Making India’s power system clean: Retirement of expensive coal plants

Solar Tariffs are Cost-competitive in India

India is the world’s third largest greenhouse gas emitter (NDTV, 2018). While India’s per-capita emissions are still low (World Bank, 2019)-recognizing the importance of climate friendly technologies against the backdrop of climate leadership as well as energy security-India announced an ambitious nationally determined contribution (NDC) of 40% of electricity generation capacity by non-fossil fuel energy by 2030 (UNFCCC, 2019).

As of end of Q3, 2018, India had approximately 345 GW of power capacity (CEA 2018a), of which there is 196 GW of coal, 23 GW of solar, and 34 GW of wind. The rate of growth in solar has been tremendous, given that the installed capacity was less than one GW in 2011 (CEA 2018b). On the other hand, wind has been growing a steady rate of approximately 2–3GW a year (CEA 2018b).

Given that coal-based electricity remains the dominant source, getting to India’s NDCs may require not only installation of more renewable energy capacity but also a move away from coal-based electricity, whether from future plants or existing ones. This would be a welcome move given the negative externalities coal power production imposes not only on the global climate but also on the local environment (Jacobson and Masters, 2001). While this appeared hard to achieve in the past given the relative economics of coal vs renewable energy, a positive sign is the cost reductions achieved by renewable energy in the past decade.

India has achieved tremendous cost reductions in auction prices (i.e., tariffs) of solar, with lows of 2.44 INR /kWh (PV Tech, 2017), starting from 17.91 INR/kWh in 2011. This is a more than 600% reduction in 6 years or an average 35% tariff reduction (or CAGR) every year. While the reductions are not as significant as in the first year, this is nevertheless impressive. This reduction has been made possible by the reverse auction policy (Shrimali et al., 2016), combined with reductions in panel prices (GTM, 2013) and reductions in balance of system costs via learning (GTM, 2017).

Levelized Cost of Solar is Lower Than Variable Cost of Coal

The sharp reductions in solar tariffs have created a strong economic opportunity for further greening India’s electricity system. This opportunity can be expressed in installing solar plants not only in lieu of new/future coal plants but also in replacing existing coal plants. The former is due to the fact that the levelized (or average) cost of solar is now cheaper than the levelized cost of new coal, whether international or domestic (BNEF, 2017), which makes the investment decision in favor of new solar in comparison to new coal justified.

However, even the latter-installing new solar and buying electricity from new solar as opposed to existing coal-is now possible due to the fact that the levelized cost of solar is now cheaper than the variable cost of a significant number of existing coal plants, which translates to a significant capacity of existing coal plants. This allows for further reducing India’s greenhouse gas emissions, even from coal plants that were already commissioned. Since this goes against the conventional wisdom of effects of locked-in investments, this becomes the focus of this investigation.

With the latest solar tariffs, which reflect the levelized (or average) cost of energy from solar, solar power is now cheaper than the variable cost of coal power generation in many cases (KPMG, 2017). This means that, in such cases, from a purely economic perspective (Brealey et al., 2016) it would be more cost effective for the DISCOMS to buy power from new solar plants as opposed to existing coal plants going forward. This decision would be independent of existing contractual commitments, if any; for example, to compensate such coal plants for the capital (or sunk) costs incurred. That is, for such coal plants-even if we have to keep on paying the fixed-cost contract on an existing coal plant-it would be cheaper to not operate them and buy electricity from a new solar plant, thus saving on the per-unit cost of electricity purchased as the difference between the variable cost of the coal plant and the levelized cost of the solar plant.

Currently, out of the existing capacity of 196 GW, approximately 47.72% (i.e., 93.53 GW) of coal plants have a variable cost of generation higher than the low solar tariffs of 2.44 INR/kWh). In fact, as an illustrative example using this low solar tariff of 2.44 INR/kWh, even if we reasonably assume an upper bound of 20% integration cost for solar (CEEW, 2018; NREL, 2017), approximately 47.96 GW (i.e., 24.47% of existing capacity) of coal plants have a variable cost of generation higher than an average solar tariff of 3.0 INR/kWh. That is, depending on how you examine this issue, approximately a quarter to a half (i.e., 50–100 GW) of existing coal capacity falls in this category of coal plants with variable cost higher than the levelized cost of solar. We refer to these coal plants as expensive brownfield plants.

Can Expensive Brownfield Coal Plants be Cost-effectively Retired?

Thus, given the argument above, going forward it would be a sound economic (i.e., cost-effective) decision to buy power from new solar plants and not from expensive brownfield coal plants, which could effectively be retired. We note that, while other options are possible, such as running these expensive brownfield coal plants more flexibly (CPI, 2018), in this paper our focus is on retirement.

This brings up the question: Can we simply retire these expensive brownfield coal plants while also paying for the already committed capital (or sunk) costs of these coal plants? In this context, the key follow-up question then becomes: How can these contracted costs be paid off in the most cost-effective manner possible?

