Home >money >personal-finance >Thanks to renewables, thermal power sector may remain distressed for a long time

The law of unintended consequences is taking its toll on the thermal power sector. A report by a government committee on the optimal energy mix in power generation says the thermal power sector may continue to bear the brunt of the thrust on renewable energy. This is especially if the renewables sector has to achieve its targeted capacity additions by 2022.

Simply put, the report says coal-based power plants will have to be underutilized if the committed renewable capacities have to be added by 2021-22. The utilization levels or the plant load factor is estimated to fall to 56.5% by 2021-22.

For perspective, with utilization levels at 60% so far this fiscal year, lenders are worried about the bankability of the projects. Depending on the capital cost, fuel mix, offtake agreements and fixed cost recovery clauses, a power plant will have to operate at a minimum utilization level of 50% to meet debt covenants, say experts. As envisaged in the report, if plants operate at about 56% utilization levels, that leaves very little margin of safety and meagre returns for owners.

The utilization level estimate takes into account the coal-based capacity of 47,855 megawatts at various stages of construction, which are likely to be commissioned during 2017-22. Much of the capacity is being built by government-owned entities. So power offtake may not be a major issue for them. But they will restrict the opportunities available for the projects that are currently stalled, which are operating at sub-optimal utilization levels and without enough power offtake agreements.

“Given their must-run status and growing size, renewables will constrain the utilization levels of the thermal power sector," says Girishkumar Kadam, sector head and vice president at ratings firm Icra Ltd. What is required is demand growth. A sustained improvement in demand will ease the pressure, he adds.

The government report also says that in an alternative scenario of higher demand, the overall utilization of coal-based power plants could see a noticeable improvement.

But the current subdued trends provide limited confidence about achieving higher demand.

Also adding to the uncertainty are the indirect costs of renewable energy integration. As renewables gain prominence, thermal power plants will have to become flexible in terms of generation to balance grid demand. This involves substantial costs and investments.

While the government seems aware of the challenges, if demand does not see noticeable improvement, the pain in the thermal power sector may last for a long while.

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