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Power Point | October 2015

A Great Hidden Opportunity - Refurbishing of Power Stations

Can we add a Megawatt (MW) at half the cost of a new build? Can we save 5-10 per cent on fuel consumption by improving heat rate? Can we save on cost of generation by reducing auxiliary consumption? Can we operate the same facility for another 10 years? Can we manage existing power stations more smartly? Can we reduce Green House Gas (GHG) emissions? These questions assume significant importance in today´s world with rising costs, issues around land availability, need for improved reliability and growing concerns about the environment and safety. The answer lies in adoption of renovation and modernisation (R&M), life extension (LE) and upgrading measures.

The drivers for undertaking R&M differ across countries. While climate change policy and compliance to environmental standards act as a major driver in the European Union, power augmentation is a key driver in the case of South Africa and India. The Government of India (GoI) identified the need for taking up R&M/LE in the 80s and rolled out plans for thermal and hydro power stations in India.

Thermal Power Plants
In 1984, under the sponsorship of Central Government, a structured program for R&M/LE was rolled out from the 7th Five Year plan onwards. This program was largely successful during the 7th, 8th and 9th Plan, but slowed down significantly from the 10th Plan. This was primarily due to fund constraints, reluctance in taking unit shutdown and delayed supplies of materials. As a result, the scheme was reviewed in 2009 and the Central Electricity Authority (CEA) came out with a National Perspective Plan for R&M upto 2016û17. Bilateral aid and financial assistance was also tied for some of these projects through KfW, JICA and World Bank. This resulted in an improvement during the 11th Plan period.

Hydro plants
In contrast, the success in hydro plants has been better. GoI set up a National Committee in 1987 and a Standing Committee in 1998 and thereafter had identified the projects/schemes to be taken up for implementation under R&M. The National Perspective Plan document for R&M of hydro power plants was prepared by CEA in 2000.

A total of 23 hydro R&M schemes having an installed capacity of about 3,582 MW, accruing benefit of about 1,197 MW, at a cost of about Rs 1,842 crore, have been planned for the 12th Plan.

Learnings from past
Let us examine the issues, challenges and way forward with respect to thermal plants a little more in detail.

A typical R&M process cycle consists of three broad stages - assessment and planning, procurement and execution. The planning stage would cover appointment of a technical consultant, plant assessment, evaluation of alternatives, scheme finalisation, scope of work, budget and funding tie up. The procurement stage would involve preparation of bid documents, tendering and placement of order. The execution stage would include preparation of detailed project plan, equipment supply, shutdowns, installation and performance testing. CEA guidelines prescribe a timeframe of around 18 months for planning stage, 24 months for procurement and around 9 months for execution.

Assessment & Planning
The need for specialised technical support services was not recognized by the utilities leading to sub-optimal schemes getting finalised without proper cost-benefit analysis. Given the mounting losses of state utilities, their ability to fund R&M schemes is challenged and banks are also reluctant to fund these, as they have hit their sector exposure limits. The regulatory framework provides very limited incentive to utilities for improving efficiency and also limits expenditure on R&M.

Procurement
Majority of R&M jobs were so far being awarded to original equipment manufacturers (OEMs), limiting development of newer players and cost effective substitutes. Poorly defined work scope and contract documents further aggravated the issue.

Execution
The issues in planning and procurement compounded the problems during execution leading to delays, and at times the schemes failed to even take off. The state utilities have been generally weak in their operation and maintenance (O&M) practices leading to offset of expected efficiency gains from an R&M/LE project.

Way forward
The target set for R&M/LE of thermal power in the 12th Plan was LE on 70 units totaling 12,066 MW and R&M on 65 units totalling 17,301 MW, out of which LE of only 14 units (1,569 MW) and R&M of only 9 units (1,060 MW) have been achieved in first three years of the plan period. At the current pace, there will be a large unfulfilled gap.

Independent market studies show a potential of over 15,000 MW of thermal power which can be taken up for R&M and LE during the 13th Plan, shared almost equally by the states and Centre. This would entail an estimated expenditure of around over Rs 35,000 crore, which if funded on a DER of 70:30 would require equity in excess of Rs 10,000 crore. Presuming that the Central sector plants will be able to fund the equity out of cash surplus, do the state utilities have the money to infuse? And, will the banks be ready to fund these projects

  • A few suggestions can be offered to push this effort, especially in the State sector Identify PFC & NTPC as nodal agencies and create separate cells within them to focus on R&M of state sector plants - PFC to be responsible for financing and NTPC for execution.
  • A special fund can be set up and managed by PFC in which other banks and financial institutions can also participate. Funds will then be provided for approved R&M projects with lower interest rates compared to market and a manageable spread for repayment. Additional revenue earned by these plants as an outcome of the R&M measures will go into a separate escrow account, which in turn will be used to repay the interest and principal to the fund. PFC will act as fund manager for which a management fee will be paid out of the project cost. This will limit direct exposure of banks and FIs to specific utilities and also ensure prudent fund management.
  • NTPC, with the help of reputed global technical consultants, will provide end-to-end support covering assessment and planning, procurement and execution. It will also be responsible for O&M of these units post completion of R&M. NTPC will be paid management fee out of the project cost, and potentially a performance linked bonus.

This will create an opportunity to pull the underperforming units out of the woods and also help drive a performance culture in the sector.

Authored by R Venkataraman, Senior Director with Alvarez and Marsal. He has over 30 years of experience in the power sector.
Reference - CEA website. The views expressed in the article are personal.

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