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Report | January 2018

Enabling Tariffs & Policies Called for

<span style="font-weight: bold;">Cogeneration is the most effective and efficient form of power generation, with lower CO2 emissions. However, certain hitches are to be ironed out for it to grow healthily.</span> <p></p> <p> Renewable energy contributes over 22 per cent to India's installed power generation capacity. Although conventional fuels still dominate this segment, the share of renewable energy sources has been steadily increasing from about 8 per cent in 2009. This growth has been fuelled by the increased availability of renewable sources at competitive costs at industrial demand centers, declining capital cost of equipment, and raising grid tariff for industrial power. Measures like preferential tariffs, accelerated depreciation, generation-based incentives, third-party power sale options, provisions for wheeling and banking of power, concessional loans and prompt clearances have also played a crucial role in promoting the captive power and cogeneration segment's growth.</p> <p>Another upside of the cogeneration project is the additional revenue captive power generation can derive from the sale of surplus power to the grid at preferential tariffs, third-party power sale and trading of renewable energy certificates (RECs) at power exchanges. Captive power usage is even being driven by regulatory pressures and renewable purchase obligation (RPO) regulations, which also apply to captive power producers, and have increased the focus on the use of renewable sources. Cogeneration has gained considerable attention in India due to increasing energy demand, depletion of fossil fuel, carbon emission from burning of fossil fuel and increasing energy import bill. Bagasse cogeneration is considered renewable energy because carbon dioxide (CO2) equivalent to carbon emission during burning of bagasse is presumed to be absorbed during sugarcane production by farmers. The government took several steps at the policy, regulatory and fiscal level to promote bagasse cogeneration. </p> <p>Cogeneration through combined heat and power is the simultaneous production of electricity with the recovery and utilisation heat. It gives the option to meet the demand for electricity and heat in the most cost-effective manner. The electricity generated can be used to meet the internal electricity requirements, thereby reducing the demand for utility power, and additionally the surplus, if any, could be sold to the utilities. Thus, cogeneration provides an alternative to the conventional utility power and reduces the overall emissions from the power sector. </p> <p>The cogeneration systems meet steam requirements of the plant completely while generally a part of total power requirements are met because cogeneration systems could generate surplus electricity. Combined heat and power plants are typically embedded close to the end user, and therefore, help reduce transportation and distribution losses, improving the overall performance of the electricity transmission and distribution (T&amp;D) network. Cogeneration offers energy savings ranging from 15-40 per cent when compared to the supply of electricity and heat from conventional power stations and boilers.</p> <p> <span style="font-weight: bold;">Process</span><br /> Cogeneration is the production of electricity using waste heat (as in steam) from an industrial process, or the use of steam from electric power generation as a source of heat. It is the simultaneous production of electricity and heat, both of which are used. The central and most fundamental principle of cogeneration is that in order to maximise many benefits that arise from it, systems should be based on the heat demand of the application. Cogeneration is electricity and heat production that is on-site or close to the load centre that could be interconnected at distribution, sub-transmission, or transmission system voltages. The system consists of a number of individual components like primemover, generator, heat recovery and electrical interconnection all configured into a whole integrated system.</p> <p>The key industries utilising renewable energy sources to meet their captive power needs include metals and minerals, sugar, textiles, engineering and chemicals. The sugar industry has the highest proportion of renewable energy-based cogeneration capacity at 55 per cent followed by textiles industry at 10 per cent. Many sectors of the industry have good potential for cogeneration. Other industrial units/ sectors like paper, food processing, rubber, petroleum and refineries, rice mill, oil extraction, urban waste and forest-based industries should take advantage by installing cogeneration. Bagasse-based cogeneration has the highest share in the total captive capacity-based cogeneration on renewable sources, followed by wind, biomass and solar power. </p> <p>Bagasse is a by-product of the sugar industry that accounts for over 95 per cent of bagasse-based captive capacity. Most sugar mills have bagasse cogeneration facilities that help them generate power and supply surplus electricity to the grid. The majority of the bagasse-based cogeneration captive power projects have unit sizes between 20-40 MW. However, a downside to this source of power generation is that since bagasse is available only in the sugar-crushing season, the plant used for their captive needs generates power only during this time.