tariff were to be maintained as
constant, it would adversely affect the viability of the project.
The Commission understands the need for the security of payment and
need for compensation to the developer in case of delay in payment.
The Commission, therefore, has decided that a Revolving Irrevocable
Letter of Credit, at the option of the developer, with a nationalized bank
should be provided to the developer as security for payment to ensure
timely payment. The Commission also prescribes that the expenses
involved in opening the LC, for an amount equivalent to the average
monthly bill, should be borne by the developer.

on Tariff Proposals
Further, to provide the compensation in case of inordinate delay in

payment, the utility will pay penal interest on any outstanding amount
at the rate of 2% above the short term lending rate of the State Bank of
India.
2.4.7 Commercial Viability of W ind Energy

Shri S.R. Paranjpe has stated that the assumption that wind energy is
commercially the most viable option is not adequately justified. The
data provided indicates that as of now it is of doubtful economic
viability.
The general statement that wind energy in reality is cheaper on the
basis of life cycle cost is also of doubtful validity.
The Commission in earlier paragraphs has discussed the basic

assumptions used in developing the financial model and tariff. The
Commission is of the view that the assumptions adopted in the model
are robust and reasonable.
In the opinion of the Commission, to determine whether wind energy is
cheaper and commercially viable, it would be necessary to compare it
with conventional energy on the basis of lifecycle cost. Here, it is not
the intention of the Commission to compute the life cycle costs of both
the conventional and wind plants, but to develop some broad
benchmarks to compare the costs of power from the two different
technologies.
The Commission notes that the levelized cost of wind energy on

attaining the critical mass and technology maturation is favourably
placed as compared to the levelized cost of energy from new TPS. The
Commission is not trying to imply that all future generation should be
wind based, but only stressing the need for substantial R&D both in
the wind technology development and storage devices for such infirm
energy sources. The Commission wants to bring to the notice of all
stakeholders that wind energy could be considered as a viable option
for power generation, and initial higher tariffs need not act as a barrier
to its adoption.
The Commission also recognizes the need to harness the potential of

non-conventional energy resources from the country’s energy security
point of view, given country’s dependence on imported fuels.

on Tariff Proposals
2.4.8 Does W ind Energy have a Place in Power Plans?
Technical Director, MSEB has stated that the view that “wind power
though slightly costly initially but cheaper in long run helps to reduce
the impact of ever-rising cost of energy from conventional sources” is
not acceptable to MSEB for the following reasons: -
i) Wind power is costly and infirm.
ii) It takes away paying consumers from the MSEB, thereby
increasing the burden on other consumers by way of higher tariff.
iii) Being infirm power, MSEB has to develop and maintain adequate
power generating capacity to meet the demand when wind power
is not available.
iv) Infrastructure development due to wind power projects is at the
cost of GOM and MSEB
The Technical Director, MSEB does not agree with the view that
decentralized locations of wind power projects help in improving the
overall power system as this is not borne out by actual experience.
As regards availability of pollution free energy from wind power

projects, the Technical Director, MSEB has suggested that benefits
available under Kyoto Protocol should be claimed and passed on to the
utility by way of reduction in tariff.
In the view of Shri Hiralal Ramdas Jadhav, the cost of wind power, which
is high initially, is also not reasonably low in the long run. Further, he
is of the view that wind power is not available during peak hours and in
peak demand season. Therefore, this negative aspect should be taken
into consideration in determination of tariff. He has also stated that
reactive power required by wind power projects is produced by burning
coal in thermal plants.
Mr. S.R. Paranjpe has stated that: -
Half-hourly data of energy availability from wind power
project is required to properly evaluate the impact on the
system and to plan for investment for addition to
thermal/hydro generation capacity required, for meeting peak
power demand.
Wind power availability during monsoon period will be
higher when the system demand would be less and it would
be less in the summer months when the system demand
would be high. Similarly, wind power availability will not
match with the daily peak power requirement in
morning/evening hours.

on Tariff Proposals
Prayas, Pune has suggested that in future if projects receive any other
concessions/benefits (e.g. carbon credit) the same should be shared
equally with MSEB/consumers/promoters.
Subordinate Engineer’s Association (MSEB) is of the view that: -
Wind power is of very high cost initially and its cost is not
reasonable even in the long run.
The population to be benefited by the infrastructure development
will be meager and the revenue income to Govt. will also be low.
Wind power cannot be considered as totally pollution free as the
reactive power required for this generation is obtained from
thermal powerhouses by burning coal.
The Commission appreciates that wind power is infirm power and it is

difficult to schedule this power. However, the Commission does not
accept the argument that due to the infirm nature of the power, the
reliability of the grid is affected. The Commission would like to point
out that European Union, which maintains a much higher quality grid,
does not find it difficult to absorb 25% of the energy from wind. The
computerized systems are available to predict wind energy generation
at half-hourly intervals with 90% accuracy. Such improvements can be
introduced when the overall power supply infrastructure is properly
designed and engineered to maintain high quality supply.
Further, the Commission would like to draw attention to the current

situation in the State, where rolling shutdowns are being forced on all
consumers due to peaking as well as general energy shortage. In such a
scenario, it is possible to absorb every unit of wind power, irrespective
of its quantum and the time of delivery.
The Commission also rejects the argument of the MSEB that, in view of
the infirm nature of wind power, it has to maintain the same level of
generating infrastructure irrespective of the wind capacity. The
Commission would like to point out that it is an established fact that
the wind power and hydropower are complementary generating options.
Generation from both sources of power could be varied at short notice.
In case of windy periods, hydro generation could be reduced while it
could be increased if wind generation is not enough. The MSEB system
contains some hydro plants, which could be conveniently rescheduled.
Therefore, the Commission rejects the argument that the MSEB has to
maintain large generation infrastructure to provide the same peaking
power.

on Tariff Proposals
Further, the Commission would like to point out that every utility is
required to consider long term fuel options while developing generating
capacity. It is also the responsibility of the Government to ensure that
optimal utilization of resources is reflected in the fuel-mix selected by
the utility. Considering the adverse environmental impact of fossil fuel
based power generation at local and regional levels and its contribution
to green house gas (GHG) emissions at the global level, it is essential to
develop other sources of energy. Among the renewable energy
technologies, wind technology has been rapidly progressing towards
maturity and is close to being commercially viable. Therefore, it is
essential to support such projects so as to attain a critical mass at this
juncture.
Another fact, which should not be ignored, is that the wind projects are
typically situated at the tail end of the feeder. This improves the
quality, i.e. the voltage profile at the receiving end of grid supply.
The Commission does not see any merit whatsoever in the argument
that wind power is not environmentally friendly. The Commission
would like to state that no substantial evidence was placed before the
Commission in support of such as irrational argument.
2.4.9 Policy Issues
MCCIA, Pune have expressed the view that deviation from the
GOM/MSEB policies then in force, in consideration of which
investments have been made, would adversely affect the return on
investment; therefore the proposal in respect of wheeling, T&D loss
levy, banking, third party sale and tariff should be as per the policies
which were in force at the time of investment. They have further stated
that, while GoM policy provides for sale to Industrial and Commercial
consumers, MSEB permits sale to Industrial consumers only. Sale to
commercial consumers should also be allowed.
REDAM have stated that investments have been made on the basis of
the GoM policy of 1998 and any deviation at this juncture would be a
great injustice to developers. They have also stated that RE projects
should not be treated as merchant generators and that conditions
specified in the NOC issued u/s 44 based on which investment is made
should not be changed subsequently.
Shri Hiralal Ramdas Jadhav has stated that all electricity consumers of
the State should share higher cost of wind power and it should not be
limited to consumers of MSEB alone. He has also stated that wind
power development should be supported by State and Central
Governments and electricity consumers should not be required to bear
the increase in the electricity cost on this account.

