How retiring old coal plants could save Rs 53,000 cr for power discoms

How can India clean up its environment, get rid of air pollutants and, at the same time, pull its cash-strapped power distribution sector out of colossal debt? A new study suggests that retiring old coal power plants could be an effective strategy to achieve all these aims.

If 54 coal plants that are 20 years or older, located across 11 states, could be shut down over the next two years, it would yield savings of up to Rs 53,000 crore ($7.2 billion) over five years for these states’ electricity distribution companies (discoms), as per a new analysis by Climate Risk Horizon (CRH), a non-profit that analyses the risks to the Indian economy from climate change. This could make up for over 50 per cent of the dues of the discoms.

These savings will come from two streams--avoiding the installation cost of expensive pollution control technology that has to be in place by 2022 to meet the government-mandated 2015 air quality standards and using cheaper options to replace the costly electricity bought from the old plants under long-term purchase agreements, said the study released on September 3, 2020. India’s renewables capacity is currently enough to cater to the energy supplied by these plants, as per the report.

As on April 30, Indian discoms owed over Rs 1 lakh crore ($13.65 billion) to power generation companies, according to the Ministry of Power data. Of this, Rs 54,695 crore ($7.47 billion) could be traced to the 11 states analysed by CRH--Andhra Pradesh, Bihar, Chhattisgarh, Gujarat, Karnataka, Madhya Pradesh, Maharashtra, Tamil Nadu, Telangana, Uttar Pradesh and West Bengal.

The prolonged lockdown crashed India’s power demand, hitting the discom business and adding to the chronic financial distress caused by legacy factors: power theft, payment defaults, inefficient billing and collection and low tariffs forced by electoral politics have kept the sector in a debt-loop that successive government could not break, IndiaSpend reported on May 21.

Now, forecasts say that discoms could end up owing lenders Rs 4.5 lakh crore ($61.27 billion) by the end of the financial year 2020-21--30 per cent more than the last financial year. Given this spiralling crisis, the CRH study suggests that phasing out old coal plants will not only help indebted discoms in the short- to mid-term but also have significant other benefits--such as “improving the financial condition of state governments and distribution companies, lowering the electricity purchase costs for consumers and ensuring better utilisation of newer, more efficient electricity generation assets”.

Old plants use a lot more coal to produce electricity than the newer energy-efficient plants, polluting the atmosphere heavily. So their phase-out, coupled with the promotion of cleaner plants and renewables, will help manage the country’s environmental problems and curb and air pollution, said the study.

Coal power plants are one of India’s chief air polluters. Their emissions have been linked to 83,000 deaths annually in India. Also, the burning of coal is responsible for 44 per cent of energy-related carbon dioxide emissions worldwide, contributing majorly to climate change.

How Rs 53,000 crore will be saved

The Rs 53,000-crore savings from the shutdown of old plants will accrue in two ways, as we said earlier: by doing away with the need to install expensive pollution-cutting technologies and by buying power at cheaper tariffs.

Savings on anti-pollution installations: To meet the stricter air pollution norms for thermal power plants announced in 2015, plants are expected to install flue gas desulphurisers (FGDs) and low NOx burners to control their sulphur dioxide (SO2) and oxides of nitrogen (NOx) emissions. For these old plants whose businesses have already been impacted by over-installed capacity, expensive pollution-control installations can escalate costs which, in turn, will be passed on to consumers.

Shutting down 36.53 gigawatt (GW) of older, inefficient coal plants in the 11 states under consideration will thus save an estimated Rs 18,800 crore ($2.46 billion) in terms of retrofit costs for pollution-control installations, the study found.

Cheaper, cleaner power: Discoms sign long-term contracts known as power purchase agreements (PPAs) with coal power plants to buy electricity. Under these, the electricity tariff is divided into two: fixed and variable costs. Discoms have to provide these fixed costs to the power plant to manage and maintain the contracted capacity even if no power is being bought. We discuss savings through fixed costs later in the story.

Variable costs are incurred in the purchase of fuel and the actual power bought from the plants. For the old plants studied by CRH, these variable costs stay above Rs 3 per kilowatt-hour or kWh (1 unit of electricity)--in the range of Rs 3.10 to Rs 4 per kWh, the study found. This is high because cheaper tariffs are now available through power exchange or from new renewable power, the study suggests.

