Price Escalations: Cost economics of FGD installations

Cost economics of FGD installations

The Indian thermal sector has been making substantial investments in flue gas desulphurisation (FGD) technology. The key driver is the government’s mandate to regulate sulphuroxide (SOx) emissions from thermal power plants (TPPs) through the installation of FGD systems. An FGD system is installed in the boiler of a TPP to absorb the sulphur content, thereby reducing the sulphur dioxide (SO2) emissions. This mandate is applicable to an aggregate thermal capacity of around 170 GW and entails an investment of around Rs 800 billion. While some gains have been made, the progress has been slow for the majority of TPPs. As a result, the government has extended the deadline for compliance. The cost economics of FGD installation in TPPs depends on various factors including plant size and the chosen technology.

Types of FGD

Primarily, there are two broad types of FGD technologies installed in a TPP – wet and dry FGD technologies. Wet FGD technologies remove particulate matter by capturing it in liquid droplets. The droplets are then collected with the liquid dissolving or absorbing the pollutant gases. Meanwhile, dry scrubbing systems function by injecting lime into flue gas to remove SO2 and hydrogen chloride (HCl).

For thermal plants smaller than 400 MW, the installation, operation and maintenance of a wet scrubber costs $500 to $5,000 per tonne, while the costs ranges from $200 to $500 per tonne for plants with a capacity of over 400 MW. Further, installing and operating an FGD system based on dry scrubbing technology in a plant with a capacity of more than 200 MW costs $150-$300 per tonne while the lifetime cost of a dry scrubbing FGD in a plant smaller than 200 MW is $500-$4,000. Fundamentally, the installation and operation of a wet FGD system costs more than the installation and operation of a dry FGD system. However, it should be taken into consideration that wet

scrubbers have SO2 removal efficiencies of more than 90 per cent while FGD systems based of dry scrubbing have removal efficiencies of around 80 per cent.

Cost economics

As per a recent Centre for Science, Technology and Policy (C-STEP) report, the total cost of installing pollution control technology in TPPs is estimated at Rs 3,910-Rs 3,960 billion till 2030. The government has notified that investments in emission control technologies such as FGD will be included in tariffs and passed on to consumers. Therefore, the report projects that electricity tariffs may need to go up by 25-75 paise per kWh to meet the additional expenditure incurred for the installation of FGD systems.

Similarly, studies done by ICRA Limited demonstrate that the installation of FGD in TPPs entails an approximate expenditure of Rs 1.9 million-Rs 9 million per MW, depending on the size of the unit, number of units in the project, the locations, and the system/technology to be utilised. The installation of FGD systems in TPPs with a capacity of 500 MW or more is prioritised considering their size and their utilisation of imported coal, which contains a much higher quantum of sulphur than domestic coal. The cost of installing FGD systems in large plants is largely in the range of Rs 4.2 million-Rs 5.3 million per MW.

FGD systems are highly reliable and comply with the stringent environmental norms, accruing the benefits of emissions trading. They also yield commercial benefits when combined with certain technologies through which gypsum can be extracted.

Recent developments

As of February 2021, FGD systems were only installed in TPPs aggregating 2.16 GW of capacity, accounting for around 1.27 per cent of the total targeted capacity of 170 GW. Poor compliance with the deadline forced the government to delay the installation till 2024-25. Recently, the Supreme Court acknowledged the lack of progress in FGD installation and thereby mandated that FGD installation has to be completed by December 2022 for TPPs within 10 km of Delhi-NCR and other cities that have a million-plus population; and for TPPs within 10 km of critically polluted areas, it has to be completed between December 2023 and December 2025.

Issues and challenges

Despite continued efforts, there are numerous reasons for the delay in the installation of FGD systems such as limited vendor and sub-vendor capability to successfully install and commission the system; delays in the award of tenders due to a lack of technical and operational expertise regarding FGD technology; and absence of an ecosystem for manufacturing components that are integral to FGD.

The government delayed in furnishing several clarifications relating to norms such as the specifications relating to chimney height and water consumption, which were only issued in June 2018, which forced several companies to re-evaluate their plans and feasibility studies that they had conducted.

On the economic front, the price of wet-type FGD has now increased from Rs 4.5 million per MW to Rs 7.5 million per MW due to the unavailability of FGD systems in the market. Such developments and unforeseeable cost escalations discourage TPPs from the installation of FGD systems given the significant cost volatility and availability-related issues.

These systems are financed in a 75:25 debt-equity ratio. However, banks are reluctant to extend financing to TPPs given the current uncertain economic climate, the rise of renewables, their declining costs, and the huge portfolio of non-performing assets originating, to a significant extent, from power sector lending. Therefore, power generation companies are finding it difficult to secure funding for these projects. Moreover, generation companies are sceptical of installing these systems considering the policy ambiguity on tariff indexation pertaining to the installation of FGD systems. This makes them reconsider and shelve their plans with respect to the installation of these technologies.

The way forward

The Ministry of Power and the Central Electricity Authority are holding regular meetings with financial institutions to ease and enable debt-based funding to TPPs so that they can allocate it towards the installation of FGD systems.

The Central Electricity Regulatory Commission has already recognised the revised environmental norms as a “change in law” event, and is also planning to amend its tariff regulations for 2019-24 in order to incorporate the cost of FGD systems in tariff calculations. Going forward, the industry is likely to see an uptake in the installation of FGD systems as the issues are being resolved through regulatory reforms.