on Tariff Proposals
Dunil Electric Saver and Maintenance Company Pvt. Ltd., Mumbai has
stated that there should be no levy of stand-by charges on wind power
projects for the months when generation will be low.
Tata Power Company have stated that the tariff under consideration for
wind power projects should be applicable to all developers without any
discrimination irrespective of whether a developer is a IPP, a licensee or
CPP. They have further stated that MSEB does not permit them to sell
the energy generated at their 17 MW wind farm to third parties on the
grounds that Tata Power are a licensee. They are of the view that there
should be no such discrimination.
BF Utilities Ltd, Pune have stated that MSEB should be directed to

provide check meters for wind farm projects, and to lay down a
procedure to assess energy generation during the period of meter
failure and/or CT/PT failure and account for the same each month.
Shri Bikram Raha, Chartered Engineer has drawn attention to the ill
effects of harmonics generated in wind power generation through
technology involving conversion AC-DC-AC, and has suggested that
adequate safeguards against these should be provided.
Subordinate Engineers Association (MSEB) is of the view that: -
Wind power generation is not the only answer for conservation of

fossil fuels which can be achieved through technologies like
solar, tidal, atomic, hydro, bagasse, city waste as well as through
measures for conservation, improvement of efficiency in operation
of coal based stations, reduction in T&D loss, etc.
Responsibility for promotion of wind power projects should be

shared by all utilities in the state.
The burden involved in promotion of wind power projects should
be borne by the Govt. and should not be passed on to electricity
consumers through tariff.
Wind power is not of use to the grid as it is not available in the

winter season when the demand on the system is high.
Prayas, Pune considers that subsidies are essential (a) for development
of RE projects in initial period, (b) to make RE projects viable, and (c) to
avoid excessive burden on consumers. They have further stated that
developers who have opted for sale to third party should not have the
option of sale to MSEB subsequently.
InWEA have stated that, for projects holding NOC for sale to third
party, energy fed to the grid from the date of commissioning till the date
of commencement of wheeling to the third party purchaser should be

on Tariff Proposals
treated as sale to the utility, and the utility should pay for the same at
the rate applicable for the year. They have also stated that changes in
third party purchaser during the life of the project should be permitted.
Technical Director, MSEB, in his presentation before the Commission,
stated that issue of guidelines for selection of the type of wind power
plant to be used was very necessary to prevent installation of inefficient
machines and also that, in view of the heavy investments required to be
made by MSEB, wind power projects should be developed only at sites
with high potential.
The Commission has repeatedly heard the plea that the investments
have been made on the basis of the GoM Policy of 1998, and any
deviation from the policy at this stage will be unjust to investors. The
Commission would like to point out that it was established by the
Government of Maharashtra under the statute of the Government of
India, i.e. the Electricity Regulatory Commissions Act, 1998.
As per Section 22 (1) (c) of the Act, it is the responsibility of the

Commission to regulate the process of purchase of power by the
utilities from the generators and it is performing its duties under the
Act. Further, the Commission would like to point out that, in
Maharashtra, no projects have been exempted from the requirement of
this scrutiny as has been done in some other States where the projects
approved prior to the establishment of the Commission cannot be
reviewed by the Commission. Legally speaking, the Commission can
review all projects from which the utility is intending to purchase
power. However, the Commission has taken a conscious decision not to
review such initial wind projects, aggregating to less than 7 MW
capacity, which have been commissioned prior to notification of its
Conduct of Business Regulations (CBR).
However, the Commission takes a note here that the GoM has issued
an Order No.NCP2000/PRA.KRA.775/ URJA-7 dated 7th January, 2002
deciding that the 5% increase per year in the rate of purchase shall be
on compounded basis. However, being a part of the tariff itself, such
directives are not legally tenable particularly, when the ERC Act is in
force and the Commission’s CBRs are in place. The Commission has
taken note that the MSEB has been rightly considering such escalation
at the simple rate. Hence the Commission directs that Group I projects,
i.e the projects that came up before 27th December 1999 shall be
allowed escalation in the MNES prescribed rate only on a simple basis.
Further, the Commission would like to point out that the norms which
are prescribed as a part of the policy could be changed along with the
policy. This may result in volatility in returns to the developers, while

on Tariff Proposals
the norms established by the Commission based on the principles of

the ERC Act would be incorporated in the EPA and would provide
certainly to the investors.
With respect to the specific request of Tata Power Company, the

Commission is of the opinion that their wind project, should be treated
as separate project and not part of the licensee’s business. The MSEB
should allow the same options as those available to any other wind
project developer under this Order. At the same time, Tata Power
should ensure that any investment in wind projects should not be
included as a part of Schedule VI investments for its licensee business.
However it may be noted that the Commission shall specify a

percentage of the total consumption of electricity for purchase from
renewable sources of energy in the area of each distribution licensee
under section 86 (1)(e) of the Electricity Act 2003.
The Commission notes that the suggestions made by the participants

in the public hearing process have been very useful and
implementation of many of them will promote growth of wind power
projects by improving the project economics. To the extent possible, the
Commission has incorporated such suggestions in this order.
The Commission hereby clarifies that, though the Commission in this
Order has given directions on several issues related to tariff as well as
the principles of Energy Purchase Agreements, it is of the opinion that
the Government’s role would be significant in ensuring the healthy
growth of the wind power sector and in harnessing the huge potential
available in the State.
The Commission’s observations on how the policy-making authorities

such as the State Government and concerned Ministries of GoI could
be instrumental in promoting the wind energy sector are elucidated
below:
It was brought to the notice of the Commission that the Sites with high
wind potential are in either forest or tribal areas, which makes wind
project development almost impossible. Therefore, there is a need for
necessary and appropriate action to make such land accessible for the
purpose of wind power project development. Necessary compensation
and creating alternative sites for afforestation may be provided for.
The Commission has noticed that during the initial years, several
windmills have faced problems poor micro-siting, improper design, etc.
Ultimately these result in lower generation. Hence there is a need to

on Tariff Proposals
consider issuing suitable guidelines for selection of sites and efficiency

parameters for wind power plants.
The developers have consistently complained about the poor grid

connectivity. Preparation of a master plan by the appropriate
authorities for high potential areas to optimize Extra High Voltage
(EHV) evacuation facility is a necessity at this stage, more so in view of
the enabling provisions of the EA, 2003. Efforts should be made to
minimize the cost of development of these facilities.
During the initial years, all renewable energy projects are required to be
paid higher tariffs. This could impact the net average cost of power in
the State. Further, the consumer tariffs may not be able to sustain this
increase in the cost of generation and power purchase. The
Commission notes that the wind technology has progrssed over the last
decade and has nearly reached the level of commercial viability mainly
because of fiscal incentives like income tax benefits, Sales Tax deferral
etc. However, a critical mass in renewables is yet to be reached at this
stage. Capital subsidy to give the required push can be thought of.
The Commission understands that several renewable energy projects

may be eligible for the benefits available through the “Clean
Development Mechanism” under Kyoto Protocol. While these benefits
are not available to a large number of projects which are on the verge of
commercial viability, they can be availed of in future. Since the
consumer is supporting the renewable energy projects by way of higher
tariffs, it is essential that any such credits secured by a project should
be shared on an equitable basis by the developer with the utility and its
consumers. The Commission shall review the tariff structure for RE
Projects that become eligible for CDM or similar credits, and devise a
system, which will enable sharing of benefits between the consumers
and the project developers at that stage.

