One of the long-term impacts of the Covid-19 pandemic on the power sector is likely to be depressed energy demand. A recent study by TERI indicates this reduction maybe 5-10% over the next five years. India’s goal of installing 450GW of renewable energy looks to be a challenge anyway, but this will be an even bigger challenge if India has overcapacity due to lower-than-expected demand.
Enter GARUDA. This innovation proposes to retire old, inefficient coal plants by bundling them with new and cheaper renewable energy (RE) capacity. GARUDA does this by employing a “blended tariff”that amortises the cost of decommissioning over the term of the RE power purchase agreement, such that the financial burden on the distribution companies is almost negligible. The RE tariff would be discovered through competitive auction, as is the norm now.
We chose the name GARUDA as the objective is the renewal and transformation of the power sector, not its diminution.
Decommissioning thermal plants
India has a total coal fleet of 170+ plants across the country, amounting to 205,000MW. Several plants are old and inefficient—the oldest is 57 years old, and the lowest plant load factor is 21%. Of these, 58 plants amounting to 45,000 MW of coal plants are over 20 years of age, with an average plant load factor of 62%, and tariffs ranging between Rs 1.87- 7.03/kWh.
Research by CPI and ReConnect Energy suggests that there is a strong economic and environmental case for decommissioning many of these plants—up to 60% of plants amounting to 28,000MW. The criteria used to identify these plants are a combination of age, plant load factor, tariff, and suitability for the installation of flue gas desulphurisation units. This last is an important category mandated in 2015 by the ministry of environment, forests and climate change and the Supreme Court to mitigate the growing problem of air pollution in India, and has since suffered implementation deadlines slipping from 2017 to 2022, also unlikely to be met. Flue gas desulphurisation units oblige higher tariffs and also require land and water, so typically older plants cannot afford them.
Of the 48 plants identified for retirement, 26 plants, or more than half, are located in or near urban areas. State-owned gencos own most of these plants–discoms own 36 plants aggregating to 21,000 MW, and National Thermal Power Corporation (NTPC) owns eight plants aggregating to 5,000MW.
The GARUDA tariff would include the normal tariff for the new renewable energy plant plus the cost of decommissioning the old fossil fuel plant. The bidder would build such RE capacity to match the generation of the retiring thermal plant. Ideally, the bidder would be a combination of a RE independent power producer and a specialised decommissioning contractor. The learnings from the Rewa solar IPP would be a helpful starting point for designing the risk allocation among the parties.
Our analysis estimates that impact of decommissioning 500 MW of coal capacity with equivalent hybrid renewable capacity ranges between Rs 0.03-0.05 per kWh. It is assumed that the decommissioning cost, net of scrap value, ranges between Rs 70-105 crore per 500 MW.
Adding renewable capacity
Critics of retiring existing coal-based capacity say this will create challenges for system reliability and resource adequacy. This is one of the reasons plants are often retrofitted and used by state utilities beyond the end of their life. Renewable energy offers infirm power adding costs for grid balancing. However, two reliable alternatives are emerging—one, hybrid renewable systems that include solar and wind together, as they collectively complement each other in terms of generation hours during the day; and, two, battery energy storage systems, as costs are declining fast and new business models are being invented. With these advances, a competitive price point can be discovered through the auction for round-the-clock renewable energy supply, providing a technically feasible way to replace coal.
Discoms do not have the resources to take up this scheme in its entirety in the short-term. We envisage GARUDA to move beyond business-as-usual, whereby some 3-5GW of thermal capacity is decommissioned each year. An accelerated program, with pre-arranged financing, could help the speed and scale up existing decommissioning trends.
The entire GARUDA program would entail an investment of approximately $41 bn. For each 5GW tranche of coal capacity, of the total 28GW program to be offset by two times the RE capacity (10GW), the bidder, would need approximately $218mn of equity. This capital would be mobilised with the assurance of debt financing to the extent of $510mn.
This debt would be pre-arranged as a green bond, or, an emerging financing class—a transition bond, in tranches to grow with the scale-up of the programme. The bond could be backed by development banks and oblige the GOI’s sponsorship/guarantee, and its subscribers could be large scale pension funds with green windows. This “GARUDA bond” would be structured as regular debt, serviced by the earnings from the RE PPA, with an upside that could come from the carbon credits earned from the renewables being injected into the grid.
GARUDA is a win-win for India’s goals, achieving both financial and social benefits.
Financially, GARUDA would save discoms Rs 9,820 crore ($1.3 bn) per year from lower tariffs, even as it results in a younger fleet with better plant utilisation. It also gives a boost to India’s RE sector, which has been slowing down with discom issues. GARUDA would add ~60,000 MW of new RE capacity. Adding significant renewable energy, in turn, would give a strong push to local manufacturing and EPC companies under the “Atmanirbhar Bharat” initiative. Replacing coal-based plants with renewable energy will also have a significant impact on reducing the RPO costs for discoms. And finally, the programme would release land for other uses. The programme identifies 26 urban plants, opening up over 13,000 acres of valuable land, which can create liquidity gains for the state and an increase in income generation of 4x-20x depending on the choice of commercial activity.
The programme would save India 113mn tonnes of GHG emissions annually. Assuming a carbon price of $5/ton, every 500MW of coal retired would produce an estimated $10mn in annual revenue to the investor—nearly equal to the decommissioning costs.
The thermal power sector makes a significant contribution to air pollution in India, for example generating 45% of SOX emissions, most harmful to human health in-country and also among the worst offenders for global warming. Further, as water shortages increase across India, thermal plants are routinely being shut down for lack of water. Implementing the GARUDA project for these older thermal power plants, many of which lack cooling towers which re-use water, would reduce the grossly inefficient use of water in these plants.
Implementing GARUDA would bring multiple transformational benefits to the power sector, improve the PLF and efficiency of old thermal plants, and move India forward in its implementation of renewable energy targets—all without burdening discoms. All this, while addressing critical environmental concerns arising from climate change, air pollution, and water scarcity.