The race to zero
The power demand outlook remains muted as economies are going through deep recessions caused by the pandemic. That has not, however, stopped the march of green power.
Or prevented new sustainability commitments by corporate leaders, with Reliance Industries the latest to reveal plans to go “net-zero”. A few key announcements capture the trends of the moment: Resilient clean power investments: Investment in new renewable energy capacity remained resilient in the first half of the year, according to the latest update from BloombergNEF, rising 5 per cent to $132 billion.
Powering reforms: Transforming India’s power sector through GARUDA
One of the long-term impacts of the Covid-19 pandemic on the power sector is likely to be depressed energy demand. A recent study by TERI indicates this reduction maybe 5-10% over the next five years. India’s goal of installing 450GW of renewable energy looks to be a challenge anyway, but this will be an even bigger challenge if India has overcapacity due to lower-than-expected demand.
Enter GARUDA. This innovation proposes to retire old, inefficient coal plants by bundling them with new and cheaper renewable energy (RE) capacity. GARUDA does this by employing a “blended tariff”that amortises the cost of decommissioning over the term of the RE power purchase agreement, such that the financial burden on the distribution companies is almost negligible. The RE tariff would be discovered through competitive auction, as is the norm now.
We chose the name GARUDA as the objective is the renewal and transformation of the power sector, not its diminution.
Decommissioning thermal plants
India has a total coal fleet of 170+ plants across the country, amounting to 205,000MW. Several plants are old and inefficient—the oldest is 57 years old, and the lowest plant load factor is 21%. Of these, 58 plants amounting to 45,000 MW of coal plants are over 20 years of age, with an average plant load factor of 62%, and tariffs ranging between Rs 1.87- 7.03/kWh.
Research by CPI and ReConnect Energy suggests that there is a strong economic and environmental case for decommissioning many of these plants—up to 60% of plants amounting to 28,000MW. The criteria used to identify these plants are a combination of age, plant load factor, tariff, and suitability for the installation of flue gas desulphurisation units. This last is an important category mandated in 2015 by the ministry of environment, forests and climate change and the Supreme Court to mitigate the growing problem of air pollution in India, and has since suffered implementation deadlines slipping from 2017 to 2022, also unlikely to be met. Flue gas desulphurisation units oblige higher tariffs and also require land and water, so typically older plants cannot afford them.
Of the 48 plants identified for retirement, 26 plants, or more than half, are located in or near urban areas. State-owned gencos own most of these plants–discoms own 36 plants aggregating to 21,000 MW, and National Thermal Power Corporation (NTPC) owns eight plants aggregating to 5,000MW.
The GARUDA tariff would include the normal tariff for the new renewable energy plant plus the cost of decommissioning the old fossil fuel plant. The bidder would build such RE capacity to match the generation of the retiring thermal plant. Ideally, the bidder would be a combination of a RE independent power producer and a specialised decommissioning contractor. The learnings from the Rewa solar IPP would be a helpful starting point for designing the risk allocation among the parties.
Our analysis estimates that impact of decommissioning 500 MW of coal capacity with equivalent hybrid renewable capacity ranges between Rs 0.03-0.05 per kWh. It is assumed that the decommissioning cost, net of scrap value, ranges between Rs 70-105 crore per 500 MW.
Adding renewable capacity
Critics of retiring existing coal-based capacity say this will create challenges for system reliability and resource adequacy. This is one of the reasons plants are often retrofitted and used by state utilities beyond the end of their life. Renewable energy offers infirm power adding costs for grid balancing. However, two reliable alternatives are emerging—one, hybrid renewable systems that include solar and wind together, as they collectively complement each other in terms of generation hours during the day; and, two, battery energy storage systems, as costs are declining fast and new business models are being invented. With these advances, a competitive price point can be discovered through the auction for round-the-clock renewable energy supply, providing a technically feasible way to replace coal.
Discoms do not have the resources to take up this scheme in its entirety in the short-term. We envisage GARUDA to move beyond business-as-usual, whereby some 3-5GW of thermal capacity is decommissioned each year. An accelerated program, with pre-arranged financing, could help the speed and scale up existing decommissioning trends.
The entire GARUDA program would entail an investment of approximately $41 bn. For each 5GW tranche of coal capacity, of the total 28GW program to be offset by two times the RE capacity (10GW), the bidder, would need approximately $218mn of equity. This capital would be mobilised with the assurance of debt financing to the extent of $510mn.
