Captive Power Market: Key trends, challenges and cost considerations

Key trends, challenges and cost considerations

Captive power plants (CPPs) continue to be a viable option for industrial and commercial consumers to meet their energy demand and hedge against the risks of high grid power tariffs. Further, the quality of grid supply is a major cause for concern for most industrial consumers as it can damage costly capital equipment, increase downtime and lead to production losses. Also, the cost of energy is a significant component of the total production cost in several industries such as fertiliser, chlor alkali, steel and aluminium. Therefore, managing energy costs is important for these industries to not only reduce their expenditure, but to improve their overall productivity and competitiveness. Besides, trading or third-party sale of surplus power can provide additional revenue to CPP owners.

A look at the key trends in CPP deployment, the cost economics, and the issues and concerns…

Key trends

As per India Infrastructure Research, the country’s total installed captive capacity is estimated at 80,160 MW as of 2016-17. It has grown at a compound annual growth rate (CAGR) of 5.38 per cent between 2007-08 and 2016-17.

Coal is the major fuel for power generation in CPPs, followed by natural gas and bagasse. The share of these fuels in the captive power capacity stood at 55 per cent, 12 per cent and 11 per cent respectively as of 2016-17. Diesel accounted for 4 per cent of the tracked capacity. The share of these fuels has more or less remained same in the past two to three years.

However, during this period, the share of solar-based CPPs increased from negligible to nearly 1 per cent in the tracked captive capacity. This can be attributed to the growing popularity of rooftop solar photovoltaic-based solutions among institutional and commercial establishments owing to the falling cost of modules and benefits like net metering. Overall, renewables (bagasse, solar, wind and biomass) had a share of over 20 per cent in the total tracked capacity.

Industry-wise, the metals and mining industry accounted for a major share of 41 per cent. The industry has set up large baseload capacities to meet the requirements of its energy-intensive production processes. Other major industries deploying CPPs are petrochemicals (12 per cent), sugar (11 per cent), cement (9 per cent) and chemicals (7 per cent).

State-wise, Odisha and Gujarat together accounted for nearly one-third of the tracked captive capacity, Tamil Nadu and Chhattisgarh followed next with of 11 per cent and 10 per cent shares respectively.

Cost economics

The capital and operational costs of CPPs depends on factors such as location, technology and fuel choice. Since the running cost of a CPP is directly proportional to the cost of fuel, the latter plays a key role in setting up a CPP. To reduce operational costs, many units utilise the by-products of manufacturing processes as fuel for their boilers. These include waste gases, washery rejects and bagasse. The location of the CPP has a bearing on the capex in terms of transportation of equipment during construction and its proximity to a fuel source during the operational phase. For instance, gas can be used by industries along gas transmission pipelines/city gas networks, whereas diesel is the only option for industries located in rural areas.

In terms of capital costs, the cost of liquid fuel based CPPs such as diesel-based units is the lowest at about Rs 34 million per MW followed by coal-based CPPs (Rs 43 million-Rs 47 million per MW) and gas-based CPPs (Rs 35 million per MW for open cycle plants and Rs 80 million-Rs 90 million per MW for closed cycle plants). The cost of renewable energy based CPPs is still high though it has fallen considerably in recent years and ranges from Rs 53 million per MW for solar to Rs 62 million per MW for wind and Rs 55 million-Rs 66 million per MW for biomass.

The CPP developer must conduct a cost benefit analysis by taking into account grid power tariffs. Captive power is economical as long as the cost of power generated is lower than the potential production loss caused by interrupted grid supply as well as grid power tariffs. Potential earnings through the sale of surplus power from a CPP in the short-term market should also be taken into account.

The generation cost of coal-based CPPs varies from Rs 3.18 per unit to Rs 4 per unit depending upon the quality of fuel being used and its heat rate. Meanwhile, for gas-based CPPs, it can range between Rs 5 per unit and Rs 7 per unit depending on the technology (open cycle or closed cycle). In the case of diesel gensets, the cost of generation can range from Rs 15 per unit to Rs 40 per unit. For instance, in rural telecom towers, the cost shoots up due to pilferage, transportation cost, etc. For renewables, the cost may vary from Rs 3.6 per unit to Rs 8.2 per unit depending on the source (solar, wind, biomass, etc.) and the state.

In contrast, the average grid power tariffs in 2016-17 stood at Rs 5.92 per unit for high tension industrial consumers, Rs 6.12 per unit for low tension industrial consumers and Rs 6.63 per unit for commercial consumers. Industrial and commercial tariffs have increased at a CAGR of 27-35 per cent and 34 per cent respectively between 2012-13 and 2016-17. Besides, high cross subsidy surcharge (Rs 0.17-Rs 4.8 per unit in 2016-17) restricted industries from buying cheaper power from outside their state, thereby driving them to set up CPPs.

Issues and the way forward

Some of the issues being faced by CPP owners are open access restrictions that make the sale of surplus power infeasible. There have been many instances where state governments have imposed restrictions on open access. In the past few years, many states such as Gujarat, Maharashtra, Rajasthan and Andhra Pradesh have allowed full-fledged open access but have later backed down on the ground that open access has huge financial implications. Also, congestion in the transmission system prevents CPPs from selling in the short-term power market. Further, a decline in the weighted average price at the power exchanges from Rs 3.50 per unit in 2014-15 to Rs 2.50 per unit in 2016-17, has led CPP owners to buy power on the exchanges while operating their plants at a lower capacity utilisation factor.

The limited availability of fuels such as natural gas and biomass is also an issue. On the coal front, although domestic supply has increased, the government has increased the coal cess from Rs 50 per tonne to Rs 400 per tonne in the past two to three years, thereby discouraging its use. In addition, stricter environmental regulations for emissions are likely to increase the capex of coal-based CPPs.

On the other hand, the role of renewables in providing captive power is expected to increase. Favourable policies, an increase in the national renewable purchase obligation target to 17 per cent by 2022, decline in capital costs and negligible running costs are some of the factors that would drive the installation of renewable energy-based CPPs in the near future.