Crippling Effect: Domestic coal shortage and rising demand disrupt CPPs

Domestic coal shortage and rising demand disrupt CPPs

Captive power plants (CPPs) have remained an important source of power supply for commercial and industrial (C&I) consumers. Rising grid power tariffs and interruptions in electricity supply by state utilities are the key drivers for industries to set up CPPs to meet their baseload and/or backup power requirements. CPPs provide reliable power supply at competitive rates. Captive power is crucial for energy-intensive C&I consumers. However, domestic coal shortage and a spike in international coal prices in recent months have crippled industries integrated with CPPs. With frequent coal shortages and a decline in the cost of solar panels, C&I consumers are increasingly looking at renewable energy options, especially solar, to meet their captive power requirements.

Power Line takes a look at the key trends and developments in the captive power segment…

Key trends

As per the Central Electricity Authority (CEA), the installed generation capacity of CPPs stood at 78 GW as of March 2020, across industries that have a demand of over 1 MW. It has grown at a CAGR of 8.9 per cent between March 2012 and March 2020. On a year-on-year basis, the installed CPP capacity increased by 3.7 per cent in 2019-20 from 75.2 GW in 2018-19.

India Infrastructure Research tracked over 72.8 GW of captive capacity (projects of 1 MW and above) as of 2021. Notably, coal-based capacity accounted for the majority share of 57 per cent in the tracked capacity, followed by wind, bagasse, natural gas and solar – each of which had single-digit shares. In terms of unit ratings, the majority of the tracked capacity (around 45 per cent) was contributed by plants of unit rating 100 MW or above. Most of these plants are coal based or natural gas based and are typically preferred by large industries in the metals and mining, cement, and petrochemicals industries owing to economies of scale. Meanwhile, smaller plants (less than 10 MW) are typically based on solar, diesel and other liquid fuels.

With regard to end-use industries, metals and minerals account for more than one-third of the tracked captive capacity. Industries such as aluminium, copper, and iron and steel have some of the largest CPPs because of their energy-intensive manufacturing processes.

As per the state-wise market analysis, Odisha and Gujarat are the leading states, accounting for the maximum share of 16 per cent and 11 per cent respectively in the country’s captive capacity. Tamil Nadu, Maharashtra and Karnataka also account for a large share of the CPPs. Uttar Pradesh has the highest number of bagasse-based CPPs owing to a large number of sugar units.

Among renewable energy-based CPPs, the total tracked capacity is largely dominated by wind- and bagasse-based CPPs, closely followed by waste heat recovery plants. Over the past five years, the share of coal in tracked CPPs has stayed more or less the same, but that of solar energy-based CPPs has increased from 1 per cent to 4 per cent. A number of large industries are also installing renewables-based CPPs to meet their renewable purchase obligations (RPOs) besides meeting their baseload/backup power needs. In May 2022, Saint-Gobain India and Sembcorp Green Infra’s subsidiary Green Infra Wind Energy signed a long-term energy supply agreement, under which Sembcorp will install a 33 MW captive wind-solar hybrid project to power Saint-Gobain’s manufacturing facilities in Sriperumbudur, Perundurai and Tiruvallur in Tamil Nadu. In the same month, Indian Oil Corporation Limited invited bids for the engineering, procurement and construction (EPC) of a 1.2 MW grid-connected captive solar project with a net metering facility at its LPG bottling plant at Sanand in Ahmedabad district, Gujarat. Likewise, business conglomerate DCM Shriram approved an equity investment of Rs 650 million for setting up a wind-solar hybrid renewable power project for captive purposes. In April 2022, Goldi Solar commissioned a 100 kW solar project at Surat’s first textile market for the Avadh Group.

Group captives are also gaining traction among industrial consumers. These are CPPs set up by industries 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 is not levied on the power procured by different consumers.