This debt would be pre-arranged as a green bond, or, an emerging financing class—a transition bond, in tranches to grow with the scale-up of the programme. The bond could be backed by development banks and oblige the GOI’s sponsorship/guarantee, and its subscribers could be large scale pension funds with green windows. This “GARUDA bond” would be structured as regular debt, serviced by the earnings from the RE PPA, with an upside that could come from the carbon credits earned from the renewables being injected into the grid.
GARUDA is a win-win for India’s goals, achieving both financial and social benefits.
Financially, GARUDA would save discoms Rs 9,820 crore ($1.3 bn) per year from lower tariffs, even as it results in a younger fleet with better plant utilisation. It also gives a boost to India’s RE sector, which has been slowing down with discom issues. GARUDA would add ~60,000 MW of new RE capacity. Adding significant renewable energy, in turn, would give a strong push to local manufacturing and EPC companies under the “Atmanirbhar Bharat” initiative. Replacing coal-based plants with renewable energy will also have a significant impact on reducing the RPO costs for discoms. And finally, the programme would release land for other uses. The programme identifies 26 urban plants, opening up over 13,000 acres of valuable land, which can create liquidity gains for the state and an increase in income generation of 4x-20x depending on the choice of commercial activity.
The programme would save India 113mn tonnes of GHG emissions annually. Assuming a carbon price of $5/ton, every 500MW of coal retired would produce an estimated $10mn in annual revenue to the investor—nearly equal to the decommissioning costs.
The thermal power sector makes a significant contribution to air pollution in India, for example generating 45% of SOX emissions, most harmful to human health in-country and also among the worst offenders for global warming. Further, as water shortages increase across India, thermal plants are routinely being shut down for lack of water. Implementing the GARUDA project for these older thermal power plants, many of which lack cooling towers which re-use water, would reduce the grossly inefficient use of water in these plants.
Implementing GARUDA would bring multiple transformational benefits to the power sector, improve the PLF and efficiency of old thermal plants, and move India forward in its implementation of renewable energy targets—all without burdening discoms. All this, while addressing critical environmental concerns arising from climate change, air pollution, and water scarcity.
Retiring old, inefficient coal-based power plants by bundling them with new, cheap renewable energy plants would bring multiple transformational benefits to the power sector, improve the PLF and efficiency of old thermal plants
Renewable energy: State has achieved 44% of 2022 target
Out of the total renewable energy target of 2022, the state has till date achieved about 44%. This was revealed in the latest analysis ‘The Curious Case of India’s Discoms’ by energy economist Vibhuti Garg and research analyst Kashish Shah from the Institute for Energy Economics and Financial Analysis (IEEFA).
As per the National Electricity Plan 2018, the state has set a clean energy target of 22 gigawatt (GW) to be achieved by 2022. According to the analysis, the renewable energy installed capacity in the state as of June 2020 is 9.7GW. “The figures highlight the need for a strong policy and investment drive to achieve the target,” the analysis stated.
Out of the total renewable energy target of 2022, the state has till date achieved about 44%. This was revealed in the latest analysis ‘The Curious Case of India’s Discoms’ by energy economist Vibhuti Garg and research analyst Kashish Shah from the Institute for Energy Economics and Financial...
India’s solar power story disrupted as renewable energy finds no buyers
India’s solar power story has been largely creditable, with a rapid pace of capacity addition and competitive tariffs being discovered, but several adversities including reluctance of discoms to sign power supply agreements (PSAs) are threatening to disrupt it.
Nearly a third of the 23,600 megawatt (MW) renewable power projects, won by various players after quoting the lowest rates in reverse auctions conducted by the Solar Energy Corporation of India (SECI) for inter-state transmission system (ISTS), are staring at an uncertain future as the agency has not yet found buyers for electricity from these solar/wind power generation units. Most of these are under-construction units; only 2,200 MW of the awarded capacity has been commissioned till date.
Project developers also grapple with other issues such as unavailability of land and inadequate power transmission infrastructure, leading to inordinate delays. The investments involved in the stuck projects with combined capacity of 8,000 mw is roughly Rs 36,000 crore at Rs 4.5 crore per MW.
