Captive to inefficiencies: What our policy should be towards captive units

December 10, 2020 4:45 AM

Today, industrial tariffs are very high, which makes it sensible to have captive units. If the industrial tariffs were lowered by reducing cross-subsidies, many industrial units will no longer find it lucrative to have captive plants

power sector, reforms in power sector, discoms, distribution companiesThe plant load factor (PLF) of thermal plants are hovering around 50% today (September 2020), and the peak and energy shortages have been reduced to less than 1%.

By Somit Dasgupta

There are occasions where decisions taken in the past in good faith come back to haunt us due to altered circumstances. This is exactly the case with our captive plants and group captive plants, also called non-utilities at a generic level. A captive power plant is one which is dedicated to one or more industrial unit(s). As far as group captive is concerned, the beneficiaries should hold at least 26% of the equity and together consume 51% of the power generated during the year. Though dedicated, it may also inject electricity to the grid. On the flip side, an industrial unit having a captive station may also draw power from the grid. Thus, it is a two-way relationship. While captive power plants have been in existence since decades, group captive is a relatively new phenomenon which owes its genesis to the Indian Electricity Rules (IER) 2005.

In a recent CEA report (July 2020), it is mentioned that captive/group captive power plants have a capacity of about 75 GW. There are no official estimates as to the break-up between captive and group captive. Considering the fact that India’s total installed capacity (excluding captive) is about 373 GW, the share of captive units is no small measure. While the share of the iron and steel industry is about 19% in the total captive capacity, the share of sugar is 11%. The corresponding figures for aluminium, cement, chemicals are 10%, 8% and 7%, respectively. Most of these plants are coal-based (64%), but there are diesel (21%) and gas-based (12%) plants as well. About 3% of such plants are wind-based, and the share of solar is 1%. Odisha (15%) is the leading state when it comes to the capacity of captive plants, followed by Gujarat (11%), Madhya Pradesh (10.8%), Maharashtra (8.9%), Tamil Nadu (8.8%), Chhattisgarh (8.2%) and Karnataka (8.1%). All figures quoted are derived from CEA’s publications.

During 2018-19, there was a net generation of 195 BUs from the non-utilities whereas generation from utilities for the same year (inclusive of renewables) was 1,375 BUs. The share of non-utilities in total generation in the country is, therefore, substantial, estimated at 12.5%. It would also be relevant to mention that when we say that India’s per capita consumption of power is about 1,181 BUs (2018-19), it includes what is being generated by the captive power units also.

Now, why do the captive and group captive plants stick out like a sore thumb today as far as the power sector in general and the discoms in particular? The fact is that the government encouraged the setting up of captive/group captive plants since it relieved the discoms of the stress of providing continuous, good quality power to high electricity-intensive industries. There was a time when peak and energy shortages were well over 12%, though the situation has changed completely today. With a massive increase in capacity vis-à-vis the rate of growth in demand in the last decade, there is a lot of spare capacity available. Demand, too, is muted because of the economic downturn even before the pandemic. The plant load factor (PLF) of thermal plants are hovering around 50% today (September 2020), and the peak and energy shortages have been reduced to less than 1%. The discoms are especially unhappy since a consumer, which chooses its captive power plant, post the Electricity Act 2003, does not pay the open-access surcharge, thus, robbing the discoms of substantial revenue. The power sector, in general, has a grouse as the PLF of thermal stations could have been much better had there been no captive plants. A higher PLF means better efficiency, which means lesser use of coal. Also, had there been no captive plants, the stranded generation assets in the power sector could have got some succour, and they could have met part of the demand instead of lying idle. This would have aided the banks in the recovery of their loans to some extent.

So with this background, what should be our policy towards the captive units? Can we discard them today now that we have surplus power? The answer is ‘no’ because one never knows when we shall be in deficit again! Besides, even if we are surplus today, we still have outages, something most energy-intensive industries can ill-afford. We have to learn to live with them, and our policies should balance out the interest of the discoms vis-à-vis the captive units. Doing this balancing act can be very difficult, which can be gauged by the fact that we have been unable to revise the IER 2005 in order to regulate the group captive units more closely. It is alleged that the group captive units have been exploiting certain loopholes regarding equity and consumption to their advantage, and at the cost of the discoms. Proposed amendments to the IER 2005 were first circulated for public comments in October 2016 (and again in May 2018 with some revisions), but they have still not been finalised.

Rationalisation of tariffs is the best way to deal with the issue of captive power. While it will not be possible to wipe them out completely, we can make some of the captive units economically unviable, especially the ones which are dedicated to non-energy intensive industries. Today, the industrial tariffs are very high, which makes sense to have captive units. If the industrial tariffs are lowered by reducing cross-subsidies, many industrial units will no longer find it lucrative to have captive plants and will source their power from discoms instead. As it is, the captive units are very inefficient since most are small units with high coal consumption and consequently, high generation cost. Therefore, even a small reduction in cross-subsidy may do the trick and render the captive power non-viable. Rationalisation of tariffs will not only improve the financial health of the discoms but will also have a salutary effect on emissions since inefficient generation will be reduced.

The writer is former member, CEA Views are personal

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