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Dark side of the shift to renewables

According to reports, harnessing renewable energy and protecting the environment are welcome intentions. But, how far can we push the agenda, and how fast? The stress is showing in terms of low capacity utilisation in thermal power, made worse by the demand slump.

Prime Minister Narendra Modi had fixed a lofty goal of reaching 175GW renewable energy (RE) capacity by 2022. This includes a five-fold rise in the National Solar Mission target to 100GW capacity in 2022. This is a policy U-turn from the coal-based capacity addition programme undertaken in 2005.

Considering the current RE capacity of 45.91GW — including 28GW wind and 8.5GW solar — an addition of 32GW wind and 91.5GW solar in five years seems impossible, especially the latter. And, that’s probably the best news for the power sector at the moment. RE share in generation moved up from 5.8 per cent to 7 per cent during April-November this year. If the capacity reaches 175GW, the share of RE in generation would cross 20 per cent, inviting serious consequences.

Over the last 10 years, coal-fired capacities grew in excess of 150GW — contributing 74 per cent of generation — and is now struggling with locked finances.

A careful reading of three key documents — the draft National Electricity Plan of Central Electricity Authority (CEA); Economic Survey 2016; and the December 2015 report of the NITI Aayog expert group on 175GW RE capacity by 2022 — would reveal that each tried to justify the political goal without defining a sustainable goal. And not much is said about the impact on power tariff.

Not that they are unaware of the transition costs. The NITI Aayog, for example, emphasised that India’s installed capacity (309GW) is nearly double the peak demand, and variable energy such as solar and wind can pose “significant” excess supply challenges. But they relied on OECD country experiences to recommend that 20-25 per cent RE share in generation “can be easily accommodated”.

The CEA’s exhaustive plan document pointed out that average PLF (plant load factor or availability) of coal-fired plants declined from 78 per cent to 62 per cent between 2009-10 and 2015-16. In November 2016, the PLF had gone down further, to 61 per cent.

This is against the declared goal of the Electricity Policy 2005, to increase PLF to 85 per cent.

The PLF of the private sector — which took a lead role in capacity addition — is dangerously close to the techno-economic viability threshold. The open market tariff indicates that too many plants are operating close to or below the operational cost.

The RE capacity addition does not offer balancing power solutions to meet evening peak demand. Since coal-based generation cannot be ramped up quickly, there are problems in meeting this demand despite having excess capacity.

Solar is no solution as its generation starts falling sharply after 2 pm. Wind too is a variable energy source. Karnataka, for instance, sources more than 10 per cent electricity from RE and faces peak shortage. Hydel and gas-based electricity, in contrast, can offer efficient balancing power solutions.

But India failed miserably on both fronts. Hydel capacity addition is less than one-third of the Twelfth Plan (2012-17) target. And gas supply to power sector was 32 per cent of the allocations in FY16.

That India doesn’t have adequate domestic gas is no secret. But, the Modi government so far failed to tie up long-term LNG (liquefied natural gas) supplies, meaning gas generation will be open to the vagaries of global price movement.

The CEA doesn’t expect gas capacity addition in the next five years. They are trying to find a solution in pump-storage capacity addition. Such capacities pump water to an elevation in off-peak hours and then use it to generate hydro-electricity to meet peak demand.

It’s the right plan but it will not come to the rescue of coal-fired capacities. With 50GW under construction coal-fired plants expected to come on stream in the next five years, the CEA did a range of sensitivity analyses. Assuming that electricity demand grows at an estimated 6.34 per cent CAGR (compound annual growth rate) over the next five years, against the existing 4.42 per cent CAGR, a mere 15 per cent RE share in generation can bring down the PLF of coal-fired plants to 53 per cent in 2022, as a best case scenario. The analysis assumed RE capacity to reach 125GW — 50GW behind target — and hydro capacity addition will be on target. Higher RE capacity addition can reduce the PLF to as low as 48 per cent.

In short, nothing but a miraculous rise in electricity demand — much beyond the CEA estimates — riding on an unprecedented rush for manufacturing, can save investors in coal-fired generation.

But miracles rarely happen. And as things stand today, not much investment is taking place even in the solar equipment sector, and energy-intensive industries such as cement are suffering from huge over-capacity. The only option left to the coal-fired generation sector is what the state-run Damodar Valley Corporation did recently. It scrapped a 2X660 MW project midway, ignoring a ₹500-crore hit in the balance sheet.

Many of those 50GW capacities which are in the pipeline may follow this example, sinking crores of private and public finance.

The existing coal capacities may not be better off either. They cannot sustain for long in the prevailing low-PLF low-tariff situation. Probable exits — they have already started happening — with banks taking a haircut are a distinct possibility.

Investors in power generation had already suffered due to de-allocation of captive coal mines. This debacle may seriously hamper their ability to invest. How that is helping the country’s interest in attracting investment is anybody’s guess.

The bottomline is clear: A rapid increase in RE capacity will increase the distress in India’s power sector. A gradual shift is welcome.

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