WIND PROJECT TARIFF ORDER 03-04 Section 3 Commission’s Decision on Tariff
Introduction
COMMISSION’S DECISION ON TARIFF
3.1 INTRODUCTION
Demand for electricity is constantly increasing. For the country as a

whole, demand is likely to go up by more than 100% in the next ten
years. The Government of India has proposed to double the installed
capacity in next nine years to meet this challenge. It is expected that
the demand for power will increase at a higher rate in the more
industrialized State of Maharashtra. In view of limited of hydropower
generation resources, the State is and would continue to be largely
dependent on energy from Thermal Power Stations.
The cost of energy produced by Thermal Power Stations and any other
fossil fuel based generating station would keep increasing in view of
constant increases in the cost of fuel. Long term power planning
involves efforts to check the ever-rising cost of generation of fossil fuel
based plants. An ideal solution is introduction of such energy sources
which have no or very little fuel cost, for example solar power, wind
energy, tidal energy, etc.
Out of several renewable sources of energy, development of wind energy

has achieved remarkable growth and, through continuous technological
improvement, it has reached a level of maturity to be seriously
considered as a commercially viable option.
India has attached high priority to generation of electricity through

renewable energy sources. Through policy support and financial
incentives, the country has attained an installed capacity of about 1870
MW of Wind Power Projects as on 31.03.2003 and ranks fifth in the
world. Through scientific studies, a large number of reasonably good
wind sites have been identified in the State of Maharashtra. To
encourage large-scale private sector investment in this field, Govt. of
Maharashtra offered attractive Sales Tax benefits as a promotional
measure for a limited period of 5 years. This has resulted in installed
capacity of about 395MW as on 31st March 2002 (though permission
has been granted for about 500 MW) and the State now ranks second
in the country. Besides being environmentally benign and perennial in
nature, the added attraction in the Maharashtra is location of windy sites
at the tail end of the State grid, which should be complementary in
reduction of loss, particularly at EHV level.
While the cost of energy from a Thermal Power Station is initially low, it
continues to increase with increases in the cost of fuel. On the other
hand, the cost of wind energy is initially high and reduces as loans are
repaid as no variable cost is involved. As a tool to keep under control
the impact of ever increasing cost of fossil fuel, the price of wind energy
should be rationally determined keeping in view the interest of both

Introduction
consumers of electricity and developers/ investors in wind power

projects. While the initial high cost of wind energy should not become
too heavy a burden on consumers, the tariff should not be unattractive
for large-scale private sector investment in this comparatively new field.
Technologically it has been well established that addition of such infirm
energy upto a level of 25% of system demand does not adversely affect
the high quality grid in European countries. Under the present
situation of perpetual shortage, both in terms of peak demand and
energy requirement as faced in the State, consumption of infirm wind
energy to the extent of, say, 5% should not pose a problem. With
overall improvement in the power system through appropriate energy
mix from various alternate energy sources the issue of infirmity in
absorption of seasonal and variable wind energy would not be a cause
of concern in the near future.
To encourage large-scale growth of the wind power sector, Ministry of
Non-conventional Energy Sources (MNES), Govt. of India issued a
general guideline to all the States. Government of Maharashtra,
primarily based on these MNES guidelines, adopted a policy on wind
power generation. Maharashtra State Electricity Board (MSEB) has
subsequently followed suit by issuing orders to this effect. These MSEB
orders are slightly different from the MNES guidelines and GoM policy.
The tariffs under these guidelines are as below: -
Table III
MNES GoM MSEB
T ariff Rs.2.25/kWh in Rs.2.25/kWh in base Rs.2.25/kWh in base year
base year 1994- year 1994-95; 5% 1994-95; 5% increase on
95 w ith 5% increase in rate/ base year rate/unit every
escalation unit/year for first 10 year for first 10 years; no
years; no increase increase for next 3 years;
for next 3 years; 5% 5% increase on base year
increase in rate/ rate/ unit/year for next 7
unit/year for next 7 years.
years. P urchase rate is subject
to a ceiling of 90% of HT
industrial base energy
tariff in force
The GoM has further issued Orders, notwithstanding the fact that the
ERC Act and the Commission’s CBR were already in place, that the
escalation allowed be at compound rate and not at simple rate as
presumed by MSEB. Govt. of Maharashtra also declared a very
attractive Sales Tax incentive policy primarily as a promotional
measure for a period of 5 years.

Introduction
In the meantime, Government of India has allowed the benefit of

accelerated depreciation to wind projects. These benefits were not
accounted for when the policies for renewable projects were first
announced.
In 1998, the Government of India enacted the Electricity Regulatory

Commissions Act to establish independent regulators at the State and
Central level. These regulators were given the powers to regulate the
power sector and determine tariffs. Several stakeholders felt that, due
to these benefits, wind power projects are making windfall gains, and
therefore their cost benefit analysis needs to be looked into. These
stakeholders approached the Commission with a request to review the
economics of these projects under the responsibilities given to the
Commission under ERC Act 1998.
The Commission is acutely aware of the responsibilities placed on it

under the ERC Act. The Commission has to balance the interests of the
consumers and at the same ensure fresh investment in the sector by
providing the reasonable incentives to the investor. The Commission
derives its powers to determine tariffs for generation projects from
Section 22(1)(c), which reads as follows:
“c) to regulate power purchase and procurement process of the

transmission utilities and distribution utilities including the
price at which the power shall be procured from the generating
companies, generating stations or from other sources for
transmission, sale, distribution and supply in the State;”
Further, Section 29 of the ERC Act prescribes the specific principles of

tariff fixation. The relevant principles, which shall guide the
Commission, are reproduced below:
" c) that the tariff progressively reflects the cost of supply of

electricity at an adequate and improving level of efficiency;
d) the factors which would encourage efficiency, economical use of
the resources, good performance, optimum investments, and
other matters which the State Commission considers appropriate
for the purpose of this Act;
e) the interest of the consumers are safeguarded and at the same
time, the consumers pay for the use of electricity in a reasonable
manner based on the average cost of supply of energy;
f) the electricity generation, transmission, distribution and supply
are conducted on commercial principles”
g) national power plans formulated by the Central Government."
It will be seen that these sections do not mandate the Commission to

use any particular methodology for determination of tariffs for either
generation projects or for retail consumers.

