IEEFA India: Exiting old coal power purchase agreements could save electricity distributors over US$7 billion per year

The decision by India’s central power regulator to allow BSES, Delhi’s largest electricity distribution company (discom), to exit a 25-year-old power purchase agreement (PPA) with NTPC’s Dadri-I power plant potentially opens the floodgates to the relinquishment of end-of-tenure thermal PPAs.

This is a welcome move that could accelerate the closure of old, inefficient coal power plants and ease financial pressure on cash-strapped discoms across the country.

The Ministry of Power has backed the Central Electricity Regulatory Commission’s (CERC) landmark judgement and told the state governments to allow discoms to terminate thermal PPAs that have completed 25-year tenures.

The state-owned discoms’ growing burden of debt weighs heavily on India’s power sector, and is expected to rise further to Rs6 trillion (US$80bn) by the end of financial year (FY) 2021/22.

Operational inefficiencies and the rising costs of power procurement have led to an unsustainable gap between average revenue realised (ARR) and average cost of supply (ACS).

BSES was in a similar predicament to that of a host of other discoms that have PPAs with central and state-owned power generation companies. It was stuck paying ~Rs6/KWh for power from the Dadri-I plant amid the discovery in 2020 of renewable energy tariffs as low as Rs1.99/kWh.

This was putting upward pressure on the discom’s power procurement costs which in turn increased the tariffs paid by its almost half a million consumers. Moreover, the sunk cost of capacity charges to coal-fired power plants has inhibited the discom’s ability to fulfil its Renewable Purchase Obligation (RPO).

The Rajasthan energy department also approved a similar decision last month, which saw the state relinquish PPAs worth 252 MW from NTPC for which it was paying as much as Rs15/kWh.

These decisions were taken against the backdrop of the worsening financial position of discoms, which owe ~Rs75,000 crore (US$10bn) to electricity producers despite being bailed out time and again by the government. India’s distribution sector is the Achilles’ heel of the broader power sector and counts unsustainable PPAs as one of the primary reasons for its financial woes.

What it means for discoms, generators and consumers

IEEFA believes the decisions set a precedent for many other discoms to follow a similar route and will help the power sector in several ways.

First, the discoms will save on their power purchase costs by being able to procure cheaper power while also fulfilling their RPOs – adherence to RPOs remains low. Moreover, as their financial standing improves, the discoms may be less inclined to flip-flop on recently tendered renewable energy PPAs.

Second, the generators could sell their now-relinquished power to other users on a short-term PPA basis or sell it directly on the power exchanges which have been gaining more traction recently.

Third, end consumers stand to benefit from lower power bills as the discoms pass on the benefits of cheaper procurement.

As per Global Energy Monitor’s data, India has ~42GW of coal-fired power plants that are over 25 years old. Nearly half of this capacity (20.6GW) is owned by state power generation companies, while the rest is owned by central government entities (NTPC, NLC) or private entities.

According to our conservative estimate, discoms could save US$7bn (Rs522bn) annually by avoiding a minimum capacity charge of Rs2/kWh to these old power plants. The savings would be even higher, US$14bn (Rs1,044bn), if a minimum variable charge of Rs2/kWh is included on top (total of Rs4/kWh tariff). The total per unit tariff for some of these plants could be higher than Rs4/kWh. The savings for discoms would be higher for those plants.

It is our understanding that the state-owned power plants currently do not fall under the ambit of this CERC regulation. However, the states should evaluate the merits of this potential option to reduce discoms’ power procurement costs.

Options for relinquished coal capacity 

Without the contractual support of PPAs, old power plants would have to compete on a variable cost basis with other sources of generation. As India’s power market moves towards a nationally pooled, market-based economic dispatch model, some of these power plants with competitive variable costs could find a lifeline in the evolving merchant market.

Alternatively, with India’s daily peak demand expected to rise above 300GW by the end of this decade (on 7 July, daytime peak demand hit a historic high of 200GW), these power plants could be used as capacity reserves. They could be mothballed and called into operation periodically during times of high demand.

Australia’s largest utility, AGL, has plans to operate its 46-year-old Torrens gas-fired power plant, located in South Australia, in a similar fashion as fossil fuel-fired base-load generators struggle to compete with low cost solar and wind and newer gas-fired plants that can operate more flexibly.

The mothballing process at the Torrens B plant means AGL can recall the unit back into operation, if needed, but it would need six months’ notice.

Plants that are unable to compete in this scenario would have to be retired, which would improve the financial health of the discoms as well as aiding India’s emissions reduction efforts. However, we recommend an orderly phase-out of ageing plants in light of India’s growing annual electricity demand and daily peak demand.

Given India’s 450GW renewable energy target by 2030, several such decisions and reforms will be required to create a market conducive to attracting the US$500-700bn investment needed to transform the power sector.

Recently Reliance Industries Limited (RIL), one of India’s biggest conglomerates, unveiled plans to invest upwards of US$10bn in clean energy and NTPC upped its game by doubling its renewable energy target by 2032 to 60GW. Renewable energy developments in the country are already on the radar of global funds with deep pockets and mandates to invest in green and ESG-compliant businesses. But investors will expect to see ground-level reforms before committing big dollars into the sector.

Shantanu Srivastava and Kashish Shah are energy finance analysts with IEEFA.

This article first appeared in the Indian Express.

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