Retiring old coal plants, freezing new ones will save Rs 1.45L cr: Report

Shuttering old coal plants and freezing under construction plants can save over Rs 1,45,000 crore ($19 billion) as well as improve the financial health of the rest of the coal fleet in India, a report said on Thursday.

With lack of power demand due to Covid-19, and difficulties in revenue collection, power distribution companies' (discoms) overdues to generators have increased to Rs 1,14,733 crore ($15.6 billion).

The report, released by Climate Risk Horizons, estimates that replacing electricity from older coal plants with cheaper renewable sources will reduce the gap between cost of supply and revenue generation for discoms.

"Covid-19 has destroyed electricity demand and caused an economic contraction of 23.9 per cent, making continued investments in outdated technologies financial suicide. State governments and discoms should take advantage of the demand slump to tap into savings that will accrue from retiring the oldest, least efficient plants and replacing them with cheaper renewable energy," said Ashish Fernandes, the lead author of the report "3Rs for Discom Recovery: Retirement, Renewables and Rationalisation".

The report looks at 11 major coal power states -- Andhra Pradesh, Bihar, Chhattisgarh, Gujarat, Karnataka, Madhya Pradesh, Maharashtra, Tamil Nadu, Telangana, Uttar Pradesh and West Bengal -- which account for over 50 per cent of discom overdues.

It identifies possible areas for savings and cost rationalisation, starting with the retirement of coal plants that are over 20 years old and are less efficient than newer plants.

According to the report, shutting down 36.5 GW of old coal plants will avoid Rs 18,000 crore worth of capital expenditure that needs to be incurred on retrofits to bring the plants in compliance with the 2015 emission norms.

The deadline for compliance is December 2022.

Replacing scheduled generation from these old plants with cheaper electricity, either from new renewables or from the market, would save another Rs 7,000 crore annually (Rs 35,000 crore over the typical five-year tariff period) as electricity from most of these plants is on the more expensive side.

"Our analysis shows that it is far more efficient and cost-effective to shut down these old plants by 2022, rather than spend thousands of crores to retrofit them," said Fernandes.

The Centre is in the process of disbursing Rs 1,00,000 crore by way of relief to discoms to enable them to pay their dues to generators.

This is expected to be a temporary fix, given the lack of progress by discoms in reducing the gap between cost of supply and revenue raised.

Surplus electricity generation capacity has seen many power plants struggle with low plant load factors, a situation that most experts predict will persist for the foreseeable future.

The situation is now exacerbated due to the economic impact of the coronavirus. Retiring older plants may just be the much-needed silver lining.

Apart from retiring old plants, the report suggests three other ways discoms and state governments can reduce costs and plug the holes in their finances.

Freezing expenditure on under construction plants: The report identifies 14GW of state-owned plants in the early stages of construction in Bihar, Maharashtra, Tamil Nadu, Telangana and Uttar Pradesh.

Freezing expenditure on these projects would save over Rs 92,000 crore.

Given the country's power surplus situation and the cost advantages now enjoyed by renewable energy, the Climate Risk Horizons analysis says there is no requirement for these new plants, and they could in fact end up worsening state finances if construction were to proceed.

Rationalising fixed costs: The states of Uttar Pradesh, Maharashtra, Gujarat, Tamil Nadu and Karnataka are paying high fixed costs despite low demand for power.

Rationalising these fixed costs through contract restructuring could save approximately Rs 1,000 crore per annum each in Gujarat, Karnataka and Tamil Nadu; Rs 2,600 crore in Maharashtra; and about Rs 5,000 crore in Uttar Pradesh, based on the latest available tariff orders.

Most of the high fixed costs are payable to public-sector generators, making contract restructuring more feasible.

Gradually phasing out the most expensive power plants and replacing their generation with cheaper options will help reduce power purchase costs and average revenue requirements.

Expensive power above Rs 4 per kWh can be replaced with cheaper power from renewable energy or existing higher efficiency power plants at Rs 3 per kWh or less.

Hypothetically, this could generate savings of Rs 55,000 crore per annum in these 11 states.