A prescription for boosting thermal power demand

By 2030, India aims to have 40% of its electricity generation capacity to be of renewable origin

By 2030, India aims to have 40 per cent of its electricity generation capacity to be of renewable origin. With such energy becoming increasingly competitive, demand for conventional thermal power is set to trip.

Today, 25 Gw of untied thermal power capacity, and another 25 Gw is expected to come up in the next three to five years in the private sector, entailing an investment of Rs 2.5 lakh crore, could end up being stranded.

With sluggish demand, the average Plant Load Factor (PLF) for coal-based power plants has steadily declined from 78.9 per cent1 in fiscal year 2008 to sub 60 per cent levels in the last fiscal year. The situation is expected to worsen because lower PLFs will lead to lower profitability and impair project viability.

Adding to the woes is worsening asset quality and rising non-performing assets (NPAs) of banks. Data from the recent Economic Survey for 2016-17 show the NPA ratio in the generation sector is 5.9 per cent2 of total advances (outstanding) of Rs 473,815 crore.

The Survey says the shift to renewables is likely to render a part of the assets in conventional energy generation idle, or result in them being used at a much lower level than their maximum technically feasible capacities. “The investments in these plants being sunk, it would be no longer possible to recover any returns from them although their useful life is still not over.” 

India’s Chief Economic Advisor Arvind Subramanian, the primary author of the Survey, also cautioned that overemphasis on renewable energy could land a double whammy for the government — eroding viability of thermal power plants and increasing bad loans of public sector banks.

The Survey estimates that in fiscal year 2017, the social cost of renewables was around three times coal at $11 per Kwh — including the cost of stranded thermal assets and NPAs — and makes a philosophical point that the pace of investments in RE should be in sync with the total cost accrued to the society.

The 50 Gw of stranded thermal capacity and mounting bad debts at banks reminds one of the path the ill-fated Dabhol power project took. This time, too, discussions are whether debt taken by private sector from banks could be passed on to public sector entities even as the core problems afflicting the sector remain unaddressed. 

But there is a better, more sustainable route to revitalising the stranded assets, which is to focus on both demand and supply. The government needs to lead electricity demand creation especially given that low PLFs are a result of more supply chasing less demand. 

That’s why we believe ‘Power for All’ and 100 per cent metering of existing and new consumers should be implemented at a war footing.

To do so, states can explore options such as direct benefit transfer and offer metered connections free or at concessional rates. And as demand picks up over the medium to long term (since demand is a function of economic growth and rural electrification, both of which are on a gradual grind up), proper procurement planning can ensure thermal projects meet the base load. 

Secondly, the supply side needs to be quickly plugged by focussing on two areas:

1. Thermal capacities of 40 Gw are under planning or construction stage and likely to be commissioned before 2022 by various state and central generating entities. 

Given the industry’s predicament, there is no case for new spending by states for these capacities more so since power could be competitively procured from stranded capacities or from plants running at low PLFs. The money thus saved can be used for direct benefit transfer and other social goals. 

And the NTPC, instead of focusing on investing in new capacities, could look at taking over joint venture plants that were set up along with states, and/or acquire state generating stations where there is significant room for efficiency improvements. 

2. Secondly, according to the Central Electricity Authority report 2015, at the national level, 34 Gw thermal assets are more than 25 years old. Present environmental norms require these plants to be decommissioned and there is no merit in making fresh investments to upgrade them into super critical plants. Early decommissioning of inefficient plants would be the better bet here. This replacement could be done through transparent competitive bidding by the same procurer holding power purchase agreements of these old plants. This would not only help distribution utilities reduce their power purchase cost, but also integrate stranded thermal capacities.

While the share of renewables will continue to grow, calibrating that growth with thermal assets by making stranded assets viable will help stanch the haemorrhaging in the sector and turn things around.

1 According to the Central Electricity Authority

2 Economic Survey 2016-17, Volume 2

The author is a senior director at Crisil Infrastructure Advisory