Introduction
3.1.1 Tariff Principles
The Commission has generally been guided by the prudent practices of

tariff determination, which it has consistently used since its first major
tariff Order in year 2000 for determination of tariff for the MSEB
consumers.
These tariff principles are:
No tariff shock to any class of consumers

Consistency in principles and its applications
Minimise Regulatory Uncertainty
Uniform Principles for tariff setting
Transparency
Compliance of regulatory and judicial procedures
3.1.2 Tariff Methodology
As mentioned earlier, the Commission had a wide choice of

methodologies to choose from while determining the tariffs for wind
power projects. These methodologies and their relative merits have
been discussed below:
A. Long Run Marginal Cost
The marginal cost is the cost incurred to supply an additional unit at a

particular time, and it represents the cost to society for meeting that
incremental demand. At times of peak demand, when additional or
marginal capacity is likely to be called for, marginal cost will often
exceed average cost; at other times, marginal cost is likely to be less
than average cost.
The Short Run Marginal Cost typically includes only costs associated
with generation of additional units of electricity i.e. only variable costs
of generation, while Long Run Marginal Costs [LRMC] also include a
component of capacity charge or a fixed charge component. However,
as per classical economic principles, this capacity charge component
should reflect the cost advantages due to technological improvements,
and general trends in equipment and erection markets. This results in
subjectivity in determination of LRMC. Further, one will appreciate that
since LRMC is function of the load, factors such as change in the load
profile of the consumers, any new interconnection with grids, and type
of generation added would have a substantial impact on the LRMC at
any particular point.

Introduction
B. Avoided Cost of Generation

It is a fact that the power flows by displacement and, therefore, in
economic terms the cost of the new power could be the cost of the
power being replaced by new power. This cost is referred to as “Avoided
Cost of Generation”.
The Avoided Cost of Generation could be derived by identifying the

generation, which is being replaced by the new generation project. This
could be done by network analysis for various system conditions such
as peak, off peak, and for seasonal and geographical variations of the
demand. On identification of the generation being displaced, cost for
that source of generation could be determined followed by cost of
transmitting the same to the place of new generation. The new
generation project could be awarded the addition of the two costs as
tariff. This method is akin to Location Based Marginal Pricing
methodology.
As one would expect in any complex system, new generation would

displace different generation during different systemic conditions.
Further, the cost of generation depends on various parameters such as
loading of the unit, weather, type and quality of fuel, etc. Also, the cost
of transmission varies depending on the loading of the lines, weather,
actual transmission path followed, etc. This makes it nearly impossible
to determine the avoided cost of generation, which could be used as a
proxy for determination of wind tariffs.
C. Tariff prescribed by MNES
The Commission notes that the MNES had prescribed the tariffs for
purchase of power from various renewable sources of energy. Various
State governments and utilities, while purchasing such power, have
used these tariff guidelines. The utilities generally and, in our specific
case, the MSEB have argued that these prices are unrealistically high
and provide windfall profits to developers, which is against prudent
principles of utility regulation.
The Commission had asked the MNES to clarify its position and submit
the rationale for these tariffs. The representative of the MNES, during
the course of proceedings, has confirmed that the tariffs prescribed
were essentially based on the tariffs for Independent Power Producers
(IPP) Projects in the base year of 1994-95 and were adopted to promote
the non-conventional sources of energy, and had not taken into
account some of the benefits such as Sales Tax benefits offered by the
State Governments subsequently. The MSEB as well as many other
stakeholders have argued that these benefits have made these projects
hugely profitable and, therefore, these benefits should be factored into
the costs while developing tariffs.

Introduction
D. Tariffs based on the Costs

Another widely used methodology is calculation of tariffs by actually
scrutinizing the costs of the project. While scrutinizing the costs, any
concessions / tax exemptions availed by the promoters are factored
into the costs. This method is used by Central Electricity Authority to
accord Techno-Economic Clearance to any power project. Since this
method involves scrutiny of all aspects of the project such as costs,
concessions, generation pattern, displacement etc, the tariffs so arrived
at provide equitable financial return to the developers while avoiding
unsustainable burden on the consumers.
The Commission has analysed these options carefully, and has decided
to use the “Cost Plus” methodology for determination of tariff of wind
projects. The factors, which have contributed to the Commission’s
decision, are as follows:
While Long Run Marginal Cost and Avoided Cost of Generation

are likely to give correct economic signals, it is not possible in
today’s context to arrive at the correct estimates of these
numbers.
Wind and other renewable technologies are operating at the

fringe i.e. generation from these technologies is insignificant as
compared to that of conventional energy sources. Any change in
generation price based on economic principles is unlikely to have
an impact on the generation market, as the price of a large
portion of generation is not giving any economic signals.
Cost plus methodology will allow the investors to earn reasonable

return commensurate to the risks borne by them
The Commission is aware that, for attracting investment in the

power sector, the most important need today, the investor
expects continuity, clarity and consistency in the regulatory
approach, and this methodology will provide certainty of revenue
to the investors, which in turn will make financing of these
projects feasible.
When the technology is evolving, rapid reduction in prices of

equipment is likely. Periodic review under the “Cost plus
methodology” will allow the Commission to review cost elements
at regular intervals and factor in the cost advantage of newer
technology while deciding the tariffs for new projects.
Lastly, promotion of renewable energy to ensure that its share in

energy mix reaches 10% over a period of time is part of the
guidelines issued by the Ministry of Non-Conventional Energy
Sources [MNES], Government of India. Thus, these guidelines

WIND PROJECT TARIFF ORDER 03-04 Section 3 Commisson’s Decision on Tariff
Approach
are an integral part of the national power plans formulated by the

Central Government, and are relevant to Section 29(1)(g) referred to
above.
Therefore, the Commission decided to adopt the Cost Plus Methodology

for determination of tariffs for wind energy projects.
3.2 APPROACH
The Commission had to make a choice between analysis of each

individual wind project followed by tariff determination, and analysis of
typical projects and determination of tariff for that typical project. The
Commission is aware of the fact that individual/ small owners own a
large number of the wind turbines and thus, each wind turbine
constitutes potentially a different project. Tariff determination for each
project would have not only been an impossible task for the
Commission, it would also not have been economical for these wind
turbine owners to pursue their cases individually. Also, this would have
led to a different tariff for each project, which would have been very
difficult for the utilities to manage.
To determine a uniform tariff for wind energy produced at different

locations through different technologies, the Commission has adopted
the following approach:
- Identification of major components of costs, and prudent norms for

the same.
- Rationalisation of operative/ technical parameters to take into
account technological developments and the need to attract a large
number of investors.
- At the same time, to attain a critical mass that drives the sectoral
effort to achieve better efficiency and economy in operation, it is
necessary to give the required push through the tariff regulation.
- To minimize impact of high initial tariff on utility costs, front loading
has been avoided to the extent possible.
- Separate cash-flow statements (enclosed as Annexure-12) for past
installations (Group II projects) availing Sales Tax benefit and future
installations (Group III projects) without Sales Tax benefit.