Therefore, if scheduled electricity dispatch from these 36.5 GW of older plants were to be replaced with electricity from cheaper sources--at upto Rs 3 per kWh--there would be a further net saving of approximately Rs 7,000 crore per annum based on current tariffs across these 11 states studied, said the report. “Since coal power tariffs tend to escalate annually, the actual savings over a five-year tariff period would be over Rs 35,000 crore [$4.78 billion],” Ashish Fernandes, lead analyst at CRH told IndiaSpend.

Future renewable power will be even cheaper

“After the discoms have paid for the fixed capacity charges of coal plants, the choice is [between the] variable charges of coal electricity and the competitive tariffs of renewables electricity,” said Kashish Shah, energy finance analyst at The Institute for Energy Economics and Financial Analysis (IEEFA), a think-tank. “Renewable would win this contest because their prices--under Rs 3 per unit, currently, are flat for 25 years in a contract. They are also deflationary--in some years renewable tariff could reach below Rs 2 per unit.”

For coal, inflations have to be adjusted in tariffs along with increased railway freight charges. Thus, renewables make economic sense for discoms. Retiring old plants was among the most important solutions offered to help discoms deal with their financial stress, according to an August 2020 study by IEEFA, which Shah co-authored.

Rationalising fixed costs to old plants

The surplus power generation capacity in the Indian electricity system has led to a record low in plant load factor (the percentage of total capacity utilised for power generation) of about 60 per cent across the coal fleet. Due to overcapacity and lower-than-projected demand, several states that have signed PPAs in the last ten years have found themselves paying high annual fixed costs though there is no real demand for power from certain generating plants. This has further hit discoms’ finances.

These fixed costs come from two sources: plants with significant electricity dispatch and high fixed cost, usually younger plants less than 10 years old and plants that have low or even zero dispatch, said the study. It added that the fixed cost amount in the latter case could be high or low, but discoms are liable to pay irrespective of the volume of electricity purchased.

Governments should come up with mechanisms--such as giving premium tariffs at peak power or giving extension in the contract life--to renegotiate and rationalise these fixed costs to bring them to acceptable levels without undermining the sanctity of the PPAs, the study suggested.

During our studies, we see that there are plants from which no major electricity dispatch is being scheduled but the discoms are still paying these plants hefty capacity charges, said Shah of IEEFA.

Shah gave the example of Madhya Pradesh to illustrate his point. In the state’s discoms, 40 per cent of the cost of power purchase is in the form of fixed capacity charges. And some of these plants receiving high capacity charges are old and inefficient. “So retiring them would be a good solution to help discoms resolve a good part of their financial stress,” he said.

To get an estimate of the excessive burden in terms of high fixed costs for the analysed 11 states--and how much money these states can save for their discoms if they rationalise these--the CRH study “conservatively assumes” a 50:50 split in the power tariff. This means a Rs 2 for variable costs and Rs 2 for fixed costs in a Rs 4 per kWh tariff (the upper limit of a competitive electricity tariff).

Discoms of these 11 states will be able to save additional Rs 12,661.28 crore ($1.72 billion) if the fixed costs are capped at Rs 2 per unit of electricity, the study found.

Savings from pausing early-stage new plants

Despite the surplus generation capacity in the system and the “onerous fixed cost obligations” of discoms, facilities for an additional 60 GW of thermal power are under construction across the country, with another 29 GW in the proposal or permission stage. Of this, over 17 GW is likely to be completed by 2022 in the 11 states under discussion, the study said. Once commissioned, these plants will pose an additional fixed cost burden for state discoms while further depressing PLFs across the coal fleet.

This new capacity can only be redeemed if there is a huge increase in electricity demand-- an unlikely case given the economic impacts of the COVID-19 pandemic, as per the CRH study. Electricity demand in India can drop by 7 per cent to 17 per cent by 2025 due to COVID-19, a new July 7 report by The Energy and Resources Institute (TERI), a Delhi-based think-tank, predicted.

The CRH study has suggested freezing further expenditure at any early stage in under-construction plants. In the 11 states included analysed, 47 GW of projects are officially under construction, including about 14 GW capacity in the early stages of active construction.

Freezing this capacity “could cumulatively save over Rs 92,000 crore [$12.56 billion] of public funds”, the study concluded.

(Tripathi is an IndiaSpend reporting fellow.)