Clean Energy Push: Time to power down old thermal plants, open exit route for legacy PPAs
Allowing discoms to exit power purchase agreements with over 15-year-old coal- & lignite-fuelled plants will facilitate them to meet renewable purchase obligation and relieve from onerous financial liability.
As it inches towards the March 2022 target of 175 gigawatts (GW) of renewable energy (RE) capacity, India’s green push is blunted somewhat due to the feeble progress in addressing the damage on account of the country’s massive fleet of aging and inefficient coal- and lignite-fuelled thermal power plants. These are highly polluting in terms of carbon dioxide emissions, emitting CO2 in the range of 1.1-1.3 kg/kWh, as compared with only 0.82kg/kWh by modern supercritical thermal plants.
The irony of the newer, cost-efficient and lesser polluting supercritical thermal plants not getting customers or coal, even as inefficient, highly polluting and aging plants continue to sell costly power under the protection of long-term power purchase agreements (PPAs) to distribution companies (discoms), is hard to get away from. At the root of the problem is the fact that discoms are unable to exit from uneconomical PPAs signed decades ago with older, polluting generating stations. An exit option would relieve discoms from onerous financial liability and the funds thus released can be used by them to buy cheaper and more power, and supplying it to consumers at better rates.
Exit from legacy PPAs would also improve the offtake of efficient thermal plants as well as private hydropower plants, reducing carbon emissions as well as financial stress in the generation sector.
Paradoxically, while being inefficient, the old coal/lignite thermal power plants are inflexible and not capable of quickly changing their output in tandem with 175 GW RE generations giving varying output each time of the day. Modern supercritical power plants are capable of flexing their generation, and they are indispensable for integrating large-scale RE, as we have limited gas power plants and just a few pump storage hydroelectric plants required to support the variable nature of RE generation.
From 2007 to 2017, the all-India power generation capacity has surged from 132 GW to 330 GW, including 58 GW from RE sources. The figures exclude captive capacity. Most rapid capacity addition has been in the thermal sector amounting to 145 GW, while RE have contributed nearly 50 GW. During the 12th Five Year Plan period 2012-2017, the gross capacity addition has been about 125 GW. As a result of massive private sector contribution, growth in installed capacity has been phenomenal in thermal and renewable sectors. Private sector now leads the thermal sector and is virtually the sole contributor to renewable sector.
The power generation capacity addition has outstripped demand growth and a relative surplus prevails. Given the power projects under construction and in various stages of pre-construction, the Central Electricity Authority (CEA) has forecast further dip in the plant load factor (PLF) of thermal power plants. The slow growth in demand coupled with creation of apparent or artificial surplus capacity has resulted in severe financial distress for independent power producers (IPPs) of conventional power. It is creating apprehension that it might begin to affect the RE sector also unless remedial action is taken.
What makes matters worse is the fact that nearly 90 per cent of the country’s coal-fired power generation capacity is in violation of emission norms notified two years ago that were to kick in during December. In June 2017, the Union power ministry had informed the environment ministry that 165.9 GW out of the total of 187.1 GW — or 89 per cent of the country’s existing coal-based power capacity — is not in compliance with the sulphur dioxide (SO2) emission limits that were notified in 2015. While existing plants of 146 GW, along with under-construction plants of 67 GW, were stated to be ready to install SO2 emission-curbing systems, this was pegged to cost an incremental investment of more than Rs 1 lakh crore and consumers paying an additional Rs 23,660 crore annually through a tariff hike of 32 paise per unit. Even though the 2015 norms stated that all existing coal-based plants need to follow emission limits by December 7, the power ministry stated that it would take seven years to “retro-fit” flue gas desulphurisation (FGD) systems — which remove SO2 from exhaust flue gases — in the existing capacity. It also said that the remaining 19.9 GW of the aforementioned 165.9 GW capacity either does not have “space” or is “not interested” in installing FGD systems. And that a plan regarding installation of FGD systems in the plants under construction is yet to be decided.
The option before the Centre and states is to work towards addressing the problem comprehensively, starting with:
* Increasing competition to lower the average cost of power supply to consumers: In order to facilitate discoms to meet their renewable purchase obligation (RPO) and make timely payment to RE generators, discoms should be relieved from the PPA obligation of uneconomical thermal coal and lignite power plants more than 10-15 years old.
* Providing discoms the option to exit out of expensive long-term cost plus PPAs with thermal power plants more than 10-15 years old, by which time the original loan is generally paid off by most developers. The older thermal PSU and private generators should be pushed to survive in the market like other IPPs and eventually close as per the CEA plan. The benefit of cost-plus tariffs cannot be extended to generators till perpetuity considering the prime objective of the Electricity Act is consumer welfare and creating a competitive electricity market. As early as 2006, the government had published Tariff Policy announcing that all future procurement of power by discoms shall be through competitive bidding. It’s neither the will of the legislature nor the principle of equity to go on bleeding discoms for the sake of inefficient generators, when the discoms can safely lean on the spot market or medium-term firm contracts through electronic auctions to a greater extent.
* Exit from uneconomical PPAs will relieve discoms from onerous financial liability, enabling them to buy cheaper power from the spot market, it becomes desirable to create a financial market for electricity so that buyers and sellers are able to secure themselves from price volatility by hedging in the financial market.
* Implement the CEA plan to retire 22,716 MW old polluting power plants in 2017-22 and another 25,572 MW in 2022-27. Importantly, new conventional capacity of about 90,000 MW is going to come up during the same period of 10 years. In future, it will not be possible to operate the grid with non-variable outdated thermal plants.
* Retiring old plants will improve the offtake of efficient thermal plants as well as private hydro plants reduce carbon emissions as well as financial stress in the generation sector.
A calibrated approach on this front would help push electrification across states, an important objective given that while there are sizeable power capacity surpluses currently, there are large pockets of unmet power demand. So, while the demand is sluggish, there are 4.29 crore (24 per cent) households in the country deprived of access to electricity. Power cuts in small towns and villages continue despite the “surplus power” situation. India’s per capita consumption is only about 1,100 kWh per year, which is one-third of the global average and way behind China’s, with systemic and regulatory shortcomings, largely legacy issues, responsible for this situation.