Looking for Viability

C&I consumers move towards renewable and group captive models

Over the years, captive and rental power have emerged as viable options for industrial and commercial consumers to meet their energy demand and hedge against the risks of high grid power tariffs. While coal has traditionally been the fuel of choice for most industries setting up captive power plants (CPPs), renewables are emerging as competitive options owing to their rapidly declining capital costs and their ability to meet the renewable purchase obligation (RPO). A growing number of industrial consumers are installing renewable power plants as an alternative to the expensive power procured from discoms, thus generating savings.

A look at the key trends in the captive and rental power market…

Market trends

As per India Infrastructure Research, the aggregate installed capacity of CPPs of

1 MW and above stood at over 87 GW during 2018-19, increasing at a compound annual growth rate of 3.8 per cent since 2014-15. It tracked a total captive power capacity of nearly 70 GW across various industries. An industry-wise analysis shows that metals and minerals have the largest share (40 per cent) in the tracked captive capacity. State-wise, Gujarat and Odisha are in the lead in terms of CPP deployment, together accounting for nearly one-third of the tracked captive capacity.

Source-wise, coal continues to be the key fuel source for the majority of CPPs, with a share of over 52 per cent in the tracked capacity. This includes CPPs that use domestic coal, imported coal and coal blended with 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 key reasons for their greater adoption. Natural gas comes next with an 11 per cent share in the tracked capacity. These CPPs are typically installed by the petrochemical and fertiliser industries which use gas as an input for production processes as well. Bagasse-based CPPs account for 9 per cent of the tracked capacity. Such CPPs are typically set up by the sugar industry, where bagasse is a key by-product. Meanwhile, the share of wind and waste heat recovery/cogeneration stands at 7-8 per cent each. Even though coal-based CPPs continue to occupy the largest share in the tracked capacity, their share declined from 56 per cent to 52 per cent between 2014-15 and 2018-19.

Meanwhile, the share of solar power-based captive plants increased from almost nothing to 2 per cent during 2018-19. Rooftop solar power plants, in particular, have emerged as key captive power sources for institutional users. A key outcome of the increased share of renewable energy-based CPPs is the decline in the share of diesel- or liquid fuel-based captive plants from 5 per cent during 2014-15 to 3 per cent during 2018-19.

Another key market trend is the growing adoption of group captives, especially solar, by industrial and commercial users to meet their power requirements. These are set up for the collective use of multiple industrial or commercial consumers that have 26 per cent equity in the project and must consume 51 per cent of the power produced, as per the Electricity Rules, 2005. A key benefit of the group captive model is that cross-subsidy surcharge and additional surcharges are not levied on the power procured by different consumers. Typically, a developer sets up the group captive project under a special purpose vehicle company and offers 26 per cent equity to the consumers. Further, an agreement is made to buy back the shares on the termination of the procurement contract.

However, there are some issues and challenges that are impacting group CPPs such as the revision of stressed asset guidelines by the Reserve Bank of India. This has resulted in insolvency proceedings for companies like KSK Energy Ventures, and a shortage of fuel and dependence on imported fuel, especially for coal- and gas-based captives, thereby impacting the business.

Besides CPPs, rental power solutions are a good option for industrial and commercial consumers to meet their power generation requirements. Rental power solutions range from stand-alone temporary power packages to multi-megawatt units that operate on fuels such as natural gas, coal and diesel. Diesel genset (DG)-based rental power solutions are commonly deployed at construction projects across the residential, commercial and infrastructure (roads, bridges, metros, etc.) segments, industrial sites, and commercial and institutional establishments such as banks, shopping malls, events, exhibitions and residential societies. Diesel gensets have shorter installation times and enable quick start/ stop. The fuel for operating them is easily available.

Focus on renewable-based captives

Commercial and industrial (C&I) consumers have been increasingly adopting renewable energy on a captive basis as it provides better cost economics vis-à-vis grid power. In India, most states have significantly higher tariffs for C&I consumers as compared to residential and public sector consumers. Commercial tariffs in Maharashtra, Delhi, Andhra Pradesh, Assam and Rajasthan range between Rs 8 per unit and Rs 10.50 per unit. These states also have high HT industrial tariffs of Rs 7.30-Rs 9.70 per unit. In fact, the average Indian grid power tariffs during 2018-19 stood at Rs 6.14 per unit for HT industrial consumers and Rs 7.10 per unit for commercial consumers.