Analysis of factors relevant for determination of Tariff
The main objectives behind preparation of different cash-flow

statements are:
• to establish bankability of the projects particularly in terms of

loan repayment.
• to allow reasonably attractive return on investment.
• to ensure lower life cycle cost of wind energy.
Tariff has been determined for an eight-year period for Group II

installations (projects which received Sales Tax benefit) and for a
thirteen-year period for Group III installations to facilitate loan
repayment requirements.
Under the option of Third Party Sale /Captive consumptions no tariff
has been determined and it is proposed to provide adjustment as per
TOD meter installed at both generating and consumption points. This
shall ensure:
- no impact on net average cost

- no cash transaction except for purchase of surplus energy banked
with the utility at the end of the year.
The concept of adjustment as per TOD meter at different time slots

shall be applicable for both past and future installations.
3.3 ANALYSIS OF FACTORS RELEVANT FOR DETERMINATION

OF TARIFF
In this section, the decision of the Commission on various cost as well

as technical and operational parameters is discussed. The rationale
behind these decisions has already been provided in earlier sections.
3.3.1 Capital Cost of Project (per MW )
The capital cost includes all cost of infrastructure, turbine, generator,

civil & electrical works, cost of land, design & engineering charges. It
was observed from the data provided by InWEA and REDAM for
projects completed in State before 31.03.2003 that the average project
cost in Maharashtra has so far been around Rs.5.00 crore per MW.
Even in the demonstration project established by MEDA, the cost is
about Rs.5.0 crores per MW. Therefore, the Commission has accepted
Rs. 5 crore / MW as capital cost for wind projects commissioned before
31.03.2003.
For the projects to be commissioned after 01.04.2003, the Commission

has taken into account the fact that the technological improvements
have brought the costs down and at the same time substantial know-

how is now available within India, which has resulted in the decrease
in the cost of the plant. Therefore, the Commission has considered the
average cost of new projects commissioned from 01.04.2003 onwards
as Rs.4.0 crores per MW based on the current level of technology and
CUF involved. (for details please refer to the Commission’s rulings
under section 2.2.1)
3.3.2 Annual Estimated Generation
Based on the available data, the Commission has accepted CUF of 18%
for Group II, i.e. old projects, and CUF of 20% for Group III, i.e. new
projects. (for details please refer to the Commission’s rulings under
section 2.2.2)
3.3.3 Cost of Operation & Maintenance
The cost of operation and maintenance includes the cost of manpower,

consumable and spares, O&M charges for Electrical maintenance,
Road, Grid maintenance, Cost of Reactive energy, Insurance, Inspection
fee, local authority charges, Land revenue etc. The Commission, in the
original tariff proposal, had considered 2% of the project cost as O&M
cost for the first year of operation, to be escalated by 5% every year.
However, during the public process, it was brought to the notice of the
Commission that contracts for supply of equipment include significant
amount of spares, and since the cost of project already includes cost of
these spares, it is not necessary to include these costs again. Therefore,
the Commission has revised its assumption and has accepted 1.5% of
the cost of the project as O&M costs for the first three years of
operation, and 2% of the cost of the project in the fourth year.
Escalation of 5% will be applicable after four years of operation. (for
details please refer to the Commission’s rulings under section 2.2.4)
3.3.4 Debt – Equity Ratio
Based on the various documentary proofs submitted by the InWEA

regarding approval of the project cost by IREDA and financing norms
approved by the Government of India for wind power projects, the
Commission has accepted 70:30 debt-equity norm for financing wind
projects in the State of Maharashtra. (for details please refer to the
Commission’s rulings under section 2.2.5)

3.3.5 Interest Rate on Debt
The Commission has considered the interest rate as 14% for Group II
(old) projects and 12.5% for Group III (new) projects.
Further, in view of the fact that the developers have not been able to
avail the rebate offered by IREDA and similar rebates are not being
offered by any other financer, the Commission has not considered this
rebate. (for details please refer to the Commission’s rulings under
section 2.2.6)
3.3.6 Loan Repayment Schedule
The Commission has taken into account the IREDA documents

submitted by InWEA in support of the loan repayment period. On the
basis of this submission, the Commission has used the loan repayment
period of six years for the old projects and ten years for new projects.
(for details please refer to the Commission’s rulings under section
2.2.7)
3.3.7 Rate of Depreciation
The Commission has used loan repayment obligation for the purpose of
development of tariff and has not used depreciation for this purpose.
(for details please refer to the Commission’s rulings under section2.2.8)
3.3.8 Return on Equity
The Commission’s decision of permitting 16% return on equity is based

on the policy of Govt. of India for Private Sector participation in Power
Sector, which provides for 16% return on promoter’s equity.
The Commission further notes that, since it has assumed that part of
the return on equity shall be initially utilized for repayment of loan, the
rate of return on equity in subsequent years should be higher to
compensate for lower rate of return on equity during the initial years.
(for details please refer to the Commission’s rulings under
section2.2.10)

WIND PROJECT TARIFF ORDER 03-04 Section 3 Commission’s Decision on T ariff
Analysis Of Other T echno -Commercial Factors
3.4 ANALYSIS OF OTHER TECHNO-COMMERCIAL FACTORS

RELEVANT FOR DETERMINATION OF TARIFF
3.4.1 High Initial Year Tariffs
The Commission noted that if the cost plus methodology is used for the
calculation of tariffs for new projects, which do not have Sales Tax
benefit, tariffs might be too high in the initial years. This will
substantially increase the burden on utilities’ consumers. Therefore,
lower tariffs as compared to actual costs may have to be considered.
Providing higher return in later years could compensate the developer.
3.4.2 Income Tax Benefit through Accelerated Depreciation
The Commission is of the opinion that the income tax and MAT are
statutory liabilities and should be provided in the cash flow analysis.
The Commission notes that the rates of income tax, i.e. 35% plus 5%
surcharge and MAT, i.e. 7.5% plus 5% surcharge considered for old
and new projects, are as per the prevailing Income Tax Rules, which
are statutory liabilities.
Further, the accelerated depreciation can be claimed only on income

from other business of Investor. The Investor, however, is liable to pay
MAT on income through generation and sale of wind energy. The
Commission has taken into account these factors in the financial
model. (for details please refer to the Commission’s rulings under
section 2.2.8, 2.2.11& 2.2.12)
3.4.3 Sales Tax Benefit
This factor is relevant for determination of tariff for past installations

only. The Commission has noted that the Sales Tax benefit has been
availed either through exemption or deferment route, or a combination
of both exemption and deferment. The Commission has noted that the
maximum benefit, which the developer can get, is 63% of the value of
the Sales Tax benefit and has, therefore, factored 63% of the Sales Tax
as the net benefit available to the developer in the cash flow model. (for
details please refer to the Commission’s rulings under section 2.2.9)
3.4.4 Capital Subsidy
Govt. of Maharashtra declared capital subsidy upto a maximum of

