Cost Economics

Implications of installing FGD systems in TPPs

Flue gas desulphurisation (FGD) technology is utilised in thermal power plants (TPPs) to treat emissions and prevent sulphur dioxide (SO2) from being emitted into the atmosphere. These FGD units eliminate SO2 emissions with an efficiency of 85-95 per cent, depending on the type of technology used. The SO2 harnessed in this manner can be used to create by-products such as gypsum and calcium sulphate, which are subsequently used in the construction and cement industries. In 2015, the Ministry of Environment, Forest and Climate Change (MoEFCC) mandated the installation of FGD units in TPPs by 2017, although recently the deadline has been pushed out to 2022 to 2024. As per ICRA Limited, the recent FGD tendering trend indicates that TPPs entail an approximate expenditure of Rs 1.9 million-Rs 9 million per MW on FGD installation, depending on the unit size, location and technology, among other things. At Rs 5 million per MW, the impact on the levellised cost of generation is estimated to be 11-12 paise per unit.

Types of FGD

Primarily, there are two different types of FGD technologies installed in a TPP, comprising wet scrubbing and dry scrubbing technologies. For thermal plants smaller than 400 MW, the installation, operation and maintenance of a wet scrubber costs $500-$5,000 per tonne, while it costs $200-$500 per tonne for installing wet scrubbers in a plant with a capacity greater than 400 MW. Correspondingly, installing and operating an FGD system, based on dry scrubbing 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 costs around $500-$4,000. Fundamentally, the installation and operation of wet FGD system costs more than that 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 on dry scrubbing have removal efficiencies of around 80 per cent.

Cost overview

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

Similarly, studies done by ICRA Limited demonstrate that the installation of FGD systems in TPPs will entail an expenditure of Rs 1.9 million-Rs 9 million per MW. The variance in cost per MW can be attributed to the size of the unit, the number of units of the project, the location and the system/technology to be utilised. At Rs 5 million per MW, the impact on the levellised cost of generation is estimated to be 11-12 paise per unit.

The installation of FGD systems in TPPs with a capacity of 500 MW or greater is prioritised considering their size and general tendency to utilise imported coal, which contains a much higher quantum of sulphur than domestic coal. The costs of installing FGD systems in large plants are in the range of Rs 4.2 million to Rs 5.3 million per MW.

Recent developments

As of February 2021, FGD systems had only been installed in TPPs with 2.16 GW of capacity, out of 170 GW of TPPs targeted for the installation of these systems, implying that very few plants had complied with this order. As a result of exiguous installation rates, the MoEFCC issued a new notification, extending the timeline for the installation of FGD units until 2022-25, as determined by their proximity to the metropolitan cities or critically polluted areas.

TPPs, which are close to the NCR or cities with a million-plus population are classified as Category A plants and are mandated to install FGD units in their plants by December 31, 2022. Similarly, those TPPs that are situated 10 km from critically polluted areas or from non-attainment cities are categorised as Category B plants and have to commission FGD units by December 31, 2023. The residual plants that fall in neither Category A nor Category B are classified as Category C.

In addition to the extension of timelines, the new rules will levy an environment penalty on non-retiring TPPs, for operation beyond the timeline. The maximum fine for plants in Category A that do not comply with the norms by the deadline is 20 paise per unit, whereas it is 15 paise per unit for plants in Category B and 10 paise per unit for plants in Category C. With regard to the penalty, as per the Centre for Science and Environment, in terms of per MW cost, the maximum penalty for any plant in Category A comes out to be Rs 1.1 million per MW. Meanwhile, for Category C plants, which are already given extended deadlines, the penalty would be about Rs 0.5 million per MW.

Issues and challenges

There are a number of financial challenges facing the developers with regard to the installation of FGD systems. Taking an average price of Rs 5.5 million per MW, the capex requirement for installing an FGD (for 170 GW of the existing thermal capacity, 10 GW of the commissioned capacity after the preparation of the phasing plan and 58 GW of under-construction capacity) is estimated to be around Rs 131 trillion. Private plants, in particular, which already have stressed balance sheets, face funding issues.

Further, these systems are installed on a 75 per cent debt and 25 per cent equity structure; however, banks are reluctant to extend financing to TPPs owing to the uncertain economic climate; the rise of renewables and 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 obtain funding for the installation of these units.

Apart from this, there is a precedent for cost escalation of components, given the fact that the price of a 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, relative to the rapidly rising demand. Such developments and unforeseeable cost escalations discourage TPPs from considering the installation of FGD systems, given the significant cost-related volatility. Besides this, other reasons for the delay in the installation of FGD systems include lack of vendor and subvendor capability to successfully install and commission the system; delay in tender issuance due to a lack of technical and operational expertise regarding FGD technology; and the absence of an ecosystem around manufacturing components integral to FGD.

The way forward

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 uptick in the installation of FGD systems, as the issues are being resolved through regulatory reforms. Government institutions need to hold comprehensive deliberations with TPPs, manufacturers of FGD units and financial institutions in order to determine a cohesive plan accounting for the financial and technical nuances so that FGD installations can be expedited. It must also include specific clauses pertaining to tariff indexation on FGD installation so that TPPs are convinced of its viability.

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