Flue Gas Desulphurisation: A Rs 80,000 crore investment opportunity

There are many advantages of moving on FGD for coal-fired thermal power plants in the country. Not only is it an investment opportunity ripe for the taking, it has obvious environmental and social benefits. Bringing regulatory clarity to enable financing of environmental investments is essential

By Vipul Tuli

Government, industry and economic experts are aligned on the need to urgently encourage new project investments, to revive growth. The multiplier effects of large, new capital investments are many, especially job creation through the project life cycle, demand stimulation, productivity improvement and credit flow. The National Infrastructure Investment Pipeline of over Rs 100 lakh crore released last month by the prime minister is a stimulus to achieve such benefits.

One of the biggest challenges in kickstarting infrastructure stimulus programmes is the 2-3 years planning and financing lead time required. Therefore, the need of the hour for the nation is to identify large, viable infra projects that are ready for implementation. The thermal power sector offers one such opportunity.

Coal-fired thermal power plants across India are required to meet the latest emission standards prescribed by the government. To achieve this, most plants will need to install additional environmental protection equipment to reduce sulphur and nitrogen emissions. Considering only the sulphur removal equipment (FGDs, or Flue Gas Desulfurisation), the estimated investment required is over Rs 80,000 crore across India. Investments to reduce nitrogen emissions would be over and above this, of a similar order of magnitude.

Besides the environmental and health benefits, there are several reasons why India should prioritise this massive capital investment programme. First, it can be kickstarted rapidly. The emission standards are already mandated by law. Many power generation companies have already planned and designed their equipment, and others are at various stages of planning. Deadlines for each power plant to install FGDs are clear and imminent, i.e., from 2019 to 2022. Second, the benefits of job creation and economic activity would be spread across the country, since the 441 thermal power plants identified for FGD implementation are across 16 states and about 140 districts. Third, FGDs offer significant scope for indigenisation, which would give a welcome boost to Make in India. And finally, the financial implications of these investments are modest, amounting to 5-10 paise per kWh across all power generated (around 25 paise per kWh for coal power). This is just 1-2% of average end-consumer tariffs of around Rs 5/kWh.

Yet, implementation of the FGD programme is sluggish. The primary obstacle is the high investment cost for each plant, amounting to Rs 0.5 crore per megawatt (MW) of installed capacity, or around Rs 1,000 crore for a 2,000 MW power plant. With neither stressed power generators nor loss-making state distribution companies having the financial wherewithal to bear the additional costs, lenders understandably seek assurance on how these costs would be recouped. Only after electricity regulations provide this clarity, would lenders approve the necessary funding.

The following measures would help accelerate financing approvals for the FGD mega-investment programme:

  • Provisional tariff increases for contracted plants: A process for in-principle approval to pass FGD costs on to the end consumers via tariff increases is already in place for plants that have long-term power purchase contracts. This should ordinarily suffice for lenders to confirm debt financing. However, in view of the inordinately long and uncertain processes to secure final regulatory approval after project implementation, lenders perceive FGD cost recovery to be risky, and therefore, seek additional sponsor guarantees, higher interest rates, higher security reserves, etc, which are rarely feasible. Therefore, to enable financing, a provisional tariff increase for each such contract should be approved upfront by regulators, rather than just in-principle approval. The final tariff can, of course, be subject to final true-up based on actuals.
  • Cost pass-through for uncontracted plants: Nearly 25,000 MW, representing 13% of India’s thermal capacity, is currently without long-term power purchase contracts. These plants are already struggling to survive since they typically sell at lower margins into the daily merchant and short-term markets (IEX and DEEP). There is currently no regulatory mechanism to repay the Rs 12,500 crore funding these plants would require for FGDs. Without a viable financing mechanism, these plants will likely end up as banking non-performing assets (NPAs), to the tune of another Rs 1,00,000 crore. FGD financing can be ensured for these plants by a regulator-approved tariff increase levied on all power sold on the IEX and DEEP markets and paid to FGD-ready plants selling into these markets. This mechanism would, in one stroke, enable uncontracted plants to go ahead with their investments.
  •  Waiver of clean energy sess: Clean Energy Cess is being levied on coal-fired plants since 2010, presently at the rate of Rs 400/ton. In 2017 this was renamed GST Compensation Cess. An alternative to passing on FGD costs to consumers as described earlier is to allow generators to retain the Clean Energy/GST Compensation Cess after they commission their FGDs. This would immediately provide financing certainty to all contracted and uncontracted plants. An additional benefit of this option is that there would also be no need to increase end-consumer tariffs. The downside of this option would be lower GST collections for the government, but this impact would be spread over 3-4 years as FGDs are commissioned. India has laid out a bold vision to transition to cleaner thermal energy, the bedrock for 24×7 power to all Indians. Bringing regulatory clarity to enable financing of environmental investments is essential for this transition. It can almost immediately unlock Rs 80,000 crore of investment activity across the country, with significant economic and health benefits and a pre-emptive solution for another looming NPA crisis. If successful, a similar financing model can also be used for other environmental equipment, such as Selective Catalytic Reduction (SCRs) that reduce nitrogen emissions.

The author is  Managing Director, Sembcorp Energy India Ltd. Views are personal


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