What’s killing India’s giant coal power plants?

End of the road?
End of the road?
Image: AP Photo/Mustafa Quraishi
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India’s giant coal-fuelled thermal power plants are steadily running out of steam.

Over a decade ago, a clutch of massive power stations—dubbed ultra mega power projects (UMPPs)—were touted as the solution to fix India’s electricity deficit. But hamstrung by bad planning, over-enthusiastic power companies, and unexpected regulations in Indonesia, these grand projects have mostly crumbled.

And now, sluggish economic growth and a dramatic drop in the price of renewable energy, are turning out to be another kick in the guts for coal-based power generation.

So, is the era of mega thermal plants in India over?

A grand plan

In November 2005, India decided to make a big push to try and solve its debilitating power crisis.

Under then prime minister Manmohan Singh, the government put together an ambitious plan (pdf) to build UMPPs with private sector participation that would each generate around 4,000 megawatts (MW) of electricity. The idea was that the economies of scale of such large generation units would ensure affordable electricity for a power-starved country.

Initially, nine UMPPs were identified, five close to the coasts and four near coal mines, before the list was extended to 16. As planned, a bunch of private companies lined up, and made their bids to produce and sell power at a certain cost. Eventually four projects were awarded—one each in Andhra Pradesh, Gujarat, Jharkhand, and Madhya Pradesh. Of these, only two got off the ground finally: Reliance Power’s Sasan project in Madhya Pradesh and Tata Power’s in Mundra, Gujarat.

There are a number of reasons why most UMPPs failed to take off. Each project had different factors at play, from faulty policy and stalled government clearances to troubled land acquisition and fuel procurement issues.

“These are highly complex projects to execute, so even if you have a few risk factors that you haven’t properly accounted for, it may lead to your project not giving you the adequate return or delays in execution,” said Rahul Prithiani, director for industry and customised research at CRISIL, a ratings and research agency.

“And at that point in time, everybody in the private sector saw power as one great growth opportunity and everybody wanted to go for these projects. And many of them, in order to get the projects, bid aggressively,” he added. However, once the chips fell, most backed out.

Even those UMPPs that managed to get running haven’t had it easy. For years now, Reliance Power has been pleading for higher tariffs for power generated from its Sasan project. Just last month, for instance, it reportedly approached the supreme court to seek an increase in tariff because of the depreciation of the rupee. In 2015, the company apparently wanted to exit the Sasan project after a mine allocation linked to it was cancelled. Earlier, it was mired in another controversy as Reliance wanted to divert coal from mines allocated to the Sasan UMPP to another power plant. The bidding documents didn’t cover such a diversion.

Meanwhile, Tata Power has also sought a bump up in tariff for the Mundra UMPP, a coastal power plant designed to use Indonesian coal. In 2010, the Indonesian government decided to benchmark its coal prices with international indices, thereby jacking up the price by over 100%. This, in turn, made the Mundra UMPP’s economics unviable. Tata Power claims that if it doesn’t get a tariff increase, the company stands to lose around Rs47,500 crore.

Slow strangulation

Even if the government fixes the policy loopholes, it may not be enough to revive big coal projects at the moment. There are two major reasons for this: flagging power demand and the rise of renewables.

Despite the Narendra Modi government’s insistence that the Indian economy is firing on all cylinders, demand for power in India is still rather lacklustre. While there is still a peak shortage of power supply in India, the deficit has steadily reduced in the last few years from over 10% in 2012 to 1.6% earlier this year.

It’s not that India’s power plants are working overtime. In fact, the plant load factor (PLF)—i.e. the actual output of a plant compared to its maximum capacity—across centrally-owned, state-owned, and private power producers has been steadily declining.

“Power demand is linked with the state of the economy,” said Rupesh Sankhe, senior analyst at Reliance Securities, a brokerage. “If you look at the demand pattern, 40% of the demand comes from industry. And industrial consumption has drastically come down.” Electricity requirement of commercial entities, which accounts for between 10% and 15% of the total power demand, has also dropped, he added.

“Secondly, we also understand that utilities were backing down. They were not buying power,”said Sudhir Kumar, an analyst at CARE Ratings. Last year, many loss-making state distribution companies simply didn’t have the money to buy electricity and, in any case, demand was weak.

If that wasn’t bad enough for thermal power, there’s also increasingly tough competition from renewables. 

Renewables rush

In February this year, tariffs hit a new low of Rs2.97 per unit for electricity produced at the 750MW plant in Reva, Madhya Pradesh, which is set to become world’s largest solar power project. Since 2010, estimates show, solar power tariffs have dropped over 70% and are now lower than the average cost of electricity supplied by the National Thermal Power Corporation, the country’s largest power generator.

“There is a clear shift towards renewables,” CRISIL’s Prithiani said. “The government wants to focus on addition on the renewables side rather than the conventional power side.” In fact, by 2022, the Modi government wants to put together 175GW (1GW is 1,000MW) of renewable power, though there are some questions about the plan’s viability

Moreover, a draft report from the Central Electricity Authority estimates that India won’t need a coal-power plant before 2022 since there’s about 70,000MW of capacity already in the pipeline. ”So, really, the attractiveness that was there for thermal projects at one point is not there today,” Prithiani added. “If you look at the large domestic power companies, they are all now increasingly focusing on the renewables space.”

But that doesn’t mean it’s the end of the road for coal, reckons Kumar. Thermal power plants are still essential to maintaining an electrical grid’s base load, i.e., the minimum amount of power that must be made available to consumers. Since they don’t depend on environmental factors (such as sunshine or wind), coal-fired generation units are able to provide a steady supply, he explained, unlike renewables. Also, if built at a certain size, thermal plants still provide economies of scale that are hard to ignore.

“The kind of energy demand we have, and the kind of coal resources we have,” Kumar said, “it would be some time before the thermal plants would be taken out of the mix.” After all, India has lots of sunshine—but also the fifth largest coal reserves in the world.