18 Mar, 2021
How to structure thermal decommissioning in India
4 mins read | CEF Analysis
With falling thermal powerplant PLFs and RE tariffs, India may have a case for early thermal decommissioning

Coal power has dominated the global energy sector for more than a century. For China and India, and the developing world at large, coal was seen as a necessary evil that balanced out its highly polluting nature with its cost-effectiveness and round-the-clock energy generation. Recent market developments have turned this truism on its head – the per unit prices of renewable energy (RE) discovered in energy auctions worldwide, including in India, are often lower than the variable cost of coal based energy.1 

In response to these economic and environmental headwinds, several countries are retiring their coal power plants early and attempting to pivot to renewables. One of the significant challenges to this decommissioning and reinvestment process is the issuance of long-term power purchase agreements (PPAs), where power plants agree to sell power to electricity distribution companies (discoms) at specified rates. PPAs usually include a clause of guaranteed capacity payments (also sometimes referred to as 'fixed charges') over the contract's life. Under PPAs, discoms typically pay coal operators a variable and a fixed charge. The former covers fuel costs, and the latter capital costs, financing costs, and other fixed costs. The fixed charges ensure recovery of the coal operator's investment irrespective of whether the discom procures power as long as the coal plant is generating energy and it is available for dispatch. The contractual locking in of discoms for the contract's life, in which they keep paying the agreed fixed charges despite procuring smaller quantities of coal power, is a critical issue, especially when more renewables are entering the energy mix. Such fixed charges increase the cost of power for end consumers and the cost of transitioning to RE.

To address this challenge, countries such as Germany and South Africa have developed robust financial mechanisms that incentivise coal power operators to retire early and reinvest their capital in RE. The question we must then ask is, "Will India follow suit?" 

The economic case for coal decommissioning in India

When considering the prospect of decommissioning purely on the basis of reducing the costs of energy generation, we can compare the variable charges incurred per kWh of electricity produced from competing sources. The variable charges that directly correlate with coal price consist of the cost of coal at the pithead and the transportation cost to the plant. Transportation costs make landed coal expensive for power plants that are located far from mines, which is reflected in the higher variable charges. For example, the weighted average variable charges for coal power plants in Chhattisgarh (a coal rich state) are as low as 1.75 INR per kWh. In contrast, in the western states – Maharashtra, Gujarat, and Rajasthan – these charges sit between 2.30 to 2.70 INR per kWh (MERIT India, 2021). 

The recently discovered RE tariffs in India are comparable with coal’s variable charges, both in the case of solar and solar blended with wind auctions.2 Significantly, the firm power supply contract under SECI's Assured Peak Power Supply auction, which concluded in January 2020, discovered a PPA price of 4.04 INR per kWh.3 The auction prices indicate the price trends in renewables combined with storage in the country versus a firm source of power like coal. 

While variable charges are easy to evaluate, we must also take into account the component of fixed charges that consists of operation and maintenance costs. Any analysis of the competitiveness of renewables versus coal will not be complete without a better idea of these non-capital expenditure related fixed costs. 

Challenges involved with coal decommissioning

The significant challenges that India is likely to encounter with coal decommissioning will be determining the plant identification criteria and the costs of decommissioning along with the complicated process of getting all the stakeholders – the power producers, discoms, coal producers (mainly Coal India), state governments, central government, and many others (including the people working at these plants and the mines supplying coal) – on the same page to ensure a just transition.

Thus, the transition to reducing the share of thermal energy in the grid requires considered retirement plans, cost evaluations, and prioritisations that are applicable to the entire coal fleet. These steps are essential as poorly conceived decommissioning could inadvertently result in a further pile-up of bad loans for banks, compelling them to stop extending much-needed capital for RE capacity expansion.

Given these realities, an external intervention may be necessary. The Indian government and key financial institutions such as the World Bank or Asian Development Bank that can fund the transition must come together to enable the retirement process. Developing a suitable intervention in India will require policymakers to consider the mechanisms implemented in other countries. These mechanisms involve varying levels of government intervention and are suited to different ground realities.

Mechanisms facilitating coal decommissioning globally

In Germany, the government passed a coal exit law that allocated more than EUR 45 billion in funding to phase out coal before 2038. Some of these payments will be to coal operators and a significant portion will be to mining workers and local communities for rehabilitation. Reverse auctions are being held to determine the payments due to hard coal operators for shutting down their plants, with the maximum price changing from EUR 165,000 per MW of capacity in the first auction (held in December 2020) to EUR 49,000 per MW in the last auction to be held in 2023. The decreasing maximum price incentivises coal operators to bid earlier and intends to speed up the rate of decommissioning.  

In South Africa, the financially distressed state-owned discom, Eskom, is attempting to transition from its almost complete reliance on coal power. Eskom has proposed a Just Transition fund worth USD 11 billion using local and international commercial and concessionary finance. The fund will allow early decommissioning of coal power plants and ensure the workers’ economic rehabilitation in affected regions. This transition funding comes with strict caveats – the government must ensure a rapid phasing out of coal.

Key questions for policymakers

Considering how early retirement is ongoing in some countries, we can conceptualise a decommissioning facility for India. But, we must ask: what sort of mechanism is required in India to finance the transition from coal to renewables. However, to develop such a mechanism, policymakers will have to answer the following questions:

  1. What is the total cost of decommissioning coal power plants in India?
  2. To what extent can the Government of India finance the transition through its treasury?
  3. How would the implementing agency get access to the low-cost financing required for the facility?
  4. What would be the effect of early plant closure on plant/mine workers and local communities dependent on these industries?
  5. How would the existing fuel supply agreements with the plants getting decommissioned be resolved?
  6. What would be the long-term effects of under-utilised coal resources on the Indian economy and coal mining regions?
  7. Will the rate of growth of renewable capacity meet the reduction in coal capacity? Can the Indian grid handle high renewable power levels, and if not, where will the investment needed to increase RE capacity come from?

The sooner we find answers to these questions, the sooner India's cash-strapped discoms can seek power from sources beyond expensive and polluting coal. Further, we could have a just and all-inclusive transition with cleaner and sustainable power for all.


References

  • [1] Recent auctions in India have discovered plain solar tariffs as low as 2 INR per kWh. Portugal recently concluded a solar PV auction with and without storage, where the plain solar PV (without storage) option led to the discovery of the lowest ever solar tariff – 0.97 INR per kWh (11.14 EUR per MWh or 13.16 USD per MWh). Variables charges consist of the cost of fuel (coal), secondary fuel, and the variable component of operations and maintenance (O&M) charges.
  • [2] Maharashtra (Tata Power) solar-wind auction, 225 MW (July 2020) – 2.59 INR per kWh; Rajasthan (SECI) solar auction, 10 MW (September 2020) — 2.58 INR per kWh; Gujarat (GUVNL) solar auction, Tranche-X, 100 MW (September 2020) – 2.73 INR per kWh.
  • [3] The innovative tender design assures the off-taker firm RE supply during the peak hours of the day.

Disclaimer

CEF Analysis” is a product of the CEEW Centre for Energy Finance, explaining real-time market developments based on publicly available data and engagements with market participants. By their very nature, these pieces are not peer-reviewed. CEEW-CEF and CEEW assume no legal responsibility or financial liability for the omissions, errors, and inaccuracies in the analysis.
Filled under: Power Markets , Renewables
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