An electrifying future for power plants

Power plants in India have been combating challenges such the coronavirus pandemic and obsolescence, among others, to ensure continuous power generation and supply for all. We analyse their performance till now and the opportunities that are foreseen in the next few years.

Power plants in India are mainly divided into thermal, nuclear, hydro, and renewable, of which thermal plants comprise the major source of power generation. The total installed power capacity according to the Central Electricity Authority (CEA)as on 30th April 2020 (and updated on 23rd May 2020) was 3,70,348 MW, of which the central sector constituted 93,477 MW (25.2 percent), the state sector 1,03,322 MW (27.9 percent), and the private sector 1,73,549 MW (46.9 percent). We take a detailed look at how they have been performing amidst the current slowdown.

Performance of power plants in India
When we asked Kunj Shah, CMD, Zodiac Energy Limited about how he assesses domestic power plants in terms of installed power generation capacity versus financial performance, he shared, “In India, almost all the government thermal power plants have completed their life cycle. Also, hydropower plants are also very old and in dilapidated condition. However, the private thermal power plants are in good working condition, but now due to uncertainty of fuel linkage and fluid geopolitical situation, thermal power generation is a challenging task. The renewable power plants in comparison are new and are working in an efficient manner.”

He added, “However, the DISCOMs are in very poor financial status and regularly defaulting in payments to generators. As a result of this, both conventional as well as renewable energy generators have to work at reduced capacity. Due to this, all the financial working of generators go haywire and becomes stressed assets for lenders. Today in India, no banks are ready to lend to conventional as well as renewable energy project due to these reasons. This vicious cycle is not going to end unless the government brings stability in policy, improves the health of DISCOMs, and disciplines the energy pricing.”
The installed capacity sector-wise is shown in the table below:

The electricity generation target of conventional sources for the year 2020-21 has been fixed at 1,330 Billion Unit (BU), i.e., growth of around 6.33 percent over actual conventional generation of 1,250.784 BU for the previous year of 2019-20. The electricity generation target of conventional sources for 2020-21 has been fixed at 1,330 BU comprising 1,138.533 BU thermal; 140.357 BU hydro; 43.880 nuclear; and 7.230 BU import from Bhutan.

As per a recent report by CARE Ratings titled ‘The Indian Power Sector in 2019-20’, the domestic power sector has been impacted by the current slowdown in the national economy, and the emerging economic disruption caused by the coronavirus pandemic will add to the weakness in the sector. The report adds that the Indian power sector in 2019-20 has been characterised by factors such a less than targeted addition to the installed generation capacity, decline in pace of growth in power generation, low capacity utilisation, subdued electricity demand, narrowing of energy deficits, increase in power purchase from power exchanges, AT&C losses and ACS-ARR gap above target, and increase in outstanding dues of DISCOMs.

AK Saxena, Senior Director, Electricity and Fuels Division, TERI, explains, “Delicensing of generation in 2003 and demand projections kindled interest of developers in generating capacity addition. There was a spurt in the capacity addition during the 10th and 11th Five Year Plan. During the last few years, the generation capacity is far in excess of demand which can be met economically. It certainly puts a pressure on the financial performance of the generating companies.”

He adds, “As of March 2020, we have about 370 GW of total capacity installed capacity, out of which about 87 GW is renewable and approximately 280 GW is from conventional power plants and peak demand met during 2019-20 was approximately 183 GW. One of the problems that occurs on account of this is that the plant load factor (PLF) of thermal power stations starts declining and the plants having incentive linked to PLF do not get any incentive as the target PLF for getting incentive is far too high than the PLFs achieved in practice. The second impact is that the plants which have high variable cost of generation get less generation schedule or they do not get scheduled at times, which leads to underutilisation/non-utilisation of generation capacity. The fixed charges per unit of power delivered to beneficiaries become more. Part load operation of thermal power plants below certain threshold also leads to increase in generation cost. All these factors impact operational as well as financial performance of the generating companies.”

Approximately 40 GW capacity was identified as stressed due to lack of PPA, fuel linkage, etc. He adds, “For revival of stressed assets, a pilot scheme was introduced by Ministry of Power about two years ago to facilitate procurement of 2.5 GW power for three years under medium term. Second pilot for another 2.5 GW for three years has been notified in February 2019. I think much more needs to be done.”

