The growing risk profile for thermal power plants is likely to result in increasing cost of capital for them
Two recent events have displayed the financial viability and competitive advantage of investment in renewable energy, as compared to investments in coal-based power. On 11 April, the Supreme Court disallowed Tata Power and Adani Power from charging compensatory tariff to neutralize the price hike of imported coal due to a change in Indonesian regulations. On 9 May, Indian solar tariffs fell to yet another record low of Rs2.44 for Solar Energy Corporation of India’s 500MW project at Bhadla in Rajasthan. What are the implications of these events for India’s rapidly transforming electricity market? They range from balance of payments, capacity utilization, construction delays to financial risks.
The Supreme Court judgement highlights the risks prevalent in the thermal power market, seeded in fuel sourcing, availability, and import dependency. Volatility in imported coal prices and the uncertainty around cost-efficiency of domestic coal production add more concern. Non-availability of coal could swiftly turn the once lucrative and viable coal power plants into stranded assets. Further, the ministry of coal’s latest discussion paper on auction of mines for commercial mining examines free pricing of domestic coal. The paper suggests pegging the minimum revenue to be generated at 1.2 times of Coal India’s run of mine price, which is likely to increase operating costs for thermal operators. While India’s renewables sector does not have to battle risks associated with fuel sourcing, the current reliance on imported solar panels and balance of system products exposes the renewable energy sector to balance of payment implications, as in the case of coal imports. This makes it imperative for India to rapidly ramp up domestic renewables manufacturing capacity.
Thermal power plants are increasingly facing lower capacity utilization. More than one-third of India’s total thermal power capacity is currently stranded and the rest is running at 55% utilization. This spells trouble for the lenders to these thermal projects, mainly state-owned banks, since lower capacity utilization translates to falling recoveries. In recent times, renewable energy capacity is also increasingly seeing curtailment despite being granted a must-run status. In renewables, curtailment risk arises due to unavailability of transmission infrastructure, grid congestion, and grid instability. However, utilities are attempting to address this risk by introducing minimum offtake guarantees and deemed generation clauses in the renewable energy power purchase agreements.
Longer construction periods for thermal plants (three-four years), compared to renewable sources of power (12-14 months), is another important aspect for risk evaluation. Delays in obtaining environmental clearances, affecting 89% of the projects, according to a recent Comptroller and Auditor General of India report, could additionally prolong the construction of thermal plants. Renewable energy projects, in most cases are exempt from environmental clearances, and significant advances have been made in recent years in streamlining the procurement of other clearances for renewable energy projects. The longer commissioning cycles, combined with higher likelihood of delays, makes investment in thermal power significantly riskier than that in renewables.
The ministry of environment’s 2015 notification mandating stricter emission and water usage standards to minimize environmental impacts of running coal-based plants has also been troubling the sector.
Leaving aside the zero comparison on emissions, a coal-based thermal power plant takes around 3.8 cubic metre/MW of water as compared to 0.1 cubic metre/MW for solar, and almost nil for wind. Going forward, water usage could lead to conflict between thermal power producers and local communities, especially in water-scarce regions of the country. Thermal power producers have been cantankerous about upgrading technology to meet these standards due to high costs and complicated procedures. Stricter standards are also likely to increase the cost of power for ordinary consumers. Hence, the government may not come down hard on defaulters who fail to take adequate measures to curb particulate matter, sulphur dioxide and nitrogen oxide emissions by the December 2017 deadline. Thermal power producers should, however, be prepared for stricter enforcement of emission standards in the near future.
The growing risk profile for thermal power plants is likely to result in increasing cost of capital for thermal projects. At the same time, with the tariffs for both wind and solar power dropping to unprecedented levels, power sector investors may shift focus to renewables. In the same breath, it is important to note that the renewable energy sector is also plagued by several risks, such as delays in executing offtake agreements, delays in payments from the utilities, curtailment, etc.
However, as the cost of renewable electricity declines, the financial burden posed by it on the utilities also declines, causing the most dominant risks in the sector to shrink. The redirection of investments to renewables and allied sectors such as energy storage, energy analytics services, etc., could drive the price of electricity from renewable energy sources down further, improving their technical grid integration feasibility and shrinking associated risks for investors.
Making strategic policy and financing decisions has become imperative in the new world of growing competitiveness of renewable energy. The traditional electricity utility models are being upended and it will augur well for financiers and policymakers to heed the risks that have unfolded in the thermal sector. If the government continues to actively revamp and reimagine India’s power sector, along with making simultaneous efforts to ensure a quick expansion in transmission infrastructure and a pickup in demand, India could find a sweet spot for itself in the new low-carbon world.
Anjali Viswamohanan and Manu Aggarwal are policy researchers at the Council on Energy, Environment and Water.