According to a new report released today, shuttering old coal plants and freezing under construction plants can save over 1,45,000 crores ($19bn) as well improve the financial health of the rest of the coal fleet. With lack of power demand due to Covid-19, and difficulties in revenue collection, power distribution companies (DISCOMs) overdues to generators have increased to 114,733 crores ($15.6bn). The report, released by Climate Risk Horizons, estimates that replacing electricity from older coal plants with cheaper renewable sources will reduce the gap between cost of supply and revenue generation for DISCOMs.

“Covid19 has destroyed electricity demand and caused an economic contraction of 23.9%, making continued investments in outdated technologies financial suicide. State governments and discoms should take advantage of the demand slump to tap into savings that will accrue from retiring the oldest, least efficient plants and replacing them with cheaper renewable energy”, said Ashish Fernandes, the lead author of the report ‘3Rs for DISCOM Recovery: Retirement, Renewables and Rationalisation’.

The report looks at 11 major coal power states (1), which account for over 50% of DISCOM overdues. It identifies possible areas for savings and cost rationalisation, starting with the retirement of coal plants that are over 20 years old and are less efficient than newer plants.

According to the report, shutting down 36.5 GW of old coal plants will avoid 18,000 crore worth of capital expenditure that needs to be incurred on retrofits to bring the plants in compliance with the 2015 emission norms. The deadline for compliance is December 2022. Replacing scheduled generation from these old plants with cheaper electricity, either from new renewables or from the market, would save another Rs. 7,000 crores annually (~35,000 crores over the typical 5 year tariff period), as electricity from most of these plants is on the more expensive side.

“Our analysis shows that it is far more efficient and cost-effective to shut down these old plants by 2022, rather than spend thousands of crores to retrofit them with FGDs and Low NOx burners. Given state governments’ precarious finances and the level of stressed assets in the banking sector, incurring debt for additional capex is difficult. These costs would also have to eventually be recovered from discoms and consumers via higher tariffs”, said Fernandes.

The Centre is in the process of disbursing Rs 1,00,000 crore by way of relief to DISCOMs to enable them to pay their dues to generators. This is expected to be a temporary fix, given the lack of progress by DISCOMs in reducing the gap between cost of supply and revenue raised.

Surplus electricity generation capacity has seen many power plants struggle with low plant load factors, a situation that most experts predict will persist for the foreseeable future. The situation is now exacerbated due to the economic impact of the coronavirus. Retiring older plants may just be the much-needed silver lining.

Apart from retiring old plants, the report suggests three other ways DISCOMs and state governments can reduce costs and plug the holes in their finances.

Freezing expenditure on under construction plants: The report identifies 14 GW of state-owned plants in the early stages of construction in the states of Bihar, Maharashtra, Tamil Nadu, Telangana and Uttar Pradesh. Freezing expenditure on these projects would save over Rs.92,000 crores. Given the country’s power surplus situation and the cost advantages now enjoyed by renewable energy, the CRH analysis says there is no requirement for these new plants, and they could in fact end up worsening state finances if construction were to proceed.

Rationalising fixed costs: The states of UP, Maharashtra, Gujarat, Tamil Nadu and Karnataka are paying high fixed costs despite low demand for power. Rationalising these fixed costs through contract restructuring could save approximately 1,000 crores p.a. each in Gujarat, Karnataka, TN, 2,600 crores in Maharashtra, and about 5,000 crores in UP, based on the latest available tariff orders. Most of the high fixed costs are payable to public-sector generators, making contract restructuring more feasible.

Gradually phasing out the most expensive power plants and replacing their generation with cheaper options will help reduce power purchase costs and Average Revenue Requirements. Expensive power above Rs 4/kWh can be replaced with cheaper power from renewable energy or existing higher efficiency power plants at Rs. 3/kWh or less. Hypothetically, this could generate savings of 55,000 crore per annum in these 11 states.

About Climate Risk Horizons: Climate Risk Horizons’ (CRH) work highlights the systemic risks that disruptive climate change poses to investors, lenders and infrastructure investments. Through a data-driven, research- oriented approach that incorporates a holistic understanding of climate policy, energy infrastructure and regulatory processes, CRH provides advice on risk management strategies to minimise stranded, non-performing assets and economic disruption in the face of climate change.

Contact for more information:

• Ashish Fernandes, CE0 & Lead Analyst, ashish.fernandes@climateriskhorizons.com
• Harshit Sharma, Lead Researcher, harshit.sharma@climateriskhorizons.com

Notes:

1. The states analysed were those for which recent tariff data from the regulator was available as of May 2020: Andhra Pradesh, Bihar, Chhattisgarh, Gujarat, Karnataka, Madhya Pradesh, Maharashtra, Tamil Nadu, Telangana, Uttar Pradesh and West Bengal.