Will India’s Renewable Dream Bring Stress To Power Sector?
If India were to achieve at least 130-gigawatt renewable capacity by 2022, that would hurt demand for coal-powered producers.
More trouble may be lurking for India’s stressed power sector in the next three years as the nation crawls towards its renewable energy targets in search of blue skies.
If the country were to achieve at least 130-gigawatt renewable capacity by 2022, that would hurt demand for coal-powered producers. The plant load factor—the proportion of output to installed capacity— of thermal units could drop to 35-40 percent, according to a vision document of the Power Ministry. It’s lower than 55 percent—the minimum required by the Central Electricity Authority.
The thermal power industry’s plant load factor has already fallen from 77 percent to 61.01 percent in the last 10 years. And a further decline could mean less income for at least some thermal units. Already, financial institutions are grappling to find solution for 34 plants with a capacity of 40 gigawatt and Rs 1.8 lakh crore worth of loans. The Supreme Court’s relief from strict default and insolvency timelines has provided lenders some breathing space to find fuel linkages, ink new pacts with distribution companies and seek better tariffs.
Projects that have long-term purchase pacts won’t suffer much as these have a mechanism to compensate them, according to Kameswara Rao, partner (energy, utilities and mining) at PwC India. Electricity generators that don’t have such agreements and sell in the spot market won’t be able to find a market, he said.
That will impact the return on equity—a measure of profitability. The Central Electricity Regulatory Commission’s tariff regulations for 2019-24 peg the return on equity for thermal power plants at 15.5 percent.
But all this is predicated on one condition: renewable power generation capacity hits at least 130GW in three years.
Can India Achieve 130GW?
India is home to some of the cities with the world’s most toxic air, and coal-fired plants are the biggest contributors. The nation has committed to turn 40 percent of energy capacity away from fossil fuels by 2030 under the Paris Agreement, besides turning nearly 30 percent private and 70 percent fleet taxis electric by then.
Renewable power is at the core of the strategy. Prime Minister Narendra Modi’s government targets to install 175GW of renewable capacity —100GW of solar and 60GW of wind—by 2022.
About 80-gigawatt, nearly a fifth of the power the nation can generate, comes from clean sources as India added 8.53GW renewable capacity in 2018-19. Nearly 50GW of solar and wind projects are under various stages of bidding and implementation, RK Singh, minister of power with independent charge, said in response to a query in Rajya Sabha this month.
The new projects, however, face viability concerns, according to Singh, including tariffs at close to record lows, changes in manufacturing technology, lack of uniform policy across states, and lack of financing. Another key risk is states backtracking on power pacts inked at higher prices. Andhra Pradesh recently decided to renegotiate renewable energy tariff.
India may not be able to achieve its target of 175GW by completely relying on the current strategy of discom-led procurement of renewable power, Jasmeet Khurana, manager, REmobility at World Business Council for Sustainable Development in India, told BloombergQuint in an emailed response. A pivot to allow large-scale corporate procurement of renewable power and mass adoption of rooftop solar will be needed to fill the gap, he said.
India has added about 36.6GW renewable capacity in the last three years (2015-2018). At that pace, reaching the 130-GW threshold—when solar and wind farms will start hurting the coal-fired industry—by 2022 appears difficult.
The power minister, however, promised in Lok Sabha that the government will not only achieve the 175-GW target of 2022 but also cross that milestone.
How Will Government Tackle It?
If 130GW is achieved, the ministry has a plan to tackle that.
Thermal power projects will cut output during the day and the grid will draw electricity from solar and wind farms during the peak hours in the day, a senior government official aware of the plans told BloombergQuint on the condition of anonymity. Coal-fired units will operate in the evening when they are needed, the official said.
For backdowns or cutting outputs during the day, distribution companies will have to pay a fixed charge to the thermal units, the official said. To be sure, fixed charge is already part of long-term power purchase agreements and is passed on to consumers. It’s paid if a project shuts output. But under the government’s plan, discoms will have to pay it even if it buys power from a solar or a wind farm.
The official quoted earlier explained: If a discom is paying Rs 2.50 a unit for solar power, it will have to pay Rs 1.75 to the thermal project for the backdown.
Moreover, that mechanism will work in such a way that the plant load factor of fossil fuel-driven generators doesn’t fall below the required 55 percent.
Isaac George, director and chief financial officer at GVK Power Ltd., explained how it works as of now. Generation companies are allowed a fixed charge against the power that could have been generated but isn’t because a utility decided to buy from somewhere else, he told BloombergQuint.
“I have a thermal power plant GVK Gowindwal Sahib in Punjab. For the units that they don’t take from me, they will pay fixed charges,” he said. “It depends on how the power purchase agreement is structured. Punjab State Power Corporation Ltd. will (have to) compensate me for using renewables by paying Rs 2.2 a unit.”
Girish Kadam, vice president and power sector head, corporate ratings at ICRA Ltd., agreed. There will be no impact for thermal projects that are allowed to pass through variable and interest costs to users given that they can claim fixed capacity charges, he said over the phone. The returns could be affected in case of shutdowns because of loss of efficiency as there will be loss of station heat rate and power consumed by equipment, he said.
Can Discoms Bear The Burden?
Inability to hike tariffs, under-recoveries linked to power theft and sops announced by governments ahead of elections left the state-run discoms saddled with debt.
Ujjwal Discom Assurance Yojana, or UDAY, the third relief scheme in decade and a half, intended to push their debt onto states and set targets to cut costs, losses and theft.
But after falling initially, discom losses jumped 36 percent year-on-year to Rs 15,080 crore in the first half of 2018-19, according to a report from Conference of Power & New and Renewable Energy Ministers of States and Union Territories held in February 2019. That’s as much as they reported in the previous fiscal. And by December, 58 power distributors across India owed power producers Rs 47,462 crore.
In such a situation, expecting discoms to pay more would be difficult.
Cost for utilities will increase because they will buy higher quantum of solar energy for the day and have to pay fixed charges to thermal power producers, Divya Charen C, senior analyst at India Ratings and Research Pvt. Ltd., said. If thermal power plants operate at a plant load factor of lower than 55 percent, prices for merchant power will be very low and they will also be at a loss, she said.
The Power Ministry and discoms of Andhra Pradesh, Telangana and Karnataka that have been running into losses didn’t respond to BloombergQuint’s emailed queries.
A senior Power Ministry official said if the peak demand comes in the evening and the difference between consumption during the day and evening is high, then a utility is paying more charges. If this gap can be reduced, then a utility is not contracting that much thermal capacity and loads can be managed, the person said on the condition of anonymity as the details are not public yet. Yet, there’s no doubt that there will be some impact on discoms, the official said.
That raises the threat of reneging on power purchase agreements to avoid payments. Already, state-run power distributors have also been renegotiating their purchase pacts as tariffs fell after solar and wind farm auctions. They may again resort to that.
Rao, however, said that would be difficult for coal-fired units. “This has been attempted in the past, and courts and regulators have been firm. It has happened in Gujarat and Karnataka (when courts rejected it).”