Coal trilemma: variable cost, efficiency and financial solvency
It was a “lost decade” (2010-2020) for coal-based power generation in India. There was a lot of promise at the start of the decade, and production capacity was added at a breakneck pace. Ultimately, weak economic growth and weak growth in demand for electricity eventually bankrupted the industry that was already on the brink of collapse. Today, non-productive assets (NPAs) abound in the industry and collecting contributions is a challenge along the value chain. We are at a crossroads, where on the global stage India is considering its net zero emissions schedule, when the only strategy presented so far has been to increase the installed capacity base of renewables ( ER). What about our thermal fleet? The deadlines for compliance with pollution standards have been stretched several times, with factories being asked to present certificates of retirement deadlines, if they have any, and benefit from more lenient treatment. While air pollution legislation has grown in importance, soil and water pollution from millions of tons of accumulated ash still goes unnoticed. The Covid-19 pandemic has also hampered demand growth and many assets, whose construction is at an advanced stage, are in the grip of uncertainty.
At the same time, a new market-based economic allocation mechanism (MBED) for the purchase of bulk electricity has been proposed to begin in April 2022. By channeling electricity through a central compensation mechanism, the MBED aims to reduce electricity supply costs of INR 12,000 crore (MoP, 2021). All of these developments point to an undercurrent of a brewing storm in the industry, and this is when we ask the question: Can India rethink the way it now manages its generating fleet? of coal-based electricity? Review of thermal configuration We began this study with a review of the performance – thermal, financial and operational – of nearly 194 GW of coal-based generation capacity in the 30 months leading up to the start of the Covid-19 pandemic. in India. We’ve explored how the assets are used and segmented them by vintage and property. We have observed that older plants generate a disproportionate share of electricity and, unsurprisingly, private sector plants are the first victims of the underutilization challenge facing the sector. By exploring the cost distribution of factories, we find that not only do older factories have low fixed costs, but also have low variable costs and outperform younger factories in the order stack. of merit. Even in cases where low variable cost factories are available, factories with higher variable costs are shipped as they are outsourced and preferred by utilities, given their foreclosure clause in contracts. The net impact of the current asset utilization strategy is that the thermal efficiency of the generating fleet in India is abysmal 29.7% t, which in turn indicates that regulators are lax about these bad technical performance.
Given the inefficient operation of the thermal park, we wanted to assess what exactly determines the efficiency of power plants and the variable costs of production. To this end, we performed a parametric regression assessment of these two metrics. We find that age, plant load factor (PLF) and the average size of units in a plant play an important role in determining the efficiency of a plant. In the case of variable costs, we find that they are largely determined by the cost of coal delivered and, to a lesser extent, by the operational characteristics of a plant such as the station heating rate (SHR) and the auxiliary consumption. These reinforce the theory that new old factories, if operated more consistently, would perform better in achieving system efficiency and possibly also reducing variable costs. This in turn means better environmental outcomes – lower greenhouse gas (GHG) emissions, reduced production of benchmark pollutants, or less ash generated. But the financial implications of this proposal remain to be seen.
Our approach to determine the allocation criteria In order to design a system where efficiency is rewarded, we demonstrate a distribution power approach, based on an order of merit of efficiency and not that based on declared variable costs. . We have chosen efficiency as the allocation criterion because variable costs are distorted by fuel costs and fuel supply contracts, among others. Order based on variable costs does not reflect efficiency, as evidenced by our descriptive evaluation of the system. As a first step in our approach, we assign higher PLFs to more recent vintages, which is inherently a logical step from an operational and financial perspective of the system. We order the plants in increasing order of estimated SHR, based on the parametric function we established in the first step. The production schedules are assigned to the power plants at a daily resolution level, without taking into account the spatial and temporal constraints in the movement of energy but by forecasting only the energy requested in a day. This is an important limitation, but it is important to understand the nature of the unconstrained opportunities existing in the Indian thermal fleet. If the proposed efficiency-based allocation is used, the Indian coal fleet would be able to meet the average energy demanded of it (during the evaluation period) with thermal efficiency improved by 6% per compared to the baseline (the current scenario in action). This implies that the generation efficiency goes up to 31.6%. As a corollary, we see that the reallocation results in an annual saving of nearly 42 MT of coal and a concomitant reduction in GHG emissions and criteria pollutants. The overall fleet is also operating at a 78% higher overall PLF, with significant headroom to deliver more production if the system demands it.
Result of our assessment: a more efficient and lower cost production mix We have structured an efficient production mix, but does that make financial sense? The drivers of the overall variable costs are the delivered cost of coal, SHR, ancillary consumption, size and age of the unit. In our assessment, we find that the delivered cost of coal in the reallocated scenario increases the overall cost of production because 20% of the mine plants do not generate in the reallocated scenario. However, power plants consume less energy, operate at a higher load factor and, as a result, there are significant savings in variable costs of production. The total savings on variable costs in this reallocated scenario is ??8,944 crores. Compared to the overall cost of providing power to nightclubs, this is a small fraction, although large enough to give their finances much needed wiggle room.
As a key result, we find that around 50 GW of capacity could be considered excess of the system’s needs, for the energy demand it is meeting. Even considering the power delivered, the production capacity retained could provide the necessary peak power quantum (143 GW over the analysis period) of the thermal park. We propose that 30 GW of excess capacity, which represents the oldest and some of the least efficient assets, be used for accelerated decommissioning, as they were identified in the National Electricity Plan (2018) for decommissioning at during this decade (2021-2030). Each year of delay that passes increases our burden with a higher electricity bill and more air, water and soil pollution to deal with. This also results in a one-time saving of ??10,200 crore in avoided pollution control renovations, which would otherwise be needed if some of these factories continued to operate. Almost 20 GW of capacity can be considered for the standby and based on a more rigorous assessment it can be decided where they would be called to generate if unforeseen events are likely to arise. We also observe that the system has an important play, apart from this estimated stock of plants, to manage the contingencies and the growth of the demand during this decade. With nearly 36 GW of thermal power at various stages of construction, we find that meeting the demand for electricity and electricity in the later years of this decade should not be of concern. Given some key limitations in terms of spatial and temporal resolution in our study, there is a need for a more rigorous assessment of the opportunities identified in this study. Likewise, it is necessary to assess the demand for electricity during this decade and the prospects for the materialization of RE insofar as they are currently anticipated in existing studies, in order to decide conclusively on the dismantling and its consequences. advantages.
(The study was written by Karthik Ganesan and Danwant Narayanaswamy)