Report flags erratic coal supply, institutional challenges; suggests closing old thermal power units
Earlier this month, the High Level Empowered Committee (HLEC) set up by Government of India in July 2018 came out with its report on stranded thermal power projects. The Committee, chaired by Cabinet Secretary P K Sinha, has assessed the landscape of these stranded assets and identified the various reasons that have contributed to the current scenario. This report focused on 34 thermal power stations, totalling to a capacity of 40 gigawatt (GW), which are entirely fuelled by coal and lignite. The report has also suggested measures to resolve the challenges. These power plants were first identified by the Ministry of Power as stressed assets in March 2017.
Multiple reasons behind the crisis
The HLEC identified several critical reasons that have contributed to the crisis, which has been festering for more than two years now. While the Twelth Five Year Plan had envisaged a capacity addition requirement of 88 GW, 99 GW capacity was added during the corresponding period — this led to a glut of supply, causing plants to perform below their rated capacities. Apart from this, several root causes identified by the HLEC are interconnected with the debt burden of the distribution utilities and the financial stress on banks/financial institutions as well as promoters and bidders. It is important to note that a significant chunk of the problem has been caused by the erratic coal supply and the uncertainty of coal supplies due to scrapping of mine auctions by the Supreme Court. Clearly, institutional challenges related to the government have contributed to the problem.
This should not absolve the power generation companies, especially the private sector players, at all. Private sector power plants came up during this time without taking necessary due diligences. In the case of the Ultra Mega Power Projects (UMPP), for which bidding took place, several players quoted very aggressively, a decision they have since come to regret. Several other promoters did not even secure coal linkages before commencing with the project. Cost and time overruns also took place with some, while in many cases promoters and bidders entered into areas without paying heed to their own financial health. In some other cases, power plants had not even secured purchase agreements.
HLEC has put forth suggestions, most of which are in line with current government policies to help power plants in general and stressed assets in particular.
Coal supply is an inter-ministerial issue, whereby the ministries for coal and railways have been requested to work out mechanisms to address short-term issues of supply, alongside the sale of coal at notified prices without entering bidding in case of short term power purchase agreements. Further, linking coal supply to power plant efficiency is a good way to incentivise better, newer and more efficient assets.
Closing down of old, inefficient thermal power units make for good economics and good environmental sense. Old plants operating way past their lifetime are less efficient in resource utilisation, have higher emission profiles and are also expensive due to swift recovery of renovation costs that keep adding on to them. However, the numbers being quoted are on the lower side—at least 15 GW of capacity was identified by the Central Electricity Authority and Regional Power Committees of India as suitable for retirement.
These power plants due to their existing purchase agreements also cause anomalies in supplies, affecting the demand from newer power stations. The retirement schedules, however, need to be determined in the shortest time possible to make an impact at the earliest, instead of merely identifying such plants.
Several measures related to power markets to address the financial risks have been strongly recommended by the HLEC. These include getting NTPC or any other agency to act as an aggregator for power purchases, which can subsequently be sold to distribution utilities. The idea is not new — it has probably been inspired from the procurement tender-based approach used to promote solar energy via Solar Energy Corporation of India (SECI) and NTPC Vidyut Vyapar Nigam (NVVN). In fact, Power Finance Corporation (PFC) had recently conducted a pilot tender for procuring 2500 megawatt (MW) of thermal power from stranded assets under specific conditions, and agreements were signed for a total of 1900 MW.
Further, suggestion on payment security mechanism needs to be seen in perspective—all PPAs have a support for a letter of credit (LoC) for one month’s purchase equivalent to guarantee it. It would rather be prudent to increase the value of the LoC instead of seeking a separate mechanism, and ensure that it can trigger automatically against a payment default or delay.
Another important step is to retain the agreements and clearances for power stations, keeping it independent of the promoters. Many promoters are facing National Company Law Tribunal (NCLT) for defaults, and their assets are also online for sale. The impact of the NCLT proceedings is certainly there — delinking might help.
Any new owner of a power plant should not be subjected to these challenges of obtaining clearances and signing agreements again, else the interest to acquire the asset may wane. Not cancelling PPAs for delays in commissioning is also welcome.
Mere platitudes on gas-based thermal power
While the scope of the study was coal- and lignite-based thermal power plants, the report delved briefly into another important subject that needs more attention. Gas-based thermal power plants in India (25 GW capacity) have been struggling for a long time due to non-supply of gas. As the report noted, the total supply of domestic gas during the year 2017-18 was 22.80 MMSCMD, which resulted in decline in average plant load factor to a mere 22%. As a result of year-on-year apathy, gas-based power plants, with a capacity of 14305 MW, are today stranded due to non-availability of domestic gas.
The talk to revive gas power plants is important, and serves good purpose—natural gas is a relatively cleaner fuel with lesser emissions and can also help support the growth of renewable energy sources.
However, gas supply will continue to remain a problem for several reasons. Priority of supply of natural gas has always been lopsided—fertiliser industry, which uses natural gas as raw material and has a strong government presence and control, is the preferred beneficiary. Further, the expansion of city gas distribution networks by the Ministry of Petroleum and Natural Gas to over 100 cities in India will mean that the political economy of gas supply and pricing will be heavily determined by this emerging consumer base as well. As it is, companies like Korean entity backed Pioneer power project in Maharashtra are threatening arbitration due to lack of fuel supply, which clearly shows that natural gas-based power is not on the top priority for the government. Even if imported, the lack of sufficient LNG storage terminal capacity and subsequent pipeline capacity will ensure that things remain more of the same in the near future. Therefore, these are mere platitudes unless a strong position is taken on reviving the fortunes of these power stations. Merely repeating e-bid RLNG scheme supported by the Power Sector Development Fund, which clearly has made no significant impacts, needs to be taken into account by the Government of India.
In conclusion, the HLEC has shown that ways can be found to sort out the mess within the thermal power sector for coal fired power plants. However, the sole focus on coal has meant that gas-based power plants will have to wait for their turn under the sun.
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