Projects facing uncertainty due to lack of buyers include those backed by global players like the UK’s CDC-(Ayana Renewable), Netherland’s Avaada Energy, French utility Engie (Betam Wind), New York-based Eden Renewables, SoftBank Group, Hong Kong based UPC Renewables (Masaya Solar), Italy’s Enel (Avikiran Surya), Germany’s Ib Vogt, Spain’s Solarpack Corporacion and the Canada-based Amp Energy Green.
According to data compiled by the Central Electricity Authority, SECI has not been able to sign PSAs with any state discom for 5,840 MW of solar and 920 MW of ISTS wind power projects. SECI being the national aggregator of renewable energy, signs power purchase agreements (PPAs) with the winning developers in competitive auctions, and subsequently inks PSAs with states to supply electricity from these plants.
In fact, as much as 1,665 MW of renewable power projects (Acme: 600 MW, Torrent: 500 MW, Mytrah: 300 MW and ReNew: 265 MW) have sought to terminate their PPAs, frustrated by delays caused by other parties, in spite of SECI finding buyers of electricity from these projects.
The impact of the coronavirus outbreak on the supply chain has also been cited as a cause of the demand for PPA cancellations.
Industry trackers have pointed that the ultra-low tariff quoted by some of the firms might not be viable anymore amid time overruns, leading to termination of contracts.
SECI’s competitive bidding rounds for ISTS projects have been instrumental in bringing down renewable energy power costs in the country as the Central government-backed agency utilised the economies of scale by conducting reverse auctions for large capacities. It also allowed solar and wind power plants to be installed in conducive locations anywhere in the country and supply power to states with lower potential for renewable energy generation. While a section of the industry has blamed discoms for not signing PSAs in the hope of better deals in the future, experts have also pointed that SECI has conducted many auctions without assessing the states’ appetite for such unreliable and intermittent sources of power.
The country has set a target to raise the capacity of installed renewable energy generation plants to 175 giga watt (GW) by the end of 2022. As on July 31, the installed renewable energy capacity was 88 GW. Around 34 GW is under various stages of implementation and 34.5 GW under various stages of bidding. If the 45.7 GW of hydro and 6.8 GW of nuclear capacities are included, the target under the Paris climate change accord of having 40% of installed power generation capacity from non-fossil fuel sources will be achieved by 2022 itself.
No country will contribute more to the rise in global carbon emissions than India. Energy consumption among its 1.4 billion people is rising fast, with 65 percent of the country’s electrical power currently generated from coal. The world’s filthiest fossil fuel—of which India consumes more than the United States and Japan combined—will “remain ingrained under the fingernails of the nation” because of “politics, economics, and the complications of generating electricity.” So said the Economist in a 2018 briefing.
The British magazine’s briefing perfectly encapsulates the widespread view of India as climate policy’s problem child. But the conventional wisdom couldn’t be more wrong. Little noticed in the West, India is undergoing a green-energy revolution—exceeding targets, breaking records, and quickly making the age of cheap clean energy a reality.
Because of the dominance of India’s coal industry, few experts ever expected India to be on track to significantly exceed two key commitments to the Paris Agreement. One is India’s pledge to increase the share of power-generation capacity that doesn’t use fossil fuels to 40 percent by 2030; today, generation capacity from renewable, hydroelectric, and nuclear sources already reaches 38 percent, putting India on track to comfortably exceed its target. The other commitment is to reduce carbon emissions by 33 to 35 percent (from 2005 levels) by 2030. Today, India looks likely to reduce emissions by as much as 45 percent by 2030, far surpassing its Paris target.
India has set its own ambitious renewable-energy goals—and is exceeding even them. Its fossil-fuel power-generation capacity is presently about 230 gigawatts (GW), of which 205 GW come from coal. When, in 2015, Prime Minister Narendra Modi announced plans to build 175 GW of new renewable-energy capacity by 2022, the announcement was met with skepticism. After all, India at the time only had renewable generating capacity of 34 GW. According to Amitabh Kant, CEO of the government policy think tank NITI Aayog, India has already installed 89 GW of renewable power capacity and will achieve Modi’s 175 GW target as planned.
Modi’s ambition and India’s successes stand in sharp contrast to the United States, where clean-energy initiatives are highly politicized.
And Modi has further raised the stakes: At the September 2019 United Nations Climate Action Summit, he announced a new target of 450 GW of renewable energy capacity by 2030. Motivating him are the deadly pollution in Indian cities, the threat of devastating impacts from climate change, and the high bill for energy imports.
