Cost Concerns

Diesel gensets offer a sound power backup option despite price pressures

While the Indian power sector is struggling to provide extensive, uninterrupted and reliable grid supply, diesel gensets have assumed greater significance as the preferred power backup option in sectors such as agriculture, construction, infrastructure and residential.

Diesel generators are the most commonly used gensets and use diesel as the main fuel. Also, they are easier to install and operate, have low space requirements and are easily available  in the market; all this makes the diesel generator a preferred choice even though diesel is more expensive on a kWh basis. Further, DG sets are economical due to easy on-site fuel availability.

Power Line takes a look at the cost economics of DG sets…

Capital cost

Capital cost constitutes 6-7 per cent of the overall lifetime cost of a DG set. The capital cost depends largely on the rating and speed of the DG set. In India, DG sets of 2 kVA to 7,000 kVA capacity are used, with those in the 15 kVA-2,000 kVA range being the most common. While a 15 kVA set is available at Rs 0.02 million-Rs 0.03 million, a 125 kVA DG set costs Rs 0.05 million-Rs 0.07 million.

The cost of a DG set goes up with the increase in capacity. The 1,000 kVA and 2,000 kVA DG sets cost Rs 5 million and Rs 11 million respectively. Meanwhile, high speed diesel engines with 1,500 revolutions per minute (rpm) cost Rs 15 million-Rs 18 million per MW, intermediate speed diesel engines with 1,000 rpm cost Rs 20 million-Rs 25 million per MW, while low speed diesel engines with 600-750 rpm cost over Rs 35 million per MW.

Input prices have also been on the rise. Pig iron rates are currently at Rs 25,000 to Rs 26,000 per tonne in the domestic market, up by a marginal Rs 300 in the past few months. As a result, manufacturers are expected to hike prices to sustain their margins. While some manufacturers have increased the prices of their products, a number of them have kept their prices constant and have even reduced them in order to capture a higher market share.

Lower capital costs of DG sets vis-à-vis other captive/backup power solutions have made them the preferred choice. For solar PV projects, as per an analysis by the Central Electricity Regulatory Commission (CERC), the capital cost of projects less than 10 MW is Rs 41.1 million-Rs 60.6 million per MW. Similarly, the capital cost of wind power projects varies from Rs 62.3 million per MW to Rs 89.9 million per MW.

Fuel costs

Fuel prices account for a major component of the primary costs of a DG set. As per the Environment (Protection) Rules, 2013, the specifications for commercial fuel in DG sets are the same as those for commercial high speed diesel (HSD) used in diesel vehicles. HSD has higher thermal efficiency and lower cost as compared to other fuels.

As per the Petroleum Planning and Analysis Cell, the price of brent crude averaged $49.86 per barrel during December 2020 as against $42.66 per barrel during November 2020 and $67.02 per barrel during December 2019. The Indian crude basket price averaged $49.84 per barrel during December 2020 as against $43.34 per barrel during November 2020 and $65.5 per barrel during December 2019.

In India, diesel is available at a premium to crude oil. Diesel prices stood at $71.78 per barrel during 2019-20, a decrease of 13 per cent from the $82.51 per barrel during 2018-19. As of December 2020, diesel prices further decreased to $53.13 per barrel. This indicates that as crude oil prices went down, diesel prices also decreased.

Meanwhile, the retail selling price of diesel in Delhi (inclusive of excise duty, value added tax (VAT) and the dealer’s commission) increased from around Rs 47.20 per litre in April 2015 to around Rs 62.29 per litre in April 2020, recording a compound annual growth rate of 7.18 per cent. As of January 1, 2021, the retail selling price of diesel (inclusive of excise duty, VAT and the dealer’s commission) in Delhi stood at Rs 73.87 per litre.

A number of industries are now shifting to cleaner sources of power generation and with tighter emission regulations in place, gas gensets are gaining traction. As per the last price revision by Indraprastha Gas Limited (IGL) in October 2020, the cost of CNG was Rs 42.70 per kg in Delhi and that of PNG was Rs 27.50 per unit.

Generation costs

The cost of power generation through DG sets can be as high as over Rs 15 per unit. In some cases, it is even in the range of Rs 25-Rs 40 per unit. The high generation costs can be attributed to pilferage and high costs of fuel transportation, whereas, the cost of electricity generation from gas-based gensets is generally lower at Rs 11-Rs 12 per unit. As a result, DG sets are losing ground to more competitive options.

DG sets are preferred less by commercial and industrial (C&I) consumers, that use renewable energy sources such as solar rooftop. For rooftop solar projects, the opex is Rs 3.50-Rs 4 per kWh; this is lower than the average C&I grid tariff prevalent across most states. Further, operations and maintenance (O&M) costs of DG sets are generally higher. However, the O&M requirement and the cost depend on the quality of fuel used and the hours of operation of the DG set.

Conclusion

The diesel genset industry currently faces significant cost pressures. The increasing focus of authorities on pollution control is expected to drive up the capital costs of these generators. Further, with falling solar and wind power tariffs and rising diesel prices, these gensets have become less cost competitive while wind and solar rooftop systems have emerged as financially viable options for providing power backup. That said, technology advancements such as hybridised solutions can help DG set owners to economise on costs by reducing fuel consumption.

While the DG set segment faces bottlenecks, these generators will continue to be in demand due to their increased usage by the residential sector as well as for being an effective source of back-up power.

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