Meanwhile, solar and wind power tariffs have crossed grid parity. Thus, large industries across all segments and commercial consumers including metro corporations, railways, airports, hotels and multinational corporations are opting for renewable-based bilateral or third-party power procurement arrangements to reduce their operating costs. Depending on the state, savings could vary from Rs 2 to Rs 3 per kWh under the renewables captive mode. Moreover, it helps the obligated entities to meet their RPOs.

In terms of technology choices, solar power has gained momentum, with more and more industries opting for it to offset their operating costs and manage their carbon emissions. With regard to wind power, there is no certainty whether it will remain competitive if grid charges are applied. The biomass segment is still struggling due to logistics issues, but the use of biomass with solar power in captive energy generation has emerged as an area of interest. However, producing biomass in such large quantities is a challenge. The solution lies in the co-location of solar panels and biomass plantations. This has been tried and tested in a few countries, where plants are grown below solar panels. This enhances plant productivity and optimises the use of land to serve two purposes.

Impact of Covid-19

The Covid-19 pandemic has significantly curtailed the operations of captive power producers. Companies are finding that the sale price on the energy exchanges is not viable even as their own captive demand is minimal. Some large industries, including steel and cement, rely on their own captive power capacities to ensure a steady supply for critical processes. Some of these companies also sell a part of the power generated to the energy exchanges. One such company with captive power capacity is Shree Cement, which sells some of its power on the exchanges. According to the Indian Energy Exchange, volumes from CPPs spiralled post-March, along with the traded prices. For the day-ahead market, the average market clearing price for August 15 was Rs 1.64 kWh per hour. Captive power sale at Rs 2-Rs 2.35 per unit on the exchanges is economically unviable.

Moreover, supply chains have been disrupted and imports halted. Under-construction projects are stranded due to issues related to approvals, equipment and labour, and are incurring incremental running costs. Experts believe that the immediate impact is going to be significant, especially for under-construction captive projects, which would be able to resume work only after access is granted to client premises.

Similarly, the pandemic has adversely affected the power rental market owing to the suspension of activities of end users. The production and supply chain delays are expected to pose a short-term challenge to the power rental market since end-user industries are still not operating at their full capacity.

Challenges and the way forward

There is an acute shortage of domestic coal supply to coal-based captive power plants, which presents a daunting operational challenge. In this regard, a key step for the segment has been the liberalisation reforms announced recently for the commercial coal mining sector under the stimulus package. Once commercial mining picks up, CPPs will be able to substitute their annual coal imports.

A key hurdle faced by renewable energy captive power plants is the uncertainty in open access frameworks. Restrictions in open access imposed by states and a plethora of charges hamper investments in renewable energy-based captive plants. To circumvent these risks, a key trend that has emerged in the segment has been of group CPPs. These are being preferred by industrial users to meet their electricity needs and lower their power costs. 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. The primary advantage of the group captive model is that cross-subsidy and additional surcharges are not levied on the power procured.

Another challenge for renewables is the need for constant power input to sites. Thus, C&I consumers have to invest in multiple power options including waste heat recovery and solar thermal along with energy storage to ensure stable plant operations and proper management of the fluctuating load. Another challenge is the policy variation across states in terms of transmission facilities, taxes and surcharges.

As per India Infrastructure Research, over 16 GW of the captive power capacity is at various stages of development across all fuel segments. Given the significant role that this segment plays in meeting the power requirements of industrial consumers, more steps are needed to resolve the issues facing it.

Going forward, supportive government policies for renewable energy and mandates for bulk consumers to comply with their RPO targets will drive the installation of renewable energy CPPs. Further, greater access to debt financing, the adoption of the opex business model and a robust regulatory framework will further facilitate the adoption of captive renewable energy in the C&I segment. Several investors and consumers are increasingly looking at a proactive role in climate change mitigation, which will also drive renewable energy procurement.

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