Power Purchase Agreement. Do we need it?

A power purchase agreement (PPA) is a contract between a company that generates electricity (the seller) and one who is looking to purchase electricity (the supply-chain buyer).

Typically distribution company is a supply-chain (intermediate) buyer.  Distribution company commits a business to Generating company -- that it will buy all electricity produced by a generating company -- when distribution company is not sure about electricity demand from end buyers (consumers) of electricity. Distribution company takes a business risk.

This happens only in electrical power business -- that a link between supply chain is exposed to  business risk -- and not the original manufacturer.

Take an example of automobile industry.  Maruti Suzuki manufacture motors. Sai Services is sales and services agent of Maruti Suzuki. Maruti Suzuki takes complete ownership of its business and is exposed to business risk.  Sai Services never commits that it will buy all the motors produced by Maruti Suzuki. Picture shown below explains the situation.

Then why electrical power industry is different that automobile industry?  The only reason I see is to protect private players in power generation as majority of distribution companies are owned by state governments.

Why accounting books of a distribution company are not good?

I am writing this post with reference to Indian environment.  However, it is true for any other countries having similar set up.

Background

CAG audit of Delhi's power distribution companies

In January 2014, Aam Aadmi Party (AAP) government slashed power tariff in Delhi and asked the Comptroller and Auditor General (CAG) to audit the performance of Delhi's power distribution companies.

Electricity Act 2003

Before year 2003, There was only one company per state called respective state electricity board -- for example Maharashtra State Electricity Board (MSEB).  MSEB was looking after everything -- generation, transmission and distribution of electricity. There was one Profit and Loss account covering all three activities.
As per electricity Act 2003, Maharashtra State Government restructured Maharashtra State Electricity Board in 4 companies w.e.f. 06 June 2005:

1. M.S.E.B. Holding Co.Ltd
2. Maharashtra State Power Generation Co. Ltd. (MahaGenco) -- Generates electricity
3. Maharashtra State Transmission Co.Ltd (MahaTranco) -- Looks after transmission of electricity
4. Maharashtra State  Distribution Co. Ltd (MahaDiscom) -- Looks of distribution of electricity

Problem analysis

June 2005 onwards, MahaDiscom company is purchasing power from MahaGenCo by signing a Power Purchase Agreement (PPA). PPA is signed by both parties before the power is actually generated. MahaDiscom company is then selling electricity to end users and bills them for used electrical units.
Everything looks good and rational till this point. However, the catch is electricity cannot be stored. MahaDiscom never gets a 'delivery' of electricity it purchased from MahaGenco. Then MahaDiscom never supplies electricity to end users. End users get electricity directly from MahaGenco using transmission and distribution infrastructure of MahaTranco and MahaDiscom. Accounting books of a distribution company are not in good shape as it is trying to do something abnormal. It is trading electricity:

• Which is not generated by them And
• Which cannot be stored -- distribution company never gets a 'delivery' of electricity

Conclusion

1. One cannot trade electricity as it cannot be stored.
2. End users should pay electricity bill directly to MahaGenco. MahaGenco will then pay some amount of it to MahaTranco and MahaDiscom for using their infrastructure.