The Aladdin solution

The share of private sector investment in new capacity addition in thermal plants during the 11th Plan increased to 41.9 per cent, from the earlier 14.2 per cent. Thus, at least on paper, we had every reason to congratulate ourselves for achieving the twin objectives of the Electricity Act, 2003 — creating generation capacity through private participation and ensuring that the electricity market remained competitive through adequate merchant capacity.

While we certainly increased generation capacity, supply of coal, its chief raw material, remains grossly inadequate.

While multiple solutions such as coal imports, cost pass-through and coal pooling are being discussed to bridge the gap, there is an alternative approach — replacing older, less efficient plants with recently built capacity for more effective utilisation of coal. According to current estimates, around 35,000 MW of capacity commissioned after 2009 are going to be idle very soon for want of coal, power purchase agreements (PPA) or equity requirement.

Unfortunately, the Coal Ministry’s solution to coal shortage goes in the opposite direction. The Ministry has suggested providing the full quantum of coal to State-run plants commissioned before 2009, and less than 60 per cent to plants that were set up after. By reversing this anomaly, India can benefit from generating up to 5,000 MW of additional power from the same amount of coal.

All thermal power units commissioned before 1990 are at the end of their useful life. Worse, most of them are operating at a much higher station heat rate (SHR) than their original design levels, going to 70 per cent in some cases. SHR is the measure of efficiency of a power plant, that is, the input energy (kcal) required for a unit of output (kwh).

The Central Electrical Authority (CEA) in its ‘Annual Performance Review 2011-12’ had reported that almost 12,300 MW of capacity had an operating SHR higher than 2,750 kcal/unit. This not only revealed the gross inefficiency in power generation across almost all thermal plants commissioned before 1990, but also underlined how these older plants on an average consumed 33 per cent more coal to produce the same unit of power!

Newer plants typically come with design efficiencies of 2,250-2,350 kcal/unit, depending on technology. Therefore, if we replace the 12,300 MW of inefficient plants with newer plants, we may use the coal to fuel up to 16,400 MW of new capacity. This will ensure efficient coal utilisation, and reduce the idle capacity by half. The Government’s existing renovation and modernisation policy was conceived and developed in a power-deficit era. In current times, where capacity addition has outpaced power demand, there is urgent need for a new approach.

And, it’s not just coal. New plants require 33 per cent less water and 25 per cent less land. The availability of common infrastructure such as land, water, water pipeline, right of way for power evacuation, and so on will lead to faster capacity addition.

This They would not only address the two critical issues — land and water —but also significantly brings down construction time and risk. Innovative PPP frameworks can be developed to incentivise stakeholders. The suggestion of replacing the old with the new will typically face resistance from those who view it from the perspective of cost-of-generation. Since coal is subsidised in India, the fixed cost of fully depreciated old plants is low. Thus, in the short-term, the cost of running old depreciated plants using subsidised coal is lighter on a State’s exchequer.

However, a long-term macro view will reveal the significantly higher economic cost of inefficient usage of subsidised coal. Besides, coal is a scarce commodity. On the other hand, non-utilisation of new capacity because of higher fixed cost is bereft of common sense.

Policymakers should take cognisance of the fact that swapping older plants for new ones will reduce economic waste and benefit the country. Moreover, better utilisation of other scarce resources such as land and water and better compliance with environmental norms add to its value.

The writer is the CEO of L&T Infrastructure Finance Ltd