Rs.20 Lacs per project. Though it may not be a very significant amount
for any major project consisting of large numbers of wind mils, yet from
the data furnished by the MSEB it is observed that individuals or
institutions in a wind farm own small number of windmills. For such
owners holding an installed capacity e.g. 2x225 kW of less than one or

two MW, this capital subsidy can be a significant (2-5% of Capital)

amount. Further, MEDA has reported that this incentive has not been
made available to the Investors due to budget constraints and other
procedural issues. In view of these uncertainties, this benefit has been
ignored both for past and future installations. (for details please refer to
the Commission’s rulings under section 2.2.15)
3.4.5 W heeling & Transmission Charge
The Commission notes that the MSEB has to maintain the

transmission lines and other infrastructure to facilitate the flow of wind
energy to consumers and it needs to be compensated for the same. This
compensation could be in Rupee terms per unit or in kind. The
Commission notes that the compensation in kind to parties involved,
i.e. as a percentage of energy wheeled, is already being used and no
other suitable methodology has been proposed. Therefore, the
Commission has decided to adopt the existing system of wheeling
charge at 2% of the energy wheeled.
The Commission has decided that a detailed study, including a load

flow analysis, should be conducted to determine the T&D loss at local
level. Based on the results of the study, T&D loss charges to be levied
on energy supplied by wind power projects would be determined by the
Commission. Till then, uniform transmission losses at the rate of 5%
shall be applicable. (for details please refer to the Commission’s rulings
under section 2.4.1 & 2.4.2)
3.4.6 Charges for Reactive Power Consumption
To ensure better discipline and efficiency, the Commission determines that

charges for kVArh consumption from the grid shall be 25 paise/unit,
which may be revised from time to time subject to the condition that
simple escalation in rate per unit shall not be more than 5% per year
from the date of commissioning for reactive energy consumption upto
10% of the active energy delivered to the grid by the developer. The
reactive energy consumption in excess of 10% shall be payable at the
prevailing rate.
Reactive energy charges shall be recovered from the bill of the developer
for energy sold to the Utility; in case of self-use, these charges shall be
added to the monthly electricity bill of the developer; incase of sale to
third party, these charges shall be added to the monthly electricity bill
of the consumer (third party purchaser to whose premises energy is
wheeled). For the period when wheeling is discontinued, it will be
recovered from the developer. (for details please refer to the
Commission’s rulings under section 2.4.4)

3.4.7 Cost of Evacuation Facilities and Infrastructure
The developer shall bear the cost of project switchyard and

interconnection facilities at the project site upto the point of energy
metering. The utilities will bear the cost of transmission lines and
associated facilities beyond the point of energy metering for the
evacuation of power. The Developer(s) shall provide an inerest free
advance to the utilities equivalent to an amount of 50% of the cost of
works to be carried out by the utilities for power evacuation purposes.
In case there is more than one Developer sharing the transmission

line/evacuation facilities to be set up by the utilities, the advance
amount shall be shared amongst the Developer(s) in equal proportion.
The utilities shall refund the above interest free advance to the
Developer(s), in five equal installments, spread over the period of five
years, commencing from one year after the date of commissioning of
the respective projects. (for details please refer to the Commission’s
rulings under section 2.4.5)
3.4.8 Metering
Real time ToD meters with online reading features are required to be
installed at the entry and exit point of each transaction.
The MSEB, if opted by the project developer, shall provide check meter,
at the cost of the developer, to assess the energy generated and fed into
the grid during such period when the main meter or its related
accessories such as CT/PT failed or developed problem. This is to avoid
any dispute. (for details please refer to the Commission’s rulings under
section 2.3.2)
3.4.9 Banking and Credit of Energy on the basis of TOD tariff slots
The Commission is of the strong view that credit for wind energy should
be provided strictly on the basis of TOD tariff slots. For example, wind
energy generation in time slot A should be offset against the
consumption in time slot A. Any generation not used during the month
should be carried forward to the next month in the same time slot. Any
unutilized wind generation at the end of the year shall be purchased by
the utility subject to banking provisions. The MSEB, in its role as a
State Transmission Utility, should immediately take steps to develop
necessary processes and software to track wind energy credits and for
maintaining accounting database.
The Commission also notes that inability to consume the entire energy
delivered into the grid due to factors beyond control of the developers/
purchasers cannot be ruled out. Also, the need to change third party
purchaser may arise during the project life, and energy fed into the grid

during the period of changeover of third party may have to be absorbed

by the MSEB.
Therefore, the Commission has decided that surplus energy at the end
of the financial year, limited to 10% of the net energy delivered into the
grid during that year, may be purchased by the utility at the lowest
slab of HT TOD tariff applicable on the 31st March of the financial year
during which the energy was fed into the grid.
The Commission is also of the opinion that, under force majeure

conditions, if the surplus energy delivered to the grid exceeds 10%,
such surplus energy in excess of the 10% limit specified earlier shall be
purchased by the utility at a rate equivalent to the weighted average
fuel cost for the year as determined by the Commission. (for details
please refer to the Commission’s rulings under section 2.3.2 & 2.4.3)
3.4.10 Billing and Payment
The Developer shall raise a monthly energy bill based on the joint meter
reading taken by the developer and the MSEB/Utility at the end of each
month. The due date for the payment by the utility shall be 45 days
from the date of the bill. In case of delay in payment beyond the due
date, the Developer shall be entitled to interest on delayed payment at
2% above the State Bank of India, short-term lending rates. (for details
please refer to the Commission’s rulings under section 2.4.6)
3.4.11 Assurance of Payment
The Commission appreciates that timely payment by the utility for the
energy purchased by it is an essential requirement without which the
developer cannot meet his liabilities in time. The Commission,
therefore, has decided that a Revolving Irrevocable Letter of Credit, for,
an amount equivalent to the average monthly bill, at the developers
cost and option, with a nationalized bank should be provided as
security for payment to ensure timely payment.
Further, in case of delay in payment beyond the stipulated period, the

utility will pay penal interest on outstanding amount at the rate 2%
above prime lending rate of the State Bank of India. (for details please
refer to the Commission’s rulings under section 2.4.6)
3.4.12 Tenure of Energy Purchase Agreement
The provisions of the EA, 2003 have mainly influenced the

Commission’s decision on this issue. The Commission notes that new
Act provides that the utilities will purchase a certain percentage of their
total energy requirement from the renewable sources of energy. The
Commission notes that it would take some time before the procedures

Determination of Tariff
for such purchase are in place. The Commission notes that in view of
these provisions of the EA 2003, it is essential that the duration of
contracts being entered into is minimum. Since no project would be
financially viable if the duration of the agreement is shorter than
necessary for loan repayments, the Commission has already agreed on
the loan repayment period of 6 and 10 years for Group II (old) and
Group III (new) projects respectively. The Commission also notes that it
is essential that some contingency be provided in the duration of the
agreement to take into account uncertainty of wind and also other
commercial exigencies. The Commission has permitted a contingency
period of 2 and 3 years for old and new projects respectively for
financial analysis.
However, it was submitted by the Associations that the investors in old

projects had undertaken these projects based on the guidelines of GoM
that should be left untouched. Though they could not be given GoM
tariff for 20 years period, they should be allowed to sell energy to
MSEB/utilities at the rates indicated in that policy till loans taken by
them are fully discharged. A comparison of the two cash flow models
suggests that the loan repayment period will be now less than or equal
to 6 years. Hence, by allowing a grace period of atleast 2 years, the
tenure of agreement will be only 8 years for Group II projects. For
Group III (new) projects, it will be 13 years. (for details please refer to
the Commission’s rulings under section 2.2.14)
3.4.13 Change in Third Party Purchaser and Change of Option
Change in Third Party Purchaser will be permissible subject to

installation of real time ToD meters with online reading feature as per
Para 1.6.5. Owners/Producers can also switch over to the option of
sale to MSEB/Utility subsequently subject to the conditions to be laid
down by the Commission. (for details please refer to the Commission’s
rulings under section 2.4.3)
3.5 DETERMINATION OF TARIFF
The Maharashtra Electricity Regulatory Commission, in exercise of the

powers vested in it under section 22(1)(c) of the Electricity Regulatory
Commissions (ERC) Act, 1998 and all other powers enabling it in this
behalf, determines the power purchase and procurement process
including the price for procurement of power by the MSEB, other
Utilities and Licensees in the State from Wind Power Projects. The tariff
determined by the Commission for energy delivered by wind power
projects shall be as follows:

