The Contracts are for a long period and cannot be terminated: These long term contracts are mostly for a period of over 25 years and cannot be terminated before the end of the period. Therefore, a discom has to ascertain its demand projections and other factors for 25 years in advance before signing the PPA. The prices of power through other sources, demand in the area of supply of the Discom or other factors may change the requirement of the contracted power considerably.
Huge cost implications: The Discoms have to pay the capacity charge irrespective of the power consumed by the Discom. If the Discom over contracts than its actual power requirement, the Discom will have to pay the capacity charge for the entire 25 year period for the power it does not even require. In such a scenario, the only option left for the Discom is to pay fixed cost to the generating stations on the declared available capacity, save variable cost to the extent generator is not asked to generate.
Globally, all countries have moved away from long term contracts, since predicting
the status of the sector 25 years in advance with certain level of accuracy is difficult. A discom may either over contract or under contract. The prices can change considerably making the Discom worse off because of signing a PPA at high cost.
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