</p> <p> <span style="font-weight: bold;">Statutory provisions</span><br /> The current policy and regulatory framework encourages cogeneration through subsidies, incentives, and recognition of cogeneration in procurement and planning processes. Rules and regulations have been put in place encouraging some forms of cogeneration. The Electricity Act 2003 is the milestone of electricity reforms in India. The Act gave impetus to speedy diffusion of renewable energy and cogeneration by mandating the states to promote electricity generation from these sources. Section 86(1) (e) of EA 2003 mandates the states to 'promote cogeneration and generation of electricity from renewable sources of energy by providing suitable measures for connectivity with the grid and sale of electricity to any person, and also specify, for purchase of electricity from such sources, a percentage of the total consumption of electricity in the area of a distribution licence.'</p> <p> The amount of power which must be purchased from renewable energy sources by distribution companies is known as RPO. Further, National Electricity Policy mandated the premium tariff to be fixed by Structural Engineering Research Centre (SERC) and Central Electricity Regulatory Commission (CERC) for the renewable energy sources. Clause 6.4 of the new Tariff Policy 2016 stipulates development of renewable sources of energy generation, including cogeneration. </p> <p>India has implemented the National Action Plan on Climate Change (NAPCC) released by the government in 2008. One of the important measures envisaged in the plan to deal with climate change is to enhance proportion of renewable energy into electricity generation. Total renewable electricity installed capacity targeted in the plan was 5 per cent in 2010 and one per cent increase every year up to 2020. </p> <p>Renewable energy resources are not evenly spread across India. Further, few states rich in renewable energy and cogeneration have exhausted their potential. Therefore, REC mechanism was adopted in India in 2010 to enable interstate sale and purchase of electrify produced from renewables. The mechanism is intended to enable all states of India achieve their RPO obligation. As mandated in the tariff policy, cogeneration is also included as a renewable source for REC trading to meet out the RPO target.</p> <p> <span style="font-weight: bold;">Promotional policies</span><br /> The government provides a number of incentives for generation of electricity from cogeneration projects. Besides the Central Financial Assistance, fiscal incentives like concessional import duty, excise duty, tax holiday for 10 years, bank loans of up to Rs.15 crore for biomass-based power generators etc., are available for biomass/cogeneration power projects. The benefit of concessional custom duty and excise duty exemption are available on equipments required for initial setting up of projects based on certification by the Ministry of New and Renewable Energy (MNRE). Indian Renewable Energy Development Agency (IREDA) provides loan for setting up biomass power and bagasse cogeneration projects. </p> <p>Central Financial Assistance of Rs.15 lakh/MW (maximum up to Rs.1.5 crore per project) is provided by the government as capital subsidy for biomass power project and bagasse cogeneration projects developed by private sugar mills. However, the bagasse cogeneration projects developed by cooperative/ public sector sugar mills, the government's capital subsidy is extended to approximately Rs.50 lakh/MW with a maximum support up to Rs.6 crore per project.</p> <p>In addition, state electricity regulatory commissions (SERCs) have determined preferential tariffs and RPO. Moreover, some state governments also issued their promotional policies for development of cogeneration in their states. Some of the state specific fiscal incentives for cogeneration projects are relaxation in wheeling charges, energy cess relaxation for 10 years, reduction in contract demand, land allocation, relaxation in entry tax, relaxation in additional cross subsidy surcharge etc. </p> <p>Tariff CERC has issued the 'Terms and Conditions for Tariff Determination from Renewable Energy Sources' Regulations, 2017, on April 17, 2017. The aforesaid regulations also specified the eligibility criteria for cogeneration project. Regulations specified the tariff for renewable sources shall be single-part tariff. Renewable energy technologies having fuel cost component like biomass power projects and non-fossil fuel-based cogeneration, single-part tariff with two components, fixed cost component and fuel cost component, shall be determined.