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India's power sector

10th August – Transforming India’s power sector

Transforming India’s power sector

India’s goal of installing 450GW of renewable energy looks to be a challenge, but this will be an even bigger challenge if India has overcapacity due to lower-than-expected demand. Therefore, an innovative response requires retiring old, inefficient coal plants by bundling them with new and cheaper renewable energy (RE) capacity.

It can be done by employing a “blended tariff” that amortises the cost of decommissioning over the term of the RE power purchase agreement, such that the financial burden on the distribution companies is almost negligible. The RE tariff would be discovered through competitive auction, as is the norm now.

Decommissioning thermal plants –

  • India has a total coal fleet of 170+ plants across the country, amounting to 205,000MW. Several plants are old and inefficient—the oldest is 57 years old, and the lowest plant load factor is 21%. Of these, 58 plants amounting to 45,000 MW of coal plants are over 20 years of age, with an average plant load factor of 62%, and tariffs ranging between Rs 1.87- 7.03/kWh.
  • Research by CPI and ReConnect Energy suggests that there is a strong economic and environmental case for decommissioning many of these plants—up to 60% of plants amounting to 28,000MW. The criteria used to identify these plants are a combination of age, plant load factor, tariff, and suitability for the installation of flue gas desulphurisation units.
  • This last is an important category mandated in 2015 by the Union Ministry of environment, forests and climate change and the Supreme Court to mitigate the growing problem of air pollution in India, and has since suffered implementation deadlines slipping from 2017 to 2022, also unlikely to be met. Flue gas desulphurisation units oblige higher tariffs and also require land and water, so typically older plants cannot afford them.

Blended tariff –

The proposed tariff would include the normal tariff for the new renewable energy plant plus the cost of decommissioning the old fossil fuel plant. The bidder would build such RE capacity to match the generation of the retiring thermal plant. Ideally, the bidder would be a combination of a RE independent power producer and a specialised decommissioning contractor.

Financing –

  • Discoms do not have the resources to take up this scheme in its entirety in the short-term. Therefore, it can be envisaged to move beyond business-as-usual, whereby some 3-5GW of thermal capacity is decommissioned each year. An accelerated program, with pre-arranged financing, could help the speed and scale up existing decommissioning trends.
  • The entire program would entail an investment of approximately $41 bn. For each 5GW tranche of coal capacity, of the total 28GW program to be offset by two times the RE capacity (10GW), the bidder, would need approximately $218mn of equity. This capital would be mobilised with the assurance of debt financing to the extent of $510mn.
  • This debt would be pre-arranged as a green bond, or, an emerging financing class—a transition bond, in tranches to grow with the scale-up of the programme. The bond could be backed by development banks and oblige the GOI’s sponsorship/guarantee, and its subscribers could be large scale pension funds with green windows. This “green bond” would be structured as regular debt, serviced by the earnings from the Renewable Energy Power Purchase Agreements (RR PPA), with an upside that could come from the carbon credits earned from the renewables being injected into the grid.

Benefits –

  • Financially, this blended tariff program would save discoms Rs 9,820 crore ($1.3 bn) per year from lower tariffs, even as it results in a younger fleet with better plant utilisation.
  • It also gives a boost to India’s RE sector, which has been slowing down with discom issues. It would add 60,000 MW of new RE capacity. Adding significant renewable energy, in turn, would give a strong push to local manufacturing and EPC companies under the “Atmanirbhar Bharat” initiative.
  • Replacing coal-based plants with renewable energy will also have a significant impact on reducing the renewable purchase obligation (RPO) costs for discoms.
  • Finally, the programme would release land for other uses. The programme identifies 26 urban plants, opening up over 13,000 acres of valuable land, which can create liquidity gains for the state and an increase in income generation of 4x-20x depending on the choice of commercial activity.
  • The programme would save India 113mn tonnes of GHG emissions annually. Assuming a carbon price of $5/ton, every 500MW of coal retired would produce an estimated $10mn in annual revenue to the investor—nearly equal to the decommissioning costs.

Conclusion –

Implementing the program would bring multiple transformational benefits to the power sector, improve the plant load factor (PLF) and efficiency of old thermal plants, and move India forward in its implementation of renewable energy targets—all without burdening discoms. All this, while addressing critical environmental concerns arising from climate change, air pollution, and water scarcity.

SourceFinancial Express

QUESTION – With the increase in share of renewable energy in our power sector, it is imperative to look for a ‘blended tariff’ or hybrid tariff programme by moving away from old thermal plants with exceedingly high inefficiencies. Examine how this blended tariff program can help India reform its power sector.

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