Modi’s ambition and India’s successes stand in sharp contrast to the United States, where clean-energy initiatives are highly politicized. The Democratic nominee for president, former Vice President Joe Biden, has developed an ambitious $2 trillion plan to produce 100 percent of the country’s energy from cleaner sources by 2050, but even if he wins on Nov. 3, this is all but certain to face opposition and roadblocks. India, on the other hand, was able to impose a tax on coal production equivalent to $6 per ton with nearly unanimous approval from the 36 political parties represented in the Indian parliament.
India’s clean-energy initiatives have the wind at their back thanks to global advances in green technology—especially solar power, wind power, and energy storage. These technologies are progressing exponentially and have entered a virtuous cycle: As prices for these technologies fall, demand for them rises, and as production is expanded to meet demand, prices fall some more, all of which contributes to accelerating adoption. When Bell Labs built its first solar photovoltaic panel in 1954, the panel cost $1,000 per watt of electrical power it could generate. By 2008, the modules used in solar arrays cost $3.65 per watt; by 2018, that figure had fallen to less than 40 cents. In India that year, solar power generation crossed an important threshold, becoming cheaper than coal (by 14 percent on a “levelized” basis, which adjusts for the impact of subsidies, construction costs, and financing). Fast-plunging costs have allowed India to increase its solar-power generation capacity more than tenfold since 2015.
Other renewables, too, follow this trend. Wind power became cost-competitive with coal in 2018, and costs continue to plummet. Battery technology, once the crucial weak link in renewable energy, is rapidly approaching the point where it solves a critical problem that has held most clean energy back: Solar panels only generate power when the sun shines and windmills only turn when it is windy. Until now, the dirty secret of green power has been that every gigawatt of sometimes-on, sometimes-off renewable generating capacity has required another gigawatt of fossil-fuel power generation capacity to stand by as a backup. Batteries resolve that conundrum by storing power and releasing it when needed; a more brute-force, low-tech method of storing wind or solar power is to pump water up a hill into a reservoir, from where it can generate hydroelectric power on demand.
India made green history this year, breaking not one but two records. In January, it conducted the world’s largest tender for renewable power that no longer requires fossil-fuel backup. One company, Greenko, will provide 900 megawatts of uninterrupted, unsubsidized power using a combination of solar panels and hydroelectric storage. Another, ReNew, will supply 300 MW of steady power using solar panels and battery storage. In May, ReNew made another successful bid to provide 400 MW of solar power with battery storage. At a levelized first-year cost of 2.90 rupees ($0.04) per kilowatt-hour, it will be among the world’s lowest rate for uninterrupted renewable power—finally making generating and storing clean energy cheaper than burning coal.
India made green history this year, breaking not one but two records.
India is a major beneficiary of these technological advances because it is rapidly adding generating capacity as it develops, avoiding many of the costly and politically charged adjustments as developed countries replace one energy technology (and its jobs) with another. It also has large stretches of sunny, sparsely populated land for acreage-hungry solar arrays. Low labor costs make the installation and maintenance of renewable generation inexpensive; solar is a low-skilled sector once the panels have left the factory. As India imports the vast majority of its oil and a significant part of its coal, it is happy to replace costly imports with home-generated clean energy, which also helps explain the relative lack of opposition to it.
What’s more, the country’s power supply has been unreliable, its national energy grid feeble, and electricity beyond the reach of nearly 100 million rural homes. As solar panels and battery storage become cheaper and diffuse across the subcontinent, a major impediment to India’s development and prosperity will be removed. That’s something Tata Power and the Rockefeller Foundation hope to accelerate: Last November, they announced a collaborative effort to set up 10,000 so-called microgrids in Indian villages by 2026, connecting more than 5 million households to small distribution networks of local renewable power.
With India’s costs already among the lowest in the world, it is at the cusp of an age of truly competitive, unsubsidized clean energy. When the price of solar panels and batteries falls another 50 percent, as is likely during the next three years, market forces will take over, and Indian consumers will take the clean-energy mantle from the government—something that still looks quite a ways off in most developed countries. As Europe loses momentum in its transition to clean energy, as a possible new U.S. administration struggles to get green policies back on track, and as China makes great strides in finally turning away from fossil fuels, India will play an increasingly important global role in transitioning the planet to a cleaner, safer, more sustainable future.