Group I Projects
Wind power projects commissioned before 27th December 1999, i.e.

before the Commission notified its Regulations.
For Sale to MSEB and other Utilities/ Licensees in the State

The purchase price shall be as notified by the Government of
Maharashtra vide its Order No. NPC/1097/CR-57/URJA-7 dated 12th
March 1998, which is as follows:
Rs. 2.25 per unit in the base year 1994-95
The purchase rate shall be increased at 5% every year for the first ten
years from the date of commissioning, no increase in rate for the next
three years and 5% increase in rate every year for the next 7 years.
Though the Govt. of Maharashtra vide its Order No. NCP2000/ PRA.
KRA.775/URJA-7 dated 7th January, 2002, i.e. when the Commission
was already seized with the tariff determination for wind projects, has
decided that the 5% increase per year in the rate of purchase shall be
on the compounded basis, the Commission upholds the contention of
the MSEB that the escalation should be at simple rate.
Based on the above, the rate payable per unit for this Group of projects
with effect from 01.04.2003 works out to Rs. 3.24 per kWh.
Adjustment for Self-use and Sale to Third Party

For the period ending 31st March, 2003, credit shall be given as per the
policy of GoM in force as on 27th December, 1999.
From 1st April, 2003 onwards, net energy delivered to the grid for self-
use or for sale to third party shall be adjusted at the rate of prevailing
base HT energy tariff.
Group – II Projects
Purchase of Energy by MSEB/ Utilities/ Licensees

For wind power projects commissioned during the period from 27th
December 1999 to 31st March 2003 (which were eligible for Sales Tax
incentive), the MSEB/ Utilities / Licensees shall purchase energy from
wind energy at the rates notified by the GoM vide its Order No. NCP
1097/CR-75/NRG-7 dated 12th March 1998, i.e. Rs.2.25 per unit in the
base year 1994-95. The purchase rate shall be increased at 5% per
year (simple rate). The validity of EPA shall be only 8 years from the
date of Commissioning in departure from GoM/MSEB policy. The
reasons for reduction of the EPA period have been discussed in earlier
sections.

Based on the above, the rate payable per unit for this Group of
projects, with effect from 01st April 2003 works out to be Rs. 3.24 per
kWh.

For the period ending 31st March 2003, credit shall be given as per the
policy of GoM/MSEB in force as on 27th December 1999.
From 01st April 2003 onwards, net energy delivered to the grid for self-
use or for sale to third party shall be adjusted against the consumption
made as per the TOD tariff time slots.
use/ sale to third party shall be adjusted against the consumption
made at the lowest energy tariff slab/ time slot first and then at next
higher slab and so on, till such time as appropriate meters are
installed.
Group III Projects
For wind power projects to be commissioned after 01st April 2003

during the balance period of the 10th Plan ending 31st March 2007, the
tariff prescribed by the Commission is as follows:
For Sale to MSEB and other Utilities/ Licensees in the State

Rs. 3.50 per unit for the first year from the date of commissioning of
the project.
The purchase rate shall be increased at 15 paise per unit every year for
a period of thirteen years from the date of commissioning of the project.

Net energy delivered to the grid for self use or for sale to third party
shall be adjusted against the consumption made as per the TOD tariff
time slots. For projects not provided with TOD meters, the energy
wheeled for self-use/ sale to third party shall be adjusted against the
consumption made at the lowest energy tariff slab/ time slot first and
then at next higher slab and so on, till such time as appropriate meters
are installed.
Based on the above, the wind projects under various groups shall be
subject to the following tariff schedule for purchase of energy from such
projects by the MSEB/ Utilities / Distribution Licensees in the State of
Maharashtra.

Table 4
Tariff S chedule
Rates (Rs. Per kWh) applicable for Wind Power Projects in the State of Maharashtra
Group I Group III
(Projects Group II (Projects
Commissioned th
(Projects Commissioned after 27 December, 1999 but Commissioned
before On or before 31 March, 2003)
Financial th From
Sr. 27 December,
Year 1 April, 2003)
1999)
Before
th
Year 27 Dec Year 1999-00 Year 2000-01 Year 2001-02 Year 2002-03 Year 2003-04
1999
1 1994 - 1995 1 2.25
2 1995 - 1996 2 2.36
3 1996 - 1997 3 2.47
4 1997 - 1998 4 2.58
5 1998 - 1999 5 2.69
6 1999 - 2000 6 2.80 1 2.80
7 2000 - 2001 7 2.91 2 2.91 1 2.91
8 2001 - 2002 8 3.02 3 3.02 2 3.02 1 3.02
9 2002 - 2003 9 3.13 4 3.13 3 3.13 2 3.13 1 3.13
10 2003 - 2004 10 3.24 5 3.24 4 3.24 3 3.24 2 3.24 1 3.50
11 2004 - 2005 11 3.24 6 3.35 5 3.35 4 3.35 3 3.35 2 3.65
12 2005 - 2006 12 3.24 7 3.46 6 3.46 5 3.46 4 3.46 3 3.80
13 2006 - 2007 13 3.24 8 3.57 7 3.57 6 3.57 5 3.57 4 3.95
14 2007 - 2008 14 3.35 8 3.68 7 3.68 6 3.68 5 4.10
15 2008 - 2009 15 3.46 8 3.79 7 3.79 6 4.25
16 2009 - 2010 16 3.57 8 3.90 7 4.40
17 2010 - 2011 17 3.68 8 4.55
18 2011 - 2012 18 3.79 9 4.70
19 2012 - 2013 19 3.90 10 4.85
20 2013 - 2014 20 4.01 11 5.00
21 2014 - 2015 12 5.15
22 2015 - 2016 13 5.30
Note :
Start with RS. 2.25 at 94-95 and escalate at the rate of 5% (I.e. 11 paise ev ery y ear) till 10th y ear, then remaining constant
Group I f or next 3 y ears, then again escalate 14th y ear onwards till 20th y ear at the same rate.
Group II Start with Rs 2.25 at the y ear 1994-95 with 5% simple escalation (I.e. 11 paise ev ery y ear) f or 8 y ears.
Start with Rs 3.50 in the y ear 2003-04 and increase at the rate of 15 paise per y ear f or 13 y ears. The starting rate will be
Group III applicable f rom the y ear of Commissioning of the Wind Project.

