Strong Outlook: Dependence on captive power continues

Dependence on captive power continues

Captive power plants (CPPs) have continued to be a viable option for industrial and commercial consumers to meet their energy demand and hedge against the risk of high tariffs of grid power. Further, the quality of grid supply is a major cause for concern for most industrial consumers, as this can result  in damage to costly capital equipment besides leading to downtime and production losses. Also, the cost of energy constitutes a significant proportion of production costs in several industries such as fertiliser, chlor alkali, steel, aluminium, etc. As a result, managing energy costs becomes important for these industries not only to reduce energy expenditure but also to improve their overall productivity and competitiveness. Besides, trading or third-party sale of surplus power can provide the benefit of additional revenues to CPP owners.

A look at the key trends in captive power plant deployment, their cost economics, as well as issues and concerns…

Key trends

As per India Infrastructure Research, the installed base of captive power is estimated at 80,160 MW as of 2016-17, having grown at a compound annual growth rate (CAGR) of 5.38 per cent between 2007-08 and 2016-17.

Coal has remained the major fuel for power generation in CPPs followed by natural gas and bagasse. The shares of these fuels in captive power capacity stood at 55 per cent, 12 per cent and 11 per cent, respectively, in 2016-17 (India Infrastructure Research). The share of these fuels has remained more or less the same in the past two-three years.

However, during this period, the share of solar-powered captives increased, from being negligible to nearly 1 per cent of the capacity being tracked. This can be attributed to the growing popularity of rooftop solar photovoltaic-based solutions among institutional and commercial establishments, owing to the falling cost of modules and benefits such as net metering being available. Overall, renewables (bagasse, solar, wind and biomass) had a share of over 20 per cent in the total tracked capacity.

Industry-wise, the metals and mining industry accounts for the major share of 41 per cent in tracked captive capacity. Other major industries deploying captive plants are petrochemicals (12 per cent), sugar (11 per cent), cement (9 per cent) and chemicals (7 per cent). The metals and mining industry has a high share in captive capacity as these industries set up large baseload capacities to meet the requirement of their energy-intensive production processes.

Cost economics

A key factor impacting captive power economics is the cost of grid supply. The generation cost of coal-based CPPs varies from Rs 3.18 per unit to nearly Rs 4 per unit, depending on the quality of fuel being used and its heat rate. Meanwhile for gas-based CPPs, it can range from Rs 5 per unit to Rs 7 per unit, depending on the technology used (open cycle or closed cycle). In the case of diesel gensets, the cost of generation can range from about Rs 15 per unit to as much as Rs 40 per unit (for instance, in rural telecom towers, the cost shoots up due to pilferage, transportation cost of diesel, etc.). For renewables, the cost can vary from Rs 3.60 per unit to Rs 8.20 per unit (depending on the source – solar, wind or biomass – and the state).

In contrast, average grid power tariffs per unit stood at Rs 5.92 for high tension industrial consumers, Rs 6.12 for low tension industrial consumers and Rs 6.63 for commercial consumers. Industrial and commercial tariffs increased at a CAGR of 27-35 per cent and 34 per cent, respectively, between 2012-13 and 2016-17. Besides, the high cross-subsidy surcharge (ranging from Re 0.17 per unit to Rs 4.80 per unit for 2016-17) restricts industries from buying cheaper power outside the state, thereby driving them to set up CPPs.

Issues and the way forward

The issues facing CPP owners include restrictions in open access that makes the sale of surplus power infeasible. Congestion in the transmission system also prevents CPPs from selling in the short-term power market. Further, a decline in the weighted average price at the power exchanges from Rs 3.50 per unit in 2014-15 to Rs 2.72 per unit in 2015-16, led CPP owners to resort to buying power at the exchanges while operating their plants at a lower capacity utililisation factor. In 2016-17 (till February 2017), prices at the exchanges varied from Rs 2.30 to Rs 3.01 per kWh.

Besides, the non-availability of fuels such as natural gas and biomass is an issue. On the coal front, though domestic supply has increased, the government has increased the coal cess from Rs 50 per tonne to Rs 400 per tonne in the past two-three years, thereby discouraging its use. In addition, stricter environmental regulations on emissions are likely to increase the capex of coal-based CPPs.

On the other hand, the role of renewables in providing captive power is expected to increase. Favourable policies, an increase in the national renewable purchase obligation target to 17 per cent by 2022, a decline in capital costs, and negligible running costs are some of the factors that will drive the setting up of renewable energy-based captives in the future.