Coal fired power plants are still smoking

Sarthak Advocates & Solicitors | View firm profile

Authored by Abhishek Nath Tripathi and Anura Gupta

Retiring old and inefficient coal fired power generation plants has been on the agenda of the government for some time. The Minister for Power and New and Renewable Energy recently reaffirmed the commitment of the government to replace older coal fired thermal plants with renewable capacity. It is widely acknowledged that replacing old and inefficient coal fired stations with renewable plants makes economic sense for most state-owned distribution companies (discoms). According to a recent study conducted by Climate Risk Horizons, that exercise could save up to ₹530 billion (US$7.2 billion) across 5 years in the 11 states that account for more than 50% of discom payments. Despite compelling economic and environmental reasons, many such plants continue to operate.

It is ironic that while some of the more efficient thermal power plants continue to operate at suboptimal levels leading to capacity being under-utilized, inefficient older power plants continue to operate. Shutting down older plants will lead to the better capacity utilization of more efficient plants. State governments and discoms will have incentives to shut down such plants only when the immediate economic costs of running the plants exceed the benefits. In an attempt to control pollution, the Ministry of Environment, Forests and Climate Change issued emission standards in December 2015, which were due to come into effect by 2017 but were later extended to 2022. Under those standards, coal based thermal power generation units are required to be installed with emission control equipment, including flue gas desulphurization units and electrostatic precipitators.

Despite the extensions, the emission control measures are yet to be implemented, particularly in older power plants. The cost of implementing emission control measures is likely to make some of the older plants financially unviable, eventually reinforcing the case for their shutdown. The Central Electricity Authority has identified 34 power generation units with a combined capacity of 5.14 GW, for retirement. These units have failed to submit emission control compliance plans. Covid-19 related disruptions in the industry have already led to demands for an extension of the deadline, which if granted will only further their life with little environmental or economic gain.

Another long-discussed regulatory measure is to prescribe the maximum heat rate for coal fired thermal power plants. Heat rate is the measure of the amount of heat consumed to generate one kilowatt hour of energy. This measure can be introduced through a notification under the Energy Conservation Act, 2001. Discussions in the public domain indicate that the suggested rate is 2600 kCal/kWh for plants that have been in operation for 25 years or more. This rate is fairly high compared to that which newer and more efficient power plants are able to achieve, and it may make sense to ensure that the rate is applied even to plants which are not yet 25 years old. The cost of retrofitting and overhauling required to achieve even such heat rate may hasten the retirement of many of the older plants.

The state regulatory commissions also need to be aligned with the objective of shutting down such plants. Unfortunately, the commissions are often faced with the difficult task of balancing the need for survival of the cash strapped discoms with the broader objective of shifting to cleaner fuel sources. This often results in regulatory forbearance for state owned power plants, many of which are old and inefficient. Such tolerance may include such measures as relaxation of heat rate and auxiliary consumption norms for older plants, ensuring that some of them remain profitable on paper. Most of the old coal fired capacity is owned by state governments, and they have many reasons to continue operating such plants. The retirement of such plants is inextricably tied to discom health. While discoms need to shift to more efficient and cheaper power sources for their long-term health, lack of funds in short-term means increased reliance on state owned plants which supply power on credit. The issues with rehabilitating employees at these plants further complicates the decision to shut them down.

The National Electricity Plan, 2018 has identified thermal power projects for retirement. The commitment shown by the government towards moving to cleaner and more efficient generation capacity raises hope. However, for the plan to be realised state governments and state regulators need to be aligned, although these bodies are also facing financial challenges due to covid-19. The government may need to make it more financially attractive for state governments and discoms to to reduce their dependence on old and inefficient thermal power plants.

Abhishek Nath Tripathi is the managing partner and Anura Gupta is a principal associate at Sarthak Advocates & Solicitors.

Published at India Business Law Journal.

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