The Union power ministry recently floated a concept note on the pooling of tariffs from central power stations (only coal and gas) that are more than 25 years old. The note says that all units that are more than 25 years old shall be pooled together, and their tariff will be decided by the regulator. All units, as and when they reach a life of 25 years, will be added to the pool. This common tariff, to be determined by the regulator, will be applicable for five years.
This concept note raises many questions. The first and foremost is that it is against the principles of the ongoing security-constrained economic dispatch (SCED) and the proposed market-based economic dispatch (MBED), which is expected to take over from the SCED. Both the SCED and the MBED try to minimise the cost of generation while meeting the existing demand.
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A plant may be cheap or expensive depending on how far it is situated from the coal mine. The coal cost of a generator located far off from the mine may be three times (or more) from the coal cost of a plant at the pit-head. Consequently, the pit-head plants are more likely to be a part of SCED or MBED vis-a-vis load centre plants. As far as the SCED is concerned, it is POSOCO (now called the Grid Controller of India) that will swing into action after the scheduling process is over and direct all relatively more expensive plants to back down and the cheaper plants to ramp up to the extent spare capacity is available. Coming to the MBED, the principle of least-cost generation is attained through the market. All generators will give their bids (for variable cost only) on a day-ahead basis, and only the relatively cheaper plants will be asked to dispatch.
Now, this principle of clubbing together plants that are more than 25 years old to form a pooled tariff is diametrically opposite to the fundamental concept of the SCED/MBED.
By pooling together the power stations, one will mask the expensive generator and will lead to some kind of cross-subsidisation amongst generators. Only the other day, the government was proposing to implement the MBED, at least as a pilot, beginning this financial year. Now, almost in the same breath, the government has come out with this concept note that discards the principle of SCED/MBED.
One really wonders why this concept note has been floated. One plausible reason is the high variable cost of some coal- and gas-based plants of NTPC. There are some NTPC plants that have attained 25 years of age and are not being scheduled by the distribution companies (discoms) because of their high variable cost.
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Dadri-I is one such example, and the matter is under litigation. The Delhi discoms want to exit the power purchase agreement (PPA) with the completion of 25 years, whereas the NTPC is trying its best to ensure that the PPAs are not annulled, and the consumers of Delhi keep paying the fixed cost. The matter does not end with Dadri-I, because if the Delhi discoms are able to exit the Dadri-I PPA, a similar fate will be faced by all the gas-based units of NTPC once they turn 25 years old, starting from Anta and Auriya. The gas-based units are also not getting any dispatch presently because of the high price of gas.
Incidentally, the age of the plant has nothing to do with its efficiency. It is common knowledge that the station heat rate (SHR) of a generating unit does not become adverse over time if it is properly maintained.
Central plants whose tariffs are being fixed by the regulator are being provided a handsome fixed cost that takes care of their maintenance. Plants that are not getting a dispatch are the ones whose variable cost is high since they are situated far away from the mine, or as in the case of gas-based plants, are affected by the high cost of gas in the international market.
Availability of domestic gas, in any case, is poor, and import is imperative if the plant has to run. The point being made is that the issue of 25 years does not hold water as the generation cost does not really go up with age.
The concept note mentions that the reason for proposing this idea is that we need plants, especially gas-based plants, to support our massive renewable capacity that needs a back-up since renewable generation is intermittent. Further, the cost of storage through batteries is still quite exorbitant.
The generation mix report of the Central Electricity Authority (CEA) actually mentions that about 25 GW of coal-based plants would retire after the completion of 25 years. If old plants are not retired, which will happen if the concept note is accepted, it would be difficult to add to our renewable capacity since, after all, demand is limited.
Bear in mind, 25 GW of coal-based generation is equivalent to at least 3-4 times of solar generation because of the low plant utilisation factor of the latter.
So, in effect, this proposal will actually hamper the growth of renewable capacity rather than aiding it. This entire exercise, it seems, is to ensure that the high-cost NTPC units continue to earn their fixed cost beyond their life of 25 years.
Also pertinent is the question of why states, which have access to low-cost PPAs with plants that are more than 25 years old, should agree to pay a higher pooled tariff. They would be happy to invoke clause 17 of CERC’s tariff regulations and continue the PPA with mutual consent.
Last but not least, this concept note should have been backed by a number-crunching exercise that would have supported the idea that these old coal and gas plants need to generate to support the renewable programme. An essay does not really inspire confidence.
The writer is Senior Visiting Fellow, ICRIER, and former member (Economic & Commercial), CEA
Views are personal