The hullabaloo about Sasan has shifted focus from the other ultra mega power project (UMPP) in Mundra. Here, there are no questions as yet of capability—since the winner was Tata Power and the surface is calm. But, a closer look shows that there should be some serious reflection on the wisdom of proceeding pell-mell with coastal UMPPs, as currently contemplated, e.g., in Krishnapatnam. If the cost of power at Mundra is a fair reflection of what one can expect, there seems to be little benefit from large UMPPs over the smaller collective captive plants based on imported coal that are emerging in places such as Tamil Nadu. These plants, typically between 50 MW and 100 MW, supply power to a small group, often less than 10, of industrial consumers. Since it is not economical for them to individually purchase coal by the shipload, usually an intermediary fuel supplier supplies a group of such plants. This intermediary is responsible for the logistics involved in the import of coal, its offloading and domestic transportation to various customers. This business model involves importing coal at a relatively smaller scale, as compared with UMPPs. In addition, there are margins that the intermediary needs to make, and domestic transportation costs that need to be included. Finally, since these are smaller plants, they are less fuel-efficient than the ultra super critical units planned for UMPPs.
Notwithstanding all these apparent cost disadvantages, these plants still generate electricity reportedly at costs between Rs2.50 and Rs2.75 per unit. Compared with this, if one adds any reasonable transmission and distribution costs to the busbar price of Rs2.26 offered by Mundra, the price to the final consumer from coastal UMPPs is likely to be higher. Will Mundra be able to compete with a captive 25 MW plant fuelled by imported coal, transported into interior Rajasthan and still generating at a variable cost of less than Rs2 per unit? It would seem that a purely private market ecosystem is already delivering power at prices below those projected from the coastal UMPPs!
Does this mean that a countryside dotted with little plants is a preferred outcome? Though there may be some energy security benefits of dispersed capacity, it does not have to be that way. The small size of the plants is reflective of many policy distortions. Existing open access provisions prevent plants from selling to the entire range of consumers. Consequently, the projects are designed small, to meet the needs of a limited number of consumers. This enables them to take advantage of a more liberal regulatory regime for captive projects, i.e., projects designed to supply to a designated consumer or groups of consumers. The source of the fuel is foreign because the current regulatory regime for coal prevents the emergence of a domestic market. Coal supply is still primarily through Coal India and its various regional avatars, based on a system of linkages rather than market transactions. If there were a functioning domestic market for coal, it would be available at a much lower price. Though there do remain some concerns about quality, these can be addressed through appropriate treatment such as washing or, if required, blending with higher grade imported coal.
A progressive open access regime and a domestic coal market can thus reasonably be expected to foster the growth of larger plants alongside the smaller projects. These plants, if not as large as the Sasan UMPP in Madhya Pradesh, can definitely reach the 1,200-1,600 MW scale of multi-unit super critical plants and deliver tariffs close to Sasan’s Rs1.20 per unit. It is possible that this development may be a little delayed by a lack of trust in open access regimes, which will need time to diminish. Till then, one would have to carry the burden of smaller and possibly less economic plants engendered by this lack of faith for which we have only our policy to blame.
What then have we learnt from UMPPs? First, coastal UMPPs may not make commercial sense. Second, regardless of ‘mistakes’, if any, with the Sasan bid, pithead UMPPs can be very competitive, especially if there is clarity about sale of coal from the captive mine and concerns over land acquisition, coal quality, transport, power evacuation and environmental issues are addressed. Third, less obsession with UMPPs and more attention to liberalizing the domestic coal sector and persuading regulators about the merits of effective open access may be most helpful intervention for the future of power. Finally, there is only so much that can be done without tackling distribution reform. Any such solution will need real Centre-state partnership in financially restructuring state electricity systems and increasing private participation in electricity distribution which, incidentally, has improved finances wherever undertaken, including much-maligned Orissa. Leaving this to the states is an excuse that does no good to either the Centre or the states.
Partha Mukhopadhyay is with the Centre for Policy Research, New Delhi. These are his personal views. Comments are welcome at firstname.lastname@example.org