Recent developments

In recent months, domestic coal shortage and the surging power demand have dominated the headlines. The price of imported coal has also seen a spike owing to the Russia-Ukraine conflict, Indonesian coal export ban in January 2022 and weather disruption in key mining areas in Australia. Owing to priority allocation of domestic coal to the power sector, the supply to other industries including CPPs, steel, cement and sponge iron has been reduced by about 32 per cent. Industry bodies have sought the prime minister’s intervention as limited coal supply for a prolonged period has considerably impacted operations with some planning to cut down production or even close down temporarily.

Meanwhile, the textile industry, concentrated in the northern and western states of India, is facing significant power cuts. Textile mills in Panipat, Haryana, started facing 10-15-hour power cuts in mid-April. Many of these textile mills have diesel gensets as a backup power source but the high cost of power supply from DG sets due to the increase in the cost of liquid fuel has rendered captive power unviable. It is estimated that captive power from DG sets costs Rs 25-Rs 28 per unit, which is nearly four times the average grid power tariffs.

The pulp and paper industry has also written to the prime minister, urging the resumption of domestic coal supply. The paper industry being a continuous, energy-intensive process industry, has made significant investments in CPPs but the lack of coal may lead to the closure of paper mills that will have a cascading effect on food, FMCG, pharma and other allied industries.

Industries, especially continuous process ones, have had to resort to excessive purchase of power from the exchanges at high prices. Industry bodies have stated that they are forced to keep CPPs idle due to coal shortage and compelled to buy power from the market, which is creating system inefficiency and higher specific consumption in CPP units due to low capacity utilisation. The average market clearing price at the Indian Energy Exchange stood at Rs 10.06 per unit for the month of April 2022, a year-on-year increase of 172 per cent. Taking cognisance of increasing prices, the Central Electricity Regulatory Commission capped all the price at market segments on the power exchanges at Rs 12 per unit till June 30, 2022.

In a key positive development, the National Open Access Registry (NOAR) went live from May 1, 2022. The NOAR is an integrated single-window electronic platform accessible to all stakeholders including open access participants, traders, power exchanges, national/regional/ state load despatch centres for electronic processing of short-term open access applications, thereby automating the administration of short-term open access in the interstate transmission system. The move will help CPPs/industries to sell/buy surplus power in/from the market through open access.

In a separate development, in May 2022, the Supreme Court passed a judgment stating that an association of corporate bodies can establish a CPP primarily for their own use in a case pertaining to Shri Bajrang Metallics and Power Limited (SBMPL) and Shri Bajrang Power and Ispat Limited (SBPIL). SBPIL had established a CPP and SBMPL, its affiliate, submitted a petition to the Chhattisgarh State Electricity Regulatory Commission for providing open access and wheeling of power through Chhattisgarh State Power Distribution Company Limited’s (CSPDCL) network for captive use by SBMPL. The petition was resisted by CSPDCL as the commission held that SBPIL was entitled to supply electricity to SBMPL and the same would qualify to be treated as “own consumption” within the ambit of Section 9 of the Electricity Act, 2003. Thereafter, appeals were filed with the Appellate Tribunal for Electricity and later with the Supreme Court. The apex court ruled that the use of electricity by SBMPL would count as captive consumption as SBMPL holds a 27.6 per cent stake in the power plant and the joint consumption by SBIPL and SBMPL is more than 51 per cent of the power generated and, therefore, the conditions laid out under the Electricity Rules, 2005, are met.

Meanwhile, it was reported in April 2022 that the Ministry of Power is considering a proposal to mandate all power projects, including CPPs, to set up renewable projects on their premises as part of their renewable generation obligation. The gencos will then need to sell bundled renewable and thermal power. The idea is to reduce the requirement of coal-based power as the country accelerates its energy transition.

The way forward

With industrial activity resuming to pre-Covid levels and India’s GDP growth forecast to grow at a decent 7.5 per cent in 2022-23 and 8 per cent in 2023-24 (by the Asian Development Bank), power demand and investment in CPPs by industries is expected to increase. Many industries are expected to shift to greener sources for captive power generation. That said, coal supply issues need to be sorted in the short term to alleviate the concerns of industries. N