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Overestimated financial viability of India's coal-fired power plants

July 02, 2021
Kashish Shah

Key Findings

India currently has 33 gigawatts (GW) of coal-fired power plants under construction and another 29GW of proposed projects under various stages of regulatory approval.

With the electricity sector transition in India being driven by cheaper and cleaner renewable energy sources, IEEFA’s view is that India’s current coal-fired power project pipeline carries massive underutilisation risk.

Executive Summary

The need for this excessive coal capacity stems from the notion that coal is still ‘cheap’. However, with tariffs now below Rs2/kilowatt hour (kWh) (US$27/MWh), solar power is cheaper than even the variable cost of coal-fired power and is ready to absorb incremental daytime demand.

The levelised cost of energy (LCOE) of coal-fired power plants in India, and globally, are massively underestimated based on an overestimated assumption of capacity utilisation factors (or plant load factors (PLF)).

The LCOE can be thought of as the average total cost of building and operating an asset per unit of total electricity generated over its assumed lifetime. The capacity factor - the estimation of the yearly amount of electricity likely to be produced by a power plant relative to its maximum electricity production capacity each year - is a critical element in calculating the LCOE.

These tools are commonly used for measuring the financial viability of energy assets. But are they based on accurate assumptions in order to provide the correct readings?

Using the misleading assumption of a constant, high capacity factor leads to an underestimation of the cost for each unit of electricity to be produced by a power plant throughout its lifetime.

Kashish Shah

Kashish Shah is an energy finance analyst with the Institute for Energy Economics & Financial Analysis (IEEFA). He specialises in financing, policy and technology matters of the Indian electricity market.

Kashish has a master’s degree in Economics from the University of Sydney and an Electronics Engineering degree from NMIMS University in Mumbai.

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