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Interaction | October 2016

Impact of costs should get pass through in tariffs

Ashok Khurana | Director General, Association of Power Producers

What would be the rough cost of adhering to these norms and what is its percentage in the cost of a TPS/MW?
Preliminary estimates indicate capital expenditure requirement in the range of Rs.1.25 Cr/MW to Rs.1.5 Cr/MW, i.e about 20-25 per cent of the capital cost of a coal based power plant. Considering the above estimates, the total outlay involved could be about Rs.2.5 lakh crores. It will also lead to additional operating costs of about Rs.3.5 lakhs / MW / year. Further, operating parameters like auxiliary consumption will increase by about 1 to 1.5 % and there will be increased water consumption and degraded Station Heat Rate (SHR). All put together, it will lead to an increase in the cost of power ranging from about Rs.0.50 to Rs.1.25 per unit depending upon the plant specific requirement. In order to facilitate funding from financial institutions, clarity is required that the capital investments for the new changes would qualify under Change-in-law provisions and should be a completely pass through. Generators should have the assurance that the resultant tariff increases, as approved by the appropriate Regulator, would be effected by the Procurers with immediate effect, in full. Further, as the generators would need Regulatory approval of capex before tying up financing, it is crucial that an institutional body comes out with benchmark costs in order to speed up the process of in-principle approvals. Considering the stressed balance sheets of the generators who are already grappling with various issues such as low offtake due to subdued demand, fuel supply uncertainty, open access and transmission corridor unavailability, the Government may consider extending subsidy/funds from the National Clean Energy Fund or PSDF at very reasonable terms.
This will also help to keep a check on the increase in power tariffs.

What would the problems caused by high ash content in Indian coal in adhering to NOx norms?
In terms of NOx control technologies, Selective Catalytic Reduction (SCR) systems have the highest NOx removal efficiency. However as mentioned above, many vendors have expressed apprehension regarding the suitability and efficiency of SCR systems in the high ash Indian coal context. There are apprehensions that the life of the very expensive catalysts (which usually need to be replaced every 3-4 years) may be reduced to a year due to the highly abrasive Indian coal characteristics. In fact, we have been informed that after discussions with vendors, NTPC plans to initially set up five pilot projects using SCR technology in order to try and test its efficiency in the Indian context.

What are the norms that the industry proposes to be relaxed and why? (Please share if you have any report on the same)
We have been highlighting that some of the norms are just impossible to achieve, such as the requirement of installing Cooling Tower and meeting specific water consumption of max 3.5m3/mwh - this is simply not possible for sea water based coastal plants to achieve, unless they start using precious fresh water resources instead of sea water for cooling.

There are also many older plants which either simply do not have the space available for installation of new equipment or even if technically feasible, these plants do not have sufficient life remaining for recovery of expenses (without making the cost of power unaffordable). We have suggested that such plants should be exempted from meeting the norms and instead be phased out in a gradual manner. This will help avoid any wasteful expenditure.

As mentioned above, while a thorough cost benefit analysis should have been carried out on a broad sector level before notifying the new norms, it is now all the more important to bring about an organised approach to an endeavour of this massive scale. We have therefore suggested that a guiding document be prepared by an institutional body which would encompass a phased implementation program with realistic timeframe, enabling framework to manage the Technological, Financial, Regulatory and institutional issues be prepared by CEA in consultation with the industry, state governments, regulators, bankers and manufacturers of air pollution control equipment.

In December 2015, MoEF has issued new environmental norms for Thermal Power Stations (TPP). How the norms will affect/effect TPSs in the country?
The new norms are considerably more stringent than the existing norms and have also been applied on a retrospective basis, which means that many of the existing power plants will require a huge amount of capital expenditure and design re-engineering to be incurred in order for compliance. While the industry is committed to the cause of reducing pollution and carbon footprints, we believe that the legislative and policy framework should also keep the ground realities in mind.