</p> <p>The regulations providing operational and financial norms for non-fossil fuel-based cogeneration projects for the financial year FY 2017-18 are provided in the table. Based on the terms and conditions specified in aforesaid regulations, the CERC has issued tariff order on May 31, 2017 and determined state-wise levellised generic tariff for FY 2017-18 for the renewable energy sources including non-fossil fuel-based co-generation projects. The details of state-wise tariff determined by the CERC for FY 2017-18 are as given below:</p> <p> <span style="font-weight: bold;">Benefits </span><br /> Cogeneration is an efficient production of two forms of useful energy from the same fuel resource, using the exhaust energy from one production system as the input for the other. The electrical or mechanical energy can be used internally to run plant equipment, and the surplus electricity, if available, can be sold to the utilities. Such a system can reduce energy input 10-30 per cent of what is required by separate systems to produce the same outputs. As a result, this simultaneous efficient production of two energy forms can significantly reduce total operating costs in many instances, even after paying for the increased capital costs. Cogeneration optimises the energy supply to all types of consumers, with the following benefits for both users and society at large:</p> <ul> <li>Increased efficiency of energy conversion and use. Cogeneration is the most effective and efficient form of power generation.</li> <li>Lower emissions, particularly CO2, the main greenhouse gas. Cogeneration is the single-biggest solution to the Kyoto targets.</li> <li>Large cost savings, providing additional competitiveness for industrial and commercial users.</li> <li>An opportunity to move towards more decentralised forms of electricity generation, where plants are designed to meet the needs of local consumers. </li> <li>Improved local and general security of supply. In addition, the reduced need for fuel resulting from cogeneration reduces import dependency for fossil fuels. An opportunity to increase the diversity of generation plant and provide competition in generation, and increased employment.</li> <li>Maximised return on investment capital.In sugar industry, disposal of bagasse, which often poses a problem, is used as fuel for cogeneration scheme. This increases cost effectiveness. </li> <li>Lower emissions to the environment and neutral in carbon sequestration. </li></ul> <p> <span style="font-weight: bold;">Barriers</span><br /> India has made impressive growth in bagasse cogeneration in the last one decade. However, sustaining growth is the real challenge. Further, growth of deployment of bagasse cogeneration has been higher in private sector mills than in cooperatives and public sectors mills. The cogeneration projects face barriers at various levels of growth. The major bottlenecks in harnessing cogeneration potential are: </p> <ul> <li> <p>Lack of management focus - Management does not take cogeneration seriously due to lack of awareness and being busy in solving other problems of sugar mill. In addition, management does not have the competence, particularly in cooperative sugar mills, to establish and run a power plant. </p></li> <li> <p>Preferential tariff - As mandated by the electricity policy, the premium tariff must be fixed for renewable energy by CERC and respective SERCs using cost plus approach. In some states, preferential tariff fixed by SERCs does not account for higher support price fixed by state government for sugarcane, making bagasse cogeneration unattractive. </p></li> <li> <p>Minimum 2500 TCD capacity is economically viable for establishing cogeneration facility. <br /> </p></li> <li> <p>Inconsistent REC mechanism. <br /> </p></li> <li> <p>Non-compliance of RPO due to absence of strong RPO compliance mechanism.</p></li> <li> <p>Lack of grid connectivity. <br /> </p></li> <li> <p>Unavailability of fuel out of season. <br /> </p></li> <li> <p>High wheeling and open access charges in some states.</p></li> <li> <p>In some of the power surplus states, distribution companies are least interested in purchasing power from cogeneration projects.</p></li> <li> <p>Hurdle in granting open access by utilities and state load dispatch centres.</p></li></ul> <p> <span style="font-weight: bold;">Way forward</span><br /> Cogeneration energy options is a promising solution for meeting captive energy requirements and reducing the dependency on fossil fuels, which are facing cost escalations and are in short supply. Owing to this shortage and the government's emphasis on green energy along with enabling tariffs and policies, a significant increase is expected in cogeneration power-based projects. However, this will also depend on the resolution of issues related to open access and fuel logistics. Going forward, with the availability of multiple power sale options for additional power generation, cogeneration captive power is likely to grow with availability of fuel generated as a by-product of the parent company's core operations.</p> <p> <span style="font-weight: bold;">Author: Ashok Upadhyay, PHD Scholar and Dy. Director (Generation), M.P. Electricity Regulatory Commission, Bhopal (M.P.)</span></p>
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