Following table $$ gives the details of financial year wise installed capacity of
wind power projects (for MSEB purchase] in the state of Maharashtra till the
year 2002-03.
Table 5
Year w ise installed capacity of w ind pow er projects (f or M SEB purchase] in the State.
Sr. Financial Location Installed Cumulative

No. Year Capacity (MW) Total (MW)
01 1994-95 - -
02 1995-96 - -
03 1996-97 Chalkewadi- Satara. 2.77
2.77
04 1997-98 Sindhudurg 1.5
4.27
05 1998-99 - -
06 1999-2000 A) Chalkewadi-Satara 0.45
B)Gudepanchgani-Sangli 1.84
C) Vankusawade-Satara 0.75
7.31
07 2000-01 A) Thoseghar-Satara 1.35
B) Vankusawade-Satara 21.7
C) Chalkewadi-Satara 0.5
D)Kovdyadongar-Ahmednagar 2.0
E) Gudepanchgani- Sangli 1.15
34.01
08 2001-02 A) Thoseghar- Satara 0.9
B) Vankusawade-Satara 53.585
C) Chalkewadi- Satara 8.475
D)Kovdyadongar-Ahmednagar 26.00
E) Dhalgaon – Sangli 8.40
131.37
09 2002-03 Brahmanwel-Dhule 3.60
134.97
$$: the information provided in the table is furnished by MSEB under cover of their letter
No.Co.Ord.Cell/Wind/035466 dated 5.11.2003 in response to Commissions letter No. MERC/Wind
Energy/1269 dated 28.10.2003

Special Condition
3.6 SPECIAL CONDITION
New wind power capacity to be permitted for sale to Utilities shall not
be more than 750 MW during the balance period of 4 years of the 10th
Plan Period ending 31st March 2007. This ceiling is based on the target
for wind power for the State of Maharashtra indicated by Director
General, MEDA, and the urgent need for capacity addition through
short gestation power projects. The Commission is of the view that
Maharashtra should reach more than 1000 MW of installed capacity
during this Plan period so that economies of scale and cost reduction
would bring wind power on par with conventional power in terms of
cost. To achieve this objective utilities may source their wind power
requirements at the determined tariff, based on competitive bidding
with the bench mark of guaranteed CUF.
3.7 Review of the Tariff Rate and Tariff Structure
The Commission shall review the tariff rate and the tariff structure for
wind power projects after 31st March, 2007 or on addition of 750 MW of
additional wind capacity after 1st April, 2003, whichever is earlier.
During this review the Commission will not revisit any old projects.
The tariff rates for wind projects, which have already been
commissioned or will be commissioned before the next review, are
linked to the year of operation of the wind project and not to the fiscal
year.
3.8 Energy Purchase Agreement (EPA) & Energy W heeling Agreement

(EW A)
It is not the intention of the Commission to approve the EPA/EWA for

each wind project individually. The Commission, however, has
formulated the principles of EPA/EWA, which have been elaborated in
the Order. The Commission directs the MSEB and other utilities/
licensees to modify draft EPA/EWAs to reflect the tariff provisions and
principles of EPA / EWA as approved in the Order before executing the
EPA/EWA with developers. The Commission further directs the MSEB
and other utilities/ licensees to make all such EPAs/EWAs public.
3.9 UTILITIES TO FURNISH DETAILS OF ENERGY PROCURED FROM

W IND POW ER PROJECTS
MSEB/Utilities/Licensees should provide and update every month

details in respect of the quantum of energy purchased, source from
which procured and the cost, both monthly and cumulative, paid for
such purchases on their web sites.

Special Condition
The Commission acknowledges the efforts taken by the Consumer

Representatives under section 26 of the ERC Act, 1998, viz. (i) Prayas,
(ii) Mumbai Grahak Panchayat, (iii) Vidarbha Industries Association,
and (iv) Thane Belapur Industries Association and the various
individuals, organizations and associations for their valuable
contribution to the regulatory process.
The Commission would also like to place on record the efforts of its
experts and advisors.
With this detailed order, the Commission disposes off the Case Nos.17
(3), 3,4 & 5 of 2002.
Sd/- Sd/- Sd/-
(Jayant Deo) (Dr. Pramod Deo) (P. Subrahmanyam)

Member Member Chairman, MERC
Sd/-
(A M Khan)
Secretary, MERC

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MAHARASHTRA

Date: November 24, 2003

1.1 TECHNICAL VALIDATION SESSIONS 5

1.2 PUBLIC HEARING PROCESS 7

1.3 TARIFF PHILOSOPHY 8

1.3.1 Long Run Marginal Cost 9

1.3.2 Avoided Cost of Generation 9

1.3.3 Tariff prescribed by MNES 10

1.3.4 Tariffs based on the costs 10

1.4 TARIFF PROPOSAL 12

1.4.1 Tariff Proposal: Issues 13

1.4.3 Grouping of Projects 14

1.4.3.3 Group III 15

1.5 DETERMINATION OF TARIFF RATE AND TARIFF STRUCTURE 15

1.5.1.2 Adjustment for Self-use and Sale to Third Party 16

1.5.3.2 Adjustment for Self-use and Sale to Third Party 18

1.5.4 Special Condition 18

1.5.5 Review of the Tariff Rate and Tariff Structure 18

1.6 TARIFF RELATED OTHER ISSUES 19

Energy purchase Agreement (EPA) & Energy Wheeling Agreement

1.6.2 Evacuation Facilities 19

1.6.3 Tenure of EPA 19

1.6.4 Purchase of Energy 19

1.6.6 Rate/Unit of Reactive Energy (KVArh) Consumption from the Grid 20

1.6.7 Billing and Payment 20

1.6.8 Payment Security 20

1.6.9 Change in Third Party Purchaser & Change of Option 20

1.6.12 Transmission Loss Charge 21

1.7 MERIT ORDER DESPATCH 21

1.8 FORMULATION & SANCTION OF WIND POWER PROJECTS 21

UTILITIES TO FURNISH DETAILS OF ENERGY PROCURED FROM WIND

1.10 APPLICABILITY OF THE ORDER 22

1.11 ORGANISATION OF THE DETAILED ORDER 22

OBJECTIONS RECEIVED AND COMMISSIONS' RULING

2.2 OBJECTIONS/COMMENTS ON BASIC ASSUMPTIONS OF PARAMETERS 25

FOR CASH FLOW MODEL

for New Projects Commissioned after 01.04.2003

2.2.1 A Group II (Old) Projects 25

2.2.1 B Group III (New) Projects 27

20% for Group III (New) Projects.

2.2.2 A Group II (Old) Projects 28

Analysis of MSEB Data 29

2.2.2 B Group III (New) Projects 32

2.2.4 Cost of O&M : - 2% of Project cost with 5% annual escalation 35

Group II (Old) & III (New) Projects 35

2.2.5 Debt Equity Ratio : - 70:30 37

Group II (Old) & III (New) Projects 37

2.2.6 Interest Rate on Debt 38

2.2.6 A Group II (Old) Projects - 14% 38

2.2.6 B Group III (New) Projects - 12.5% 39

2.2.7 A Group II (Old) Projects - 6 years 40

2.2.7 B Group III (New) Projects - 10 years 41

2.2.8 Income Tax Benefit : - 100% accelerated depreciation 42

2.2.8 A Group II (Old) Projects 42

2.2.8 B Group III (New) Projects 43

2.2.9 A Group II (Old) Projects 44

2.2.10 Return on Eqity (ROE) : - 16% Per Annum 46

Group II (Old) & Group III (New) Projects 46

2.2.11 Rate of Income Tax - 35% + 5% Surcharge ; MAT - 7.5 + 5% 49

Group II (Old) & Group III (New) Projects 49

considered separately as the amount earmarked for O&M out of sale

proceeds would meet this requirement

Group II (Old) & Group III (New) Projects 50