In the present case, the ground reality is that it would be impossible for the compliance timeline to be met (December 2017 for already installed plants and plants to be installed after Jan 2016 are expected to be compliant right from the start).This is because of a number of factors, such as limited vendor availability, large scale plant retrofitting which takes considerably more time, need for phasing out implementation in order to minimize disruptive effect of plant shutdowns, uncertainty on benchmark costs and regulatory capex approvals without which financing cannot be done, etc. Even global experience shows us that programmes of such size are staggered over a period of 7 to 10 years.

The plants which are under construction have already frozen their design parameters and any changes at this stage will require significant re-work, thereby delaying the commissioning of the plants. Many of these plants have already been delayed beyond their original commissioning date due to various factors beyond the control of the developer and any further delay would render them NPAs under current RBI guidelines. Further, the additional capex and operating expenses of the modifications required for compliance will have a significant impact on the power tariff, affecting the offtake of power in this current environment of subdued demand from the financially weak State electricity distribution utilities.

What is the cost-benefit analysis of adhering to these norms by all the three categories of power plants in the next two years?
Ideally, a cost-benefit analysis should have been carried out initially in order to arrive at the norms to be followed. Unfortunately, there is no such cost benefit analysis has been shared with the stakeholders and even today there is uncertainty and confusion about the indicative costs that may be incurred. Before introducing the norms, detailed studies should have been carried out to identify proven technologies which would be suitable in the Indian context while taking into account economic aspects - impact on tariff due to additional capital cost and increase in operating costs, technical aspects (effectiveness of technologies, availability of technology and vendor capacity to meet demand) and technical feasibility and financial viability concerns.

However, in the absence of any such preliminary studies having been conducted, we find all the stakeholders facing various uncertainties and confusion with regard to technology to be used and anticipated cost even at this late stage when the deadline for compliance is just some months away for the plants which are to be installed after Jan 2017.

While there is no doubt that the new norms will ensure significantly lower emissions going forward, there is no definitive study which quantifies the likely benefits. As per some reports though, it is estimated that new plants which comply with the new norms will have 25% lower PM emissions, 50% lower Sox and 67% lower NOx emissions as compared to current plants which have been commissioned recently.

What are the technical and economic limitations of adhering to the new MoEF norms for TPPs?
There are many technical and operational issues involved with adhering to the new norms. For starters, many of the existing plants simply do not have sufficient space for installation of additional equipment such as additional fields for ESP, DeNOx systems etc or spare land for FGDs. Further, the domestic availability of required technology/equipment is limited and many of the technologies have not even been tested in Indian conditions. For example, some vendors have expressed the need to first set up a small pilot project to test the suitability of SCR technology for NOx reduction in Indian coal with high ash content. For SOx reduction systems such as FGD, the availability and transportation of good quality limestone (Estimated overall requirement of 24 million TPA) and disposal of gypsum (estimated 34 million TPA) in environmentally friendly manner may pose a problem.

Another major issue is the requirement of plant shutdowns to retrofit the equipment in existing plants. It is estimated that an average 5 to 6 months down time will be required for retrofitting the equipment for each plant, assuming that all the equipments are installed at the same time. Sequential installation may require even longer shutdown time. Considering the short period available to take necessary measures for compliance, all the units in a plant may have to be shutdown during the same period. This will lead to wide scale disruption in power supply across the grid and in order to avoid this, it is imperative to stagger the implementation of retrofits in a phased manner so that only a limited amount of generating capacity is taken out of the grid at a time.

Economic limitations are a major cause of concern for the plants which have already been in operation for more than 15-20 years. It is estimated that there would be about 60,000 MW of such plants. The time required to recover the cost of retro-fitting such emission control equipment would be quite less and spreading the investments over a limited remaining life-time would result in high level of recovery through tariff which would make the plants completely unviable. The Government is already encouraging the gradual phasing out of ageing thermal plants and replacement with more efficient super critical units by allowing transfer of coal linkage in such cases. In this scenario, it would not make sense to make significant capital investments in such ageing plants which will soon be replaced. Thus we have recommended that such plants may be exempted from the norms and be phased out gradually.

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