New emission norms may raise thermal generation cost

Rating agency Icra today said the revised emission norms notified by the environment ministry for thermal power projects may impact operational coal-based capacity of 187 gw and under-development capacity of 74 gw.
These norms will let these plants invest in additional equipment and the resultant capital expenditure is likely to result in an increase in cost of generation, Icra said in a statement.
"As per Icra's estimates, these norms would entail a capital investment of Rs 0.6 crore to Rs 1 crore per mw, based on the ageing of the plant. This amounts to an aggregate capex requirement of about Rs 1.2 trillion, which is likely to materialise over a 2-3 year period, given our assumptions about the implementation delays," Icra Ratings Senior Vice-President Sabyasachi Majumdar said.

This is likely to result in an increase in the cost of generation of such plants by about 13-22 paise per unit on account of the capital charges alone, apart from entailing additional operations and maintenance charges, Majumdar added.
The environment ministry earlier in December last year had notified revised emission norms for thermal power projects (TPPs) with an aim to minimise emission of particulate matter, sulphur dioxide, oxides of nitrogen and mercury and also reduce water consumption.
The existing TPPs are required to follow the revised standards within two years from the date of publication of the notification (December 2015) whereas new plants starting their operations from January 2017 are required to comply with these norms from the commissioned date.

Compliance by the generating companies/independent power producers (IPPs) to meet these norms, within the given timeline, remains challenging due to their apprehension in terms of cost recoverability and timely approvals for the pass-through of such a cost under the change in law by the regulators.

"Power generating companies are likely to be able to pass on the higher cost of generation to the off-takers, primarily state-owned distribution utilities under the 'change in law' mechanism in the power purchase agreement. This would put an upward pressure on the retail tariffs, which could be seen in 2018-19, assuming that the generating companies implement the revised norms over the next two years," Majumdar said.

Further, adequacy of tariff hikes by the regulators for distribution utilities factoring in such an increase in the cost of coal-based generation remains important from their cash flow perspective, Majumdar said.
"On the positive side, however, this is likely to provide a boost to the domestic capital goods sector (power generation equipment) over the medium term, which has been impacted by the slowdown in fresh orders," Majumdar added.