As a first step in the analysis, we quantify the value created by retiring a representative coal plant and replacing it with a solar one. The value is created by not only replacing the energy contract but also by refinancing the remaining payments on capital. We find that, for our sample coal plant, a retirement in year five could save:

• 33.90% in energy costs;
• 31.57% in fixed costs, including 5.37% in debt and 74.4% equity payments, respectively.

We note that a lot more work needs to be done to add nuance to this analysis, including a calculation of the value saving potential for the Indian power sector, and fully addressing the many implementation issues such as: Would the system meet demand reliably and cost-effectively? Can existing coal plant contracts be legally broken? Can DISCOM liabilities be converted to state bonds? How would these state level bonds be paid? How would coal plant workers be compensated? Would the solutions be different under public ownership?

Our work has also highlighted multiple policy/regulatory changes that may need to be brought about to enable early retirement of expensive coal plants. These include changes at both the cabinet as well as the regulator levels. The former may include a one-time allowance of state-level bond issuance for paying off DISCOM liabilities as well as the use of National Clean Energy Fund (NCEF) for partial payment of these liabilities. The latter may include an allowance of ratepayer surcharges to pay for the bonds as well as a one-time exception to Availability Based Tariff (ABT) for paying of fixed charges.

In closing, we hope that the Indian government will utilize this opportunity to retire expensive brownfield coal plants and further increase penetration of renewable energy, thus enabling a faster and deeper transition towards India’s commitments towards a cleaner local environment as well as a cleaner global climate. Our initial conversations with states (e.g., Maharashtra) have been positive, and we hope to build on this momentum.

Finally, we note that, while we have suggested a potential way to meet India’s climate targets cost-effectively and have identified potential issues that may need to be addressed in the process, much more in-depth work is needed on the ground to make this a reality. We also note that coal plant retirement is just one of the potential ways to address the issue of expensive brownfield coal plants, with another attractive way being conversion of such plants into more flexible plants. However, we hope that our work provides a reasonable alternative to meeting India’s NDCs cost-effectively.

References:

BNEF (2017), “Cheaper Solar in India Prompts Rethink for Coal Projects,” available at https://www.bloomberg.com/news/articles/2017-06-01/cheaper-solar-in-india-prompts-rethink-for-more-coal-projects

Brealey R A, Myers S C, Allen F (2016), Principles of Corporate Finance, McGraw Hill

CEA (2018a), “All India Installed Capacity (in MW) of Power Stations,” available at http://www.cea.nic.in/reports/monthly/installedcapacity/2018/installed_capacity-09.pdf

CEA (2018b), “All India Installed Capacity (in MW) of Power Stations,” available at http://www.cea.nic.in/reports/monthly/installedcapacity/2018/installed_capacity-03.pdf

CEEW (2018), “Sustainable Development, Uncertainties, and India’s Climate Policy,” available at https://www.ceew.in/sites/default/files/CEEW_Sustainable_Development_Uncertainties_India_Climate_Policy_30Apr18.pdf

CPI (2018), “An Assessment of India’s Energy Choices: Managing India’s Renewable Integration through Flexibility,” Working Paper, available at https://climatepolicyinitiative.org/wp-content/uploads/2018/05/Managing-Indias-Renewable-Energy-Integration-through-Flexibility-.pdf

GTM (2013), “Here’s How Chinese Firms Will Produce Solar for 36 Cents per Watt,” available at https://www.greentechmedia.com/articles/read/solar-cost-reduction-drivers-in-2017

GTM (2017), Solar Costs Are Hitting Jaw-Dropping Lows in Every Region of the World,” available at https://www.greentechmedia.com/articles/read/solar-costs-are-hitting-jaw-dropping-lows-in-every-region-of-the-world

KPMG (2017), “Solar Beats Coal Costs: Implications,” available at https://assets.kpmg.com/content/dam/kpmg/in/pdf/2017/09/Solar-beats-coal-cost.pdf

Jacobson M, Masters G (2001), “Exploiting Wind vs Coal,” Science, 293: 1438-.

NREL (2017), “Greening the Grid: Pathways to Integrate 175GW of Renewable Energy into India’s Electricity Grid — Part I,” available at https://www.nrel.gov/docs/fy17osti/68530.pdf

PV Tech (2017), “Yet Another India Solar Tariff Record of 2.44 Rupees in Rajasthan,” available at https://www.pv-tech.org/news/yet-another-india-solar-tariff-record-of-2.44-rupees-in-rajasthan

Shrimali G, Konda C, Farooquee A (2016), “Designing Renewable Energy Auctions for India: Managing Risks to Maximize Deployment and Cost-Effectiveness,” Renewable Energy, 97: 656–670

UNFCCC (2019), “INDCs as Communicated by Parties,” available at https://www4.unfccc.int/sites/submissions/indc/Submission%20Pages/submissions.aspx, accessed 22 October, 2019

World Bank (2019), “CO2 Emissions,” available at https://data.worldbank.org/indicator/en.atm.co2e.pc?view=map, accessed 22 October, 2019

Originally published at https://energy.stanford.edu.