Measures to be taken by power plants to meet emission control norms
The recent Union Budget mentioned shutting down thermal power plants for not meeting the emission control regulations as laid out by the Ministry of Environment, Forest and Climate Change (MOEFCC), and already 14 plants have been issued notices in this regard. In view of this, Saxena tells us, “The new emission norms which have been specified by MOEFCC in December 2015 pertain to the control of particulate matter (PM), SOx, NOx, mercury, etc. Power stations are in the process of implementing various emission control systems. For control of particulate matter in the existing stations, electrostatic precipitator (ESP) may need retrofitting with additional field/replacement; new stations would require ESP design compliant to the new norms. Norms for SOx and NOx having been specified for the first time, flue gas desulphurisation system and DeNOx system need to be installed.”

Impact of generation and transmission companies serving DISCOMs without settlement of dues
In light of COVID-19 and its negative impact on the financial health of DISCOMs, the Ministry of Power has demanded generation and transmission companies to continue serving DISCOMs for the next few months without payment. Saxena elaborates, “The generation and transmission utilities as well as distribution companies have continued to supply power in the post COVID-19 period as they were doing during pre COVID-19 period. Their efforts need to be appreciated. The main issue they have is the liquidity or cash flow. The demand for electricity, though it has come back close to what it was in the corresponding period of last year, had gone down by 25 percent to 30 percent and reduction happened in the industrial and commercial segments, which are high-tariff consumer segments of DISCOMs. The revenue receipts of DISCOMs have gone down considerably. Consequently, they find it difficult to meet their payment liabilities to the generation and transmission companies.”

He adds, “The Ministry of Power has recently decided that the central public sector generating companies and the central public sector transmission companies may consider to offer (a) deferment of capacity charges for power not scheduled to be payable without interest after the end of the lockdown period in three equal monthly instalments and (b) rebate of about 20-25 percent on power supply billed (fixed cost) to DISCOMs and ISTS charges levied by POWERGRID. The question which assumes importance in this context is that how the generation and transmission companies will meet their cash flow requirements and how long they will be able to sustain this. The fixed charges for the regulated entities consist of components which are costs except for return on equity, which is the major component. Does the rebate in fixed charges entail reduction in return on equity? Cash flow of DISCOMs is expected to remain stressed till their revenue realisation improves, which mainly depends on revival of industrial and commercial demand and ability of all the consumer categories to pay their bills.”

Role of power tariffs
The main issue in regard to tariff is the disconnection between fixed charges recovered by a DISCOM through retail tariff and the fixed charges paid by it for procurement of power, which are considerably high. The fixed cost liability of DISCOMs, therefore, represents a large financial burden on them.

Saxena discusses, “Post COVID-19, a greater number of generating stations with high variable cost either get a lower schedule or they do not get any schedule. Resultantly, there is a reduction in total variable charges payable by DISCOMs for procurement of power. Being linked to availability of plant and not actual generation, the fixed charges per unit of energy go up. We had carried out an analysis based on the data available in public domain and best possible estimates in regard to data which was not available. As per our analysis, during the first four weeks of lockdown, as compared to two weeks prior to lockdown, an overall reduction in the variable cost worked out to be of the order of about 20 paise per unit and the fixed charge liability increase worked out to almost 40 paise per unit, a net increase of 20 paise per unit.”

Upcoming opportunities for domestic power plants
Saxena stated, “The power plants will have to be in readiness to meet the demand as it picks up. The time of reduced/subdued demand can be used as an opportunity to do annual maintenance/ capital maintenance of the generating stations. They can also take shutdown of the power plants for retrofitting, replacement, or installation of new pollution control equipment. One of the concerns which have been expressed in this regard is that shutdown of units for this purpose will affect power supply to the consumers. Thermal power plants would also have to prepare for meeting the challenge from renewable energy sources, which have become competitive even with storage component added to them.”

Shah added, “Looking at the projected growth plans to become a $5-trillion economy, India will have huge demand for electricity in the next two years. Also, all the old plants that have surpassed their life cycle have to be replaced with new ones. These will result in good growth potential for power generators. Since solar power now is cheaper than thermal power and also environmental considerations prohibit new thermal power plants, solar power plants in India have huge growth potential for the next two years. The government agencies and power PSUs have already floated many tenders and this will result in good business opportunities for all players in the value chain of solar power.”

Thermal power plants would also have to prepare for meeting the challenge from renewable energy sources, which have become competitive even with storage component added to them.
AK Saxena, Senior Director, Electricity and Fuels Division, TERI

Looking at the projected growth plans to become a $5-trillion economy, India will have huge demand for electricity in the next two years.
Kunj Shah, CMD, Zodiac Energy Limited