Outlook for Captives

Growing share of CPPs despite fuel supply issues

Captive power plants (CPPs), both stand-alone and grid connected, are playing a significant role in meeting the country’s power demand. As per India Infrastructure Research, the aggregate installed capacity of captive plants of 1 MW and above stood at 83 GW in 2017-18, increasing at a compound annual growth rate of 5.3 per cent since 2007-08. Over the years, CPPs have emerged as a viable option for industrial and commercial consumers to meet their energy demand and hedge against the risks of high grid power tariffs.

However, of late, captive power producers have been facing challenges relating to fuel supply. As a result, plants are operating below their potential. Further, there are policy issues around shareholding in group captives, and many projects are termed as CPPs only to evade cross-subsidy surcharge on the sale of power. To address these concerns, the central government plans to soon issue revised norms to prevent the misuse of CPP status. In May 2018, the Ministry of Power (MoP) introduced draft amendments to the Electricity Rules, 2005, with stricter criteria for structuring and operating CPPs. In the Union Budget 2019-20 speech, the finance minister announced that the central government will work with the state governments to remove barriers like cross-subsidy surcharges, and undesirable duties on open access sales or captive generation for industrial and other bulk power consumers.

Key trends

India Infrastructure Research tracked a captive capacity of nearly 68 GW across various industries. An analysis of the tracked capacity shows that coal continues to be the key fuel source for the majority of CPPs, with a share of over 56 per cent. This includes CPPs that use domestic coal, imported coal and coal blended with coal washery rejects, petcoke and lignite. The abundance of fuel and the competitive capital cost of setting up large-scale coal-based CPPs are the two biggest reasons for their greater uptake.

Natural gas comes next with an 11 per cent share in the tracked capacity. These CPPs are typically installed by petrochemical and fertiliser industries, which use gas as an input for production processes as well. Bagasse-based CPP capacity accounts for 10 per cent of the tracked capacity. Such CPPs are typically set up by sugar industries, where bagasse is a key by-product. Meanwhile, the share of wind and waste heat recovery/cogeneration stands at 7 per cent each.

Diesel/Liquid fuel-based CPPs, biomass and solar CPPs hold a share of 2-3 per cent each in the tracked capacity. Industries are increasingly looking at solar power-based captives to meet their power needs. This can be attributed to the improving cost economics of renewable power plants due to falling capital costs and favourable state and central government policies. Rooftop solar provides an attractive opportunity to industrial and commercial consumers to reduce their dependence on grid power and meet a part or whole of their energy needs through rooftop solar plants. They can be installed at transit systems, airports, hospitals, campuses, malls, industrial units and office complexes.

An industry-wise analysis shows that metals and minerals have the largest share in the tracked captive capacity. Some of the largest CPPs have been set up by the aluminium, copper, and iron and steel industries owing to their energy-intensive manufacturing processes. Some examples are Vedanta’s 1,125 MW coal-based CPP in Jharsuguda, National Aluminium Company Limited’s 1,200 MW coal-based CPP in Angul and Jindal Steel and Power Limited’s (JSPL) 810 MW Angul coal-based CPP. Apart from these, petrochemical (crude oil/petroleum extraction and refining), cement, sugar, chemical, textile,  engineering, paper and pulp and fertiliser industries as well as institutional users have witnessed significant CPP deployment.

Among states, Gujarat is in the lead in terms of CPP deployment with over 17 per cent share in the tracked captive capacity. The state hosts a large number of petrochemical companies such as Indian Oil, Reliance Industries and the Essar Group, as well as textile companies such as Aditya Birla Nuvo and Raymond, with CPPs based on gas and wind respectively. The state has a well-developed city gas distribution network and a high wind potential.

Odisha is another key state for captives where a number of metals and mining companies like Vedanta, NALCO, JSPL and Steel Authority of India Limited have set up large-sized CPPs, largely based on coal, to meet their needs.

Group captives

Group CPPs are being preferred by industrial users to meet their electricity needs. These projects are set up by developers for the collective use of many industrial and commercial consumers. Group CPPs enable small and medium industries that do not have the required investment and experience for setting up and managing an individual CPP but need uninterrupted power for their business operations. High industrial tariffs and the presence of large industrial clusters in key states like Maharashtra and Gujarat are the primary growth drivers for setting up group CPPs. Renewable-based group CPPs also offer the benefit of meeting renewable purchase obligations (RPOs) and selling renewable energy certificates in the open market. The group CPP model, moreover, provides economies of scale and reduces the power purchase agreement risk with multiple offtakers.

According to the Electricity Rules, 2005, a power project is considered captive if an entity or entities consume at least 51 per cent of the power generated and own at least 26 per cent of the equity. However, the MoP has proposed changes to these rules with respect to the shareholding structure of group CPPs. Under the existing rules, the ownership of a CPP is linked to the equity share capital in order to meet the 26 per cent ownership requirement and thus, in many cases, the ownership is linked to only the number of shares issued by the CPP. The draft amendments proposed by the MoP in April 2018 seek to link the ownership of the CPP to the issued and paid-up share capital in the form of equity share capital, with voting rights (excluding equity share capital with differential voting rights). The final norms are expected to be notified soon.

Cost economics

The cost economics of CPPs varies according to fuel type, technology, size and location (in terms of proximity to fuel source). The capex of a coal-based CPP includes the initial cost of procuring and installing equipment of the requisite capacity and fuel. In the variable cost component, fuel cost is the most important element. For a small- to mid-sized CPP, the main plant equipment accounts for around 45 per cent of the capex while infrastructural works, coal handling plants, water management system and ash handling systems, etc. account for the remaining cost. The average capital cost of coal-based CPPs is around Rs 48 million per MW (based on capital cost estimates of select CPPs commissioned between 2010-11 and 2017-18). Meanwhile, the generation cost varies from Rs 3.18 per unit to Rs 3.96 per unit depending on the type of coal used.

In the case of gas-based CPPs based on open cycle technology, the estimated capital cost ranges from Rs 22 million per MW to Rs 53 million per MW. CPPs based on closed cycle gas turbine technology, which offers better efficiency, are more complex to construct and, therefore, entail higher costs. The capex per MW for CPPs based on combined cycle technology ranges from Rs 80 million to Rs 90 million. Meanwhile, the cost of gas-based generation varies according to the source of gas supply. The energy cost rate varies from Rs 2.86 per unit for administrative price mechanism gas to Rs 6.5-per unit for regasified liquefied natural gas, which is higher than that of coal-based power.

Liquid fuel-based CPPs have the lowest capital cost and the highest generation cost. The average capital cost per MW of these plants stands at Rs 36 million. These plants can run on fuels like naphtha, kerosene, furnace oil and diesel. Diesel-based gensets are the most commonly used CPPs under liquid fuel-based plants. The retail selling price of diesel (in Delhi) has increased from Rs 48 per litre in March 2016 to Rs 66 per litre in July 2019, and the cost of generation can range from Rs 16 per unit to Rs 40 per unit. For instance, in the case of rural telecom towers, the cost shoots up due to pilferage and diesel transportation cost.

Issues and challenges

The lack of adequate fuel supply is a key concern for CPP implementation. CPPs have been receiving only half of the required coal quantities as state utilities and independent power producers receive priority coal allocation. There is also uncertainty around the availability of domestic gas. Another issue being faced by CPP owners is open access restrictions that make the sale of surplus power unfeasible. There have been many instances where state governments have imposed restrictions on open access. Also, congestion in the transmission system prevents CPPs from selling in the short-term power market. To conclude, given the significance of CPPs in the growth of industries, immediate policy action is needed to resolve these issues and ensure